AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 2002
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
FELCOR LODGING LIMITED PARTNERSHIP
FELCOR LODGING TRUST INCORPORATED
FELCOR/CSS HOTELS, L.L.C.
FELCOR/LAX HOTELS, L.L.C.
FELCOR EIGHT HOTELS, L.L.C.
FELCOR/CSS HOLDINGS, L.P.
FELCOR/ST. PAUL HOLDINGS, L.P.
FELCOR/LAX HOLDINGS, L.P.
FELCOR HOTEL ASSET COMPANY, L.L.C.
FHAC TEXAS HOLDINGS, L.P.
FELCOR OMAHA HOTEL COMPANY, L.L.C.
FELCOR MOLINE HOTEL, L.L.C.
FELCOR COUNTRY VILLA HOTEL, L.L.C.
FELCOR CANADA CO.
FELCOR TRS HOLDINGS, L.P.
KINGSTON PLANTATION DEVELOPMENT CORP.
(Exact name of co-registrant as specified in its charter)
<Table>
DELAWARE 7011 75-2564994
MARYLAND (Primary Standard Industrial 72-2541756
DELAWARE Classification Code Number) 75-2624290
DELAWARE 75-2647535
DELAWARE 75-2582006
DELAWARE 75-2620463
DELAWARE 75-2624292
DELAWARE 75-2624293
DELAWARE 75-2770156
TEXAS 75-2797670
DELAWARE 75-2769826
DELAWARE 75-2771084
DELAWARE 75-2771072
NOVA SCOTIA, CANADA 75-2773637
DELAWARE 75-2916176
DELAWARE 75-2734270
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
</Table>
<Table>
LAWRENCE D. ROBINSON, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
545 E. JOHN CARPENTER FRWY., SUITE 1300 545 E. JOHN CARPENTER FRWY., SUITE 1300
IRVING, TEXAS 75062 IRVING, TEXAS 75062
(972) 444-4900 (972) 444-4900
(Address, including zip code and telephone number, (Name, address, including zip code, and telephone
including area code, of registrant's principal executive number,
offices) including area code, of agent for service)
</Table>
---------------------
FELCOR NEVADA HOLDINGS, L.L.C.
FHAC NEVADA HOLDINGS, L.L.C.
(Exact name of co-registrant as specified in its charter)
<Table>
NEVADA 7011 74-2906947
NEVADA (Primary Standard Industrial 74-2906949
(State or other jurisdiction Classification Code Number) (I.R.S. Employer Identification No.)
of incorporation or organization)
</Table>
<Table>
LAWRENCE D. ROBINSON, ESQ.
101 CONVENTION CENTER DRIVE EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
SUITE 850 545 E. JOHN CARPENTER FRWY., SUITE 1300
LAS VEGAS, NEVADA 89109 IRVING, TEXAS 75062
(702) 949-0211 (972) 444-4900
(Address, including zip code and telephone number, (Name, address, including zip code, and telephone
including area code, of registrant's principal executive number,
offices) including area code, of agent for service)
</Table>
---------------------
Copies to:
ROBERT W. DOCKERY, ESQ.
JENKENS & GILCHRIST,
A PROFESSIONAL CORPORATION
1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75202
(214) 855-4500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES BEING REGISTERED REGISTERED PER UNIT PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
9 1/2% Senior Notes Due 2008................. $100,000,000 100% $100,000,000 $9,200(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Guarantees of Senior Notes(2)................ $100,000,000 100% $100,000,000 (4)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Estimated solely for the purposes of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended.
(2) The following co-registrants have each guaranteed the Notes issued by Felcor
Lodging Limited Partnership that are being registered hereby: FelCor Lodging
Trust Incorporated, FelCor/CSS Hotels, L.L.C., FelCor/LAX Hotels, L.L.C.,
FelCor Eight Hotels, L.L.C., Felcor/CSS Holdings, L.P., FelCor/St. Paul
Holdings, L.P., FelCor/LAX Holdings, L.P., FelCor Hotel Asset Company,
L.L.C., FelCor Nevada Holdings, L.L.C., FHAC Nevada Holdings, L.L.C., FHAC
Texas Holdings, L.P., FelCor Omaha Hotel Company, L.L.C., FelCor Moline
Hotel, L.L.C., FelCor Country Villa Hotel, L.L.C., FelCor Canada Co, FelCor
TRS Holdings, L.P., and Kingston Plantation Development Corp.
(3) Pursuant to Rule 457(p), the registration fee of $9,200 is offset against
filing fees previously paid in connection with the Form S-4 (file no.
333-62510), filed on June 7, 2001 by FelCor Lodging Trust Incorporated and
FelCor Lodging Limited Partnership and subsequently withdrawn on September
28, 2001.
(4) Pursuant to Rule 457(n), no separate fee is payable with respect to the
guarantees of the Notes being registered.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Filed Pursuant to Rule 424(b)(3)
Registration Number 333-63092
SUBJECT TO COMPLETION, DATED APRIL 12, 2002
<Table>
[FELCOR LODGING
TRUST LOGO] FELCOR LODGING LIMITED PARTNERSHIP
</Table>
- --------------------------------------------------------------------------------
OFFER TO EXCHANGE
ALL OUTSTANDING 9 1/2% SENIOR NOTES DUE 2008
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR REGISTERED 9 1/2% SENIOR NOTES DUE 2008
- --------------------------------------------------------------------------------
We are offering to exchange all of our $100 million in outstanding 9 1/2% Senior
Notes Due 2008, or Old Notes, for $100 million in registered 9 1/2% Senior Notes
Due 2008, or New Notes. The Old Notes and New Notes are collectively referred to
as the Notes. The Old Notes were issued on December 3, 2001. The terms of the
New Notes are identical to the terms of the Old Notes except that the New Notes
are registered under the Securities Act of 1933, as amended, and therefore are
freely transferable, subject to certain conditions.
You should consider the following:
- - INVESTING IN THE NOTES INVOLVES MATERIAL RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 12 OF THIS PROSPECTUS.
- - Our offer to exchange Old Notes for New Notes will be open until 5:00 p.m.,
New York City time, on May , 2002, unless we extend the offer.
- - You should also carefully review the procedures for tendering the Old Notes
beginning on page 26 of this prospectus.
- - If you fail to tender your Old Notes, you will continue to hold unregistered
securities and your ability to transfer them could be adversely affected.
- - A limited public market currently exists for the New Notes. We do not intend
to list the New Notes on any securities exchange and, therefore, no active
public market is anticipated.
Information about the Notes:
- - The Notes will mature on September 15, 2008.
- - We will pay interest on the Notes semi-annually on March 15 and September 15
of each year, which began March 15, 2002, at the rate of 9 1/2% per annum.
- - We may redeem the Notes on or after September 15, 2004, at certain rates set
forth on page 74 of this prospectus.
- - We also have the option on or prior to September 15, 2003, to redeem up to 35%
of the original aggregate principal amount of the Notes with the net proceeds
of certain equity offerings.
- - The Notes are unsecured obligations and rank equally with our existing and
future unsecured senior debt.
- - The Notes are fully and unconditionally guaranteed on an unsecured senior
basis by FelCor Lodging Trust Incorporated and by certain of our subsidiaries.
- - If we undergo a change of control or sell certain of our assets, we may be
required to offer to purchase the Notes from you.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 2002
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Summary..................................................... 1
Risk Factors................................................ 12
The Exchange Offer.......................................... 23
Capitalization.............................................. 32
Selected Historical and Pro Forma Consolidated Financial
Information............................................... 33
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 37
Business and Properties..................................... 56
Description of Certain Indebtedness......................... 71
Description of the Notes and Guarantees..................... 73
United States Federal Income Tax Considerations............. 108
Plan of Distribution........................................ 108
Legal Matters............................................... 109
Experts..................................................... 109
Unaudited Pro Forma Consolidated Financial Information...... F-1
</Table>
------------
We obtained market data and certain other industry data and forecasts used
throughout this prospectus from internal surveys, market research, publicly
available information and industry publications. Industry publications generally
state that they obtain their information from sources they believe to be
reliable, but they do not guarantee the accuracy and completeness of that
information. Similarly, while we believe that the internal surveys, industry
data and forecasts and market research are reliable, we have not independently
verified the data, and make no representation as to the accuracy of the
information.
------------
This prospectus 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(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), Six Continents(TM), Walt Disney World(R) and Westin(R).
ii
FORWARD-LOOKING STATEMENTS
The information contained in this prospectus and the documents incorporated
by reference in this prospectus contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that involve a number of risks and
uncertainties. Forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "anticipates," "may,"
"will," "should," "seeks," "pro forma" or other variations of these terms,
including their use in the negative, or by discussions of strategies, plans or
intentions. A number of factors could cause results to differ materially from
those anticipated by these forward-looking statements. Among these factors are:
- general economic and lodging industry conditions, including the effects
of the terrorist attacks of September 11, 2001, and any subsequent events
affecting business or leisure travel;
- our overall debt levels and our ability to obtain new financing and
service debt;
- our inability to retain earnings;
- our liquidity and capital expenditures;
- our growth strategy and acquisition activities;
- our inability to sell the hotels held for sale at assumed prices; and
- competitive conditions in the lodging industry.
In addition, these forward-looking statements are necessarily dependent upon
assumptions and estimates that may prove to be incorrect. Accordingly, while we
believe that the plans, intentions and expectations reflected in these
forward-looking statements are reasonable, we cannot assure you that those
plans, intentions or expectations will be achieved. The information contained in
this prospectus and in the other documents referenced in this prospectus,
including "Risk Factors," identifies important factors that could cause these
differences.
iii
WHERE YOU CAN FIND MORE INFORMATION
Both FelCor and FelCor LP file annual, quarterly and special reports, and
other information with the SEC. Our SEC filings are available to the public from
the SEC's web site at "http://www.sec.gov" and are also available from our web
site at "http://www.felcor.com." Information contained on our web site should
not be considered part of this prospectus. You may also read and copy any
document we file with the SEC at the following locations:
<Table>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 233 Broadway Citicorp Center
Room 1024 New York, New York 10279 500 West Madison Street
Washington, D.C. 20549 Suite 1400
Chicago, Illinois 60661-2511
</Table>
You can also obtain copies of the documents at prescribed rates by writing
to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities. Our SEC filings
are also available at the office of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005. For further information on obtaining copies of
our public filings at the New York Stock Exchange, you should call (212)
656-5060.
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act with respect to our offering of New Notes. This prospectus, which
constitutes part of the registration statement, does not contain all of the
information in the registration statement on Form S-4. You will find additional
information about us and the New Notes in the registration statement on Form
S-4. All statements made in this prospectus concerning the provisions of legal
documents are not necessarily complete and you should read the documents that
are filed as exhibits to the registration statement or otherwise filed by us
with the SEC.
We "incorporate by reference" into this prospectus the information that we
file with the SEC, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is an important part of this prospectus and information that we file
subsequently with the SEC will automatically update this prospectus. The
following documents have been filed with the SEC and they are incorporated
herein by reference:
(1) our Annual Reports on Form 10-K for the fiscal year ended December
31, 2001;
(2) FelCor's Current Reports on Form 8-K filed with the SEC on March
25 and April 4, 2002; and
(3) all documents subsequently filed by either FelCor or FelCor LP
with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, prior to the termination of this exchange
offer.
You may request a copy of our filings (other than an exhibit to a filing unless
that exhibit is specifically incorporated by reference into that filing) at no
cost, by writing to or telephoning us at the following address: Lawrence D.
Robinson, Executive Vice President, General Counsel and Secretary, FelCor
Lodging Trust Incorporated, 545 East John Carpenter Freeway, Suite 1300, Irving,
Texas 75062, telephone (972) 444-4900, or by e-mail at information@felcor.com.
iv
SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the exchange offer and the financial
statements and notes thereto appearing elsewhere in this prospectus or
incorporated herein by reference. Unless the context otherwise requires, the
words "we," "our," "ours," "us" and the "Company" refer to FelCor Lodging Trust
Incorporated, or FelCor, FelCor Lodging Limited Partnership, or FelCor LP, and
their respective subsidiaries, collectively.
FELCOR AND FELCOR LP
We are one of the nation's largest hotel real estate investment trusts, or
REITs, with ownership interests in 183 hotels at December 31, 2001, with nearly
50,000 rooms and suites. As of 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.
On May 9, 2001, we entered into a merger agreement with MeriStar
Hospitality Corporation, or 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 aggregating $19.9 million associated with the merger and $5.5
million of merger financing costs.
THE PROPERTIES
The following table includes descriptive information about our properties
as of December 31, 2001:
<Table>
<Caption>
NUMBER OF PROPERTIES(1)
-----------------------
Hilton Brands:
Embassy Suites Hotels..................................... 59
Doubletree and Doubletree Guest Suites.................... 13
Hampton Inn............................................... 7
Hilton and Hilton Suites.................................. 1
Homewood Suites........................................... 1
Six Continents Brands:
Holiday Inn............................................... 44
Crowne Plaza and Crowne Plaza Suites...................... 18
Holiday Inn Select........................................ 10
Holiday Inn Express....................................... 5
Starwood Brands:
Sheraton and Sheraton Suites.............................. 10
Westin.................................................... 1
Other Brands................................................ 14
---
Total Hotels...................................... 183
===
</Table>
- ---------------
(1) Includes 13 hotels designated as held for sale.
1
BUSINESS STRATEGY
In the current operating environment, where the lodging industry is
experiencing a sharp decline in revenue per available room, or 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. In the near term,
however, 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 actively to 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.
- 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 succeeded to Promus' equity interest in us having an aggregate
value of approximately $17 million at December 31, 2001, its 50% joint
venture interest with us in the ownership of 12 hotels and its 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.
- 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.
- 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, and were 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.
2
Hotel Renovation, Redevelopment and Rebranding
We expect to continue to differentiate ourselves from many of our
competitors by:
- 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
- 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 successfully to 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. We currently anticipate 2002 maintenance capital
expenditures of between $40 and $50 million, depending upon the pace of the
anticipated economic recovery.
3
CORPORATE STRUCTURE
The following diagram depicts our general corporate structure and debt
outstanding at December 31, 2001 (dollars in millions):
[CORPORATE STRUCTURE CHART]
RECENT DEVELOPMENTS
Since December 31, 2001 we:
- repaid approximately $10 million under our line of credit; and
- issued and sold 1,025,800 depositary shares, each representing 1/100th of
a share of FelCor's 9% Series B cumulative redeemable preferred stock,
for net proceeds of approximately $24 million, used initially for general
corporate purposes.
Our principal and executive offices are located at 545 E. John Carpenter
Freeway, Suite 1300, Irving, Texas 75062 and our telephone number is (972)
444-4900.
4
THE EXCHANGE OFFER
On December 3, 2001, we completed the private offering of $100 million of
9 1/2% Senior Notes Due 2008. We entered into a registration rights agreement
with the initial purchasers in the private offering of the Old Notes in which we
agreed, among other things, to deliver to you this prospectus and to complete
this exchange offer within 180 days of the original issuance of the Old Notes.
You are entitled to exchange in this exchange offer Old Notes that you hold for
registered New Notes with substantially identical terms. If this exchange offer
is not completed on or prior to June 1, 2002, then the interest rate on the Old
Notes will increase to 10.0% until it is completed or, under certain
circumstances, until a resale registration statement with respect to the Old
Notes is declared effective by the SEC. You should read the discussion under the
headings "-- Description of New Notes" and "Description of the Notes and
Guarantees" for further information regarding the New Notes.
We believe that the New Notes to be issued in this exchange offer may be
resold by you without compliance with the registration and prospectus delivery
provisions of the Securities Act, subject to certain conditions.
The following summarizes the terms of the exchange offer. You should read
the discussion under the heading "The Exchange Offer" for further information
regarding this exchange offer and resale of the New Notes.
Securities to be
Exchanged................ On December 3, 2001, we issued $100 million in
aggregate principal amount of Old Notes to the
initial purchasers in a transaction exempt from the
registration requirements of the Securities Act.
The terms of the New Notes and the Old Notes are
substantially identical in all material respects,
except that the New Notes will be freely
transferable by the holders, except as otherwise
provided in this prospectus. See "Description of
the Notes and Guarantees."
The Exchange Offer......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date of this prospectus, Old Notes
representing $100 million aggregate principal
amount are outstanding.
Based on interpretations by the staff of the SEC,
as set forth in no-action letters issued to certain
third parties unrelated to us, we believe that New
Notes issued pursuant to the exchange offer in
exchange for Old Notes may be offered for resale,
resold or otherwise transferred by their holders
other than any holder that is an "affiliate" of
FelCor LP, FelCor or certain of their subsidiaries
within the meaning of Rule 405 under the Securities
Act, or a broker-dealer who purchased Old Notes
directly from us to resell pursuant to Rule 144A or
any other available exemption under the Securities
Act, without compliance with the registration and
prospectus delivery requirements of the Securities
Act, if the New Notes are acquired in the ordinary
course of the holders' business and the holders
have no arrangement with any person to engage in a
distribution of New Notes.
However, the SEC has not considered this exchange
offer through a no-action letter, and we cannot be
sure that the staff of the SEC would make a similar
determination with respect to this exchange offer.
Furthermore, each holder, other than a
broker-dealer, must acknowledge that it is not
engaged in, and does not intend to engage or
participate in, a distribution of New Notes. Each
broker-dealer that receives New Notes for its own
account pursuant to the exchange offer must
acknowledge that it will comply with the prospectus
delivery requirements of the Securities Act in
connection with any
5
resale of such New Notes. Broker-dealers who
acquired Old Notes directly from us and not as a
result of market-making activities or other trading
activities may not rely on the staff's
interpretations discussed above or participate in
the exchange offer and must comply with the
prospectus delivery requirements of the Securities
Act in order to resell the Old Notes.
Registration Rights
Agreement................ FelCor LP sold the Old Notes on December 3, 2001,
in a private placement in reliance on Section 4(2)
of the Securities Act. The Old Notes were
immediately resold by the initial purchasers in
reliance on Rule 144A under the Securities Act. In
connection with the sale, we entered into a
registration rights agreement with the initial
purchasers requiring us to make the exchange offer.
See "The Exchange Offer -- Purpose and Effect."
Expiration Date............ The exchange offer will expire at 5:00 p.m., New
York City time, on May , 2002, or a later date
and time if we extend it.
Withdrawal................. Old Notes tendered by you pursuant to the exchange
offer may be withdrawn at any time prior to the
expiration date. Any Old Notes not accepted for
exchange for any reason will be returned to you,
without expense, as soon as practicable after the
expiration or termination of the exchange offer.
Interest on the New Notes
and the Old Notes........ Interest on the New Notes will accrue from March
15, 2002, or from the date of the last payment of
interest on the Old Notes, whichever is later. No
additional interest will be paid on Old Notes
tendered and accepted for exchange.
Conditions of the Exchange
Offer.................... The exchange offer is subject to certain customary
conditions, certain of which may be waived by us.
See "The Exchange Offer -- Conditions of the
Exchange Offer."
Procedures for Tendering
Old Notes................ Each holder of the Old Notes wishing to accept the
exchange offer must complete, sign and date the
letter of transmittal, or a copy of the letter of
transmittal, in accordance with the instructions
contained in this prospectus and in the letter of
transmittal, and mail or otherwise deliver the
letter of transmittal, or the copy, together with
the Old Notes and any other required documentation,
to the exchange agent at the address set forth on
page 30. Persons holding the Old Notes through the
Depository Trust Company, or DTC, and wishing to
accept the exchange offer must do so pursuant to
DTC's Automated Tender Offer Program, by which each
tendering participant will agree to be bound by the
letter of transmittal. By executing or agreeing to
be bound by the letter of transmittal, each holder
will represent to us that, among other things,
- the New Notes acquired pursuant to the exchange
offer are being obtained in the ordinary course
of business of the person receiving the New
Notes,
- the holder is not engaging in and does not intend
to engage in a distribution of the New Notes,
6
- the holder does not have an arrangement or
understanding with any person to participate in
the distribution of the New Notes, and
- the holder is not an "affiliate," as defined
under Rule 405 promulgated under the Securities
Act, of FelCor LP, FelCor or any of the
subsidiary guarantors.
We will accept for exchange any and all Old Notes
which are properly tendered, and not withdrawn, in
the exchange offer prior to the expiration date.
The New Notes will be delivered promptly following
the expiration date. See "The Exchange
Offer -- Terms of the Exchange Offer."
Exchange Agent............. SunTrust Bank is serving as exchange agent in
connection with the exchange offer.
Federal Income Tax
Considerations........... We believe the exchange of Old Notes for New Notes
pursuant to the exchange offer will not constitute
a sale or an exchange for federal income tax
purposes. See "United States Federal Income Tax
Considerations."
Effect of Not Tendering.... Old Notes that are not tendered or that are
tendered but not accepted will, following the
completion of the exchange offer, continue to be
subject to the existing restrictions upon transfer.
We will have no further obligation to provide for
the registration of the Old Notes under the
Securities Act.
DESCRIPTION OF NEW NOTES
Issuer..................... FelCor Lodging Limited Partnership.
Securities Offered......... $100 million aggregate principal amount of 9 1/2%
Senior Notes Due 2008.
Maturity................... September 15, 2008.
Interest................... Interest will be payable in cash on March 15 and
September 15 of each year, beginning September 15,
2002.
Optional Redemption........ We cannot redeem the New Notes until September 15,
2004, except as described below in connection with
certain equity offerings. At any time on or after
September 15, 2004, we may redeem some or all of
the New Notes at the redemption prices listed under
the heading "Description of the Notes and
Guarantees -- Optional Redemption," plus accrued
and unpaid interest.
Optional Redemption
After Equity Offerings... At any time on or prior to September 15, 2003, we
may elect to redeem up to 35% of the outstanding
Notes, including New Notes, with funds that we
raise in one or more equity offerings, as long as:
- we pay 109.5% of the face amount of the Notes,
plus interest;
- we redeem the Notes within 90 days of completing
the equity offering; and
- at least 65% of the aggregate principal amount of
the Notes remains outstanding afterwards.
Change of Control.......... Upon a change of control, we will be required to
make an offer to purchase the New Notes at 101% of
the principal amount plus
7
accrued and unpaid interest. We may not have
sufficient funds available at the time of any
change of control to effect the purchase.
Guarantees................. The New Notes will be unconditionally guaranteed on
an unsecured senior basis by FelCor and by certain
wholly-owned subsidiaries that are obligors on
other senior debt of FelCor or FelCor LP.
Ranking.................... The New Notes will be unsecured and will rank
equally with all of our existing and future
unsecured senior debt. The New Notes will be
effectively subordinated to all of our and our
consolidated subsidiaries' secured debt and to all
other debt of our non-guarantor subsidiaries. At
December 31, 2001, we and our consolidated
subsidiaries had approximately $696 million of
secured debt, all of which was mortgage and
capitalized lease debt and effectively senior to
the New Notes to the extent of the value of the
underlying assets. At December 31, 2001, our
non-guarantor subsidiaries had no other debt.
Certain Other Covenants.... The indenture governing the New Notes restricts our
ability and the ability of our restricted
subsidiaries to:
- incur additional debt;
- incur additional secured debt and subsidiary
debt;
- make certain distributions, investments and other
restricted payments;
- limit the ability of restricted subsidiaries to
make payments to us;
- issue or sell stock of restricted subsidiaries;
- enter into transactions with affiliates;
- create liens;
- sell assets;
- enter into certain sale-leaseback transactions;
and
- with respect to FelCor LP and FelCor,
consolidate, merge or sell all or substantially
all of their assets.
These covenants are subject to a number of
important limitations and exceptions.
Ratings Downgrade.......... Upon the occurrence of, and during the continuance
of, a ratings downgrade, as defined, the New Notes
will bear yearly interest at a rate equal to 10%.
See "Description of the Notes and
Guarantees -- Certain Definitions -- Ratings
Downgrade."
Fall-Away Covenants........ Under the indenture governing the Notes, in the
event, and only for as long as, the Notes are rated
investment grade and no default or event of default
has occurred and is continuing, many of the
covenants described above will not be applicable to
FelCor, FelCor LP and their restricted
subsidiaries.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE CAPTION
"RISK FACTORS" BEGINNING ON PAGE 12 BEFORE INVESTING IN THE NEW NOTES.
8
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth summary historical and pro forma
consolidated financial information for FelCor LP and FelCor. The summary
historical information is presented as of and for the years ended December 31,
1999, 2000 and 2001. We derived the summary historical financial information for
the years ended December 31, 1999, 2000 and 2001 from our consolidated financial
statements and the notes thereto, audited by PricewaterhouseCoopers LLP,
independent accountants. Certain reclassifications have been made to previously
reported amounts to conform to current year presentation with no effect to
previously reported net income, stockholders' equity or partners' capital. The
summary unaudited pro forma financial information for the year ended December
31, 2001 is presented for illustrative purposes only and is not necessarily
indicative of what our actual results of operations would have been had the
transactions described below been consummated on the date indicated.
The summary unaudited pro forma statement of operations and other data is
presented as if the following occurred on January 1, 2001: (i) our acquisition
of 88 hotel leases held by Six Continents Hotels on July 1, 2001; and (ii) the
completion of the offering of the Old Notes and the application of the net
proceeds to repay borrowings under our line of credit. These pro forma
assumptions differ from those applicable to the pro forma information presented
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The pro forma information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" was prepared solely
to facilitate the comparison of our results of operations for 2000 and 2001.
You should read the following in conjunction with "Selected Historical and
Pro Forma Consolidated Financial Information," "Unaudited Pro Forma Consolidated
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and the notes to consolidated financial statements included elsewhere in this
prospectus or incorporated by reference.
FELCOR LODGING LIMITED PARTNERSHIP
<Table>
<Caption>
PRO FORMA
ACTUAL (UNAUDITED)
------------------------------------ ------------
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------------------ DECEMBER 31,
1999 2000(1) 2001(2) 2001(3)
---------- ---------- ---------- ------------
(IN THOUSANDS, EXCEPT RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues.............................................. $ 493,087 $ 593,964 $1,200,971 $1,442,974
Net income (loss)........................................... $ 135,776 $ 66,391 $ (50,144) $ (48,230)
Net income (loss) applicable to unitholders................. $ 111,041 $ 41,709 $ (74,744) $ (72,830)
OTHER DATA:
Funds From Operations(4).................................... $ 286,895 $ 288,636 $ 183,657 $ 184,301
EBITDA(5)................................................... $ 432,689 $ 470,861 $ 369,591 $ 373,053
Ratio of earnings to fixed charges(6)....................... 2.1x 1.5x 0.7x 0.7x
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets................................................ $4,255,751 $4,103,603 $4,088,929
Total debt, net of discount................................. $1,833,954 $1,838,241 $1,938,408
</Table>
9
FELCOR LODGING TRUST INCORPORATED
<Table>
<Caption>
PRO FORMA
ACTUAL (UNAUDITED)
------------------------------------ ------------
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------------------ DECEMBER 31,
1999 2000(1) 2001(2) 2001(3)
---------- ---------- ---------- ------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Total revenues.............................................. $ 493,087 $ 539,964 $1,200,971 $1,442,974
Net income (loss)........................................... $ 131,080 $ 61,699 $ (39,276) $ (37,456)
Net income (loss) applicable to common shareholders......... $ 106,345 $ 37,017 $ (63,876) $ (62,056)
OTHER DATA:
Funds From Operations(4).................................... $ 286,895 $ 288,636 $ 183,657 $ 184,301
EBITDA(5)................................................... $ 432,689 $ 470,861 $ 369,591 $ 373,053
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets................................................ $4,255,751 $4,103,603 $4,088,929
Total debt, net of discount................................. $1,833,954 $1,838,241 $1,938,408
</Table>
- ------------
(1) In the second quarter of 2000, we recorded a $63 million loss related to the
decision to sell certain non-strategic hotel assets, which is reflected in
the income statements presented for the period.
(2) Includes 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 these leases, these hotels' revenues
were comprised mainly of percentage lease revenues. Additionally, for the
year ended December 31, 2001, we recorded approximately $78 million of
non-recurring expenses made up of lease termination costs of $37 million,
merger termination costs of $20 million, merger related financing costs of
$6 million, swap termination expense of $7 million, loss on hotels held for
sale of $7 million, $1 million of extraordinary loss from the write-off of
deferred loan costs and abandoned project write-off of $1 million.
(3) Net income (loss) on a pro forma basis is presented before extraordinary
items, and includes $78 million of non-recurring expenses incurred for the
year ended December 31, 2001.
(4) We consider Funds From Operations to be a key measure of a REIT's
performance which should be considered along with, but not as an alternative
to, net income and cash flow as a measure of operating performance and
liquidity.
The White Paper on Funds From Operations approved by the Board of Governors
of NAREIT defines Funds From Operations as net income or loss (computed in
accordance with GAAP), excluding gains or losses from debt restructuring
which would be extraordinary items in accordance with GAAP and sales of
depreciable operating properties, plus real estate related depreciation and
amortization and after comparable adjustments for our portion of these items
related to unconsolidated entities and joint ventures. We believe that Funds
From Operations is 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, it provides investors with an
indication of our ability to incur and service debt, to make capital
expenditures and to fund other cash needs. We compute Funds From Operations
in accordance with standards established by NAREIT, except that we add back
the loss on hotels held for sale, lease termination costs, merger
termination costs, non-recurring merger financing costs, loss on hotels held
for sale, abandoned projects and swap termination expense to derive Funds
From Operations. This may not be comparable to Funds From Operations
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 Funds From Operations for the
loss on hotels held for sale, lease termination costs, merger termination
costs, non-recurring merger financing costs, loss on hotels held for sale,
abandoned projects and swap termination expense. Funds From Operations does
not represent cash generated from operating activities 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 is it indicative of funds available to fund
our cash needs, including our ability to make cash distributions. Funds From
Operations may include funds that may not be available for our management's
discretionary use due to requirements to conserve funds for capital
expenditures and property acquisitions and other commitments and
uncertainties.
10
The computation of Funds From Operations for FelCor LP and FelCor yields the
same result. The following table details the computation of Funds From
Operations for FelCor LP.
<Table>
<Caption>
PRO FORMA
ACTUAL (UNAUDITED)
------------------------------ ------------
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------------ DECEMBER 31,
1999 2000 2001 2001
-------- -------- -------- ------------
(IN THOUSANDS)
Net income (loss).......................................... $135,776 $ 66,391 $(50,144) $(48,230)
Lease termination costs.................................... 36,604 36,604
Swap termination expense................................... 7,049 7,049
Merger costs:
Termination costs........................................ 19,919 19,919
Financing costs.......................................... 5,486 5,486
Gain on sale............................................... (2,595) --
Loss on hotels held for sale............................... 63,000 7,000 7,000
Abandoned projects......................................... 837 837
Series B redeemable preferred distributions................ (12,937) (12,937) (12,937) (12,937)
Extraordinary charge from write-off of deferred financing
fees..................................................... 1,113 3,865 1,270
Depreciation............................................... 152,948 160,745 157,692 157,692
Depreciation from unconsolidated entities.................. 9,995 10,167 10,881 10,881
-------- -------- -------- --------
Funds From Operations...................................... $286,895 $288,636 $183,657 $184,301
======== ======== ======== ========
Weighted average units outstanding(a)...................... 75,251 67,239 66,675 66,675
</Table>
-----------------
(a) Weighted average units outstanding are computed including dilutive
options, unvested stock grants and assuming conversion of Series A
preferred units to common units.
(5) EBITDA is computed by adding Funds From Operations, interest expense, our
portion of interest expense from unconsolidated entities, amortization
expense, and our Series B redeemable preferred distributions. EBITDA is
presented because it provides useful information regarding our ability to
service debt. EBITDA should not be considered as an alternative measure of
operating results or cash flow from operations, as determined in accordance
with GAAP. EBITDA as presented by us may not be comparable to other
similarly titled measures used by other companies. The computation of EBITDA
for FelCor LP and FelCor yields the same result. A reconciliation of Funds
From Operations to EBITDA for FelCor LP is as follows:
<Table>
<Caption>
PRO FORMA
ACTUAL (UNAUDITED)
------------------------------ ------------
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------------ DECEMBER 31,
1999 2000 2001 2001
-------- -------- -------- ------------
(IN THOUSANDS)
Funds From Operations..................................... $286,895 $288,636 $183,657 $184,301
Interest expense.......................................... 125,435 158,620 161,226 164,044
Interest expense from unconsolidated entities............. 6,729 9,188 9,678 9,678
Amortization expense...................................... 693 1,480 2,093 2,093
Series B redeemable preferred distributions............... 12,937 12,937 12,937 12,937
-------- -------- -------- --------
EBITDA.................................................... $432,689 $470,861 $369,591 $373,053
======== ======== ======== ========
</Table>
(6) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income from continuing operations plus fixed charges,
excluding capitalized interest, and fixed charges consist of interest,
whether expensed or capitalized, and amortization of loan costs. For the
year ended December 31, 2001, and the pro forma year ended December 31,
2001, earnings were insufficient to cover fixed charges by $44 million and
$43 million, respectively, because of $78 million of non-recurring expenses
included in those periods.
11
RISK FACTORS
An investment in the New Notes involves a significant degree of risk. You
should carefully consider the following material risk factors, together with all
of the other information included or incorporated by reference in this
prospectus, in evaluating the exchange offer.
IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED OLD NOTES AND YOUR ABILITY TO TRANSFER OLD NOTES WILL BE ADVERSELY
AFFECTED
We will only issue New Notes in exchange for Old Notes that are timely
received by the Exchange Agent together with all required documents, including a
properly completed and signed letter of transmittal. Therefore, you should allow
sufficient time to ensure timely delivery of the Old Notes and you should
carefully follow the instructions on how to tender your Old Notes. Neither we
nor the Exchange Agent are required to tell you of any defects or irregularities
with respect to your tender of the Old Notes. If you do not tender your Old
Notes properly, then, after we consummate the exchange offer, you may continue
to hold Old Notes that are subject to the existing transfer restrictions. In
addition, if you tender your Old Notes for the purpose of participating in a
distribution of the New Notes, you will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the New Notes. If you are a broker-dealer that
receives New Notes for your own account in exchange for Old Notes that you
acquired as a result of market-making activities or any other trading
activities, you will be required to acknowledge that you will deliver a
prospectus in connection with any resale of such New Notes. After the exchange
offer is consummated, if you continue to hold any Old Notes, you may have
difficulty selling them because there may be only a small amount of Old Notes
outstanding.
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 average daily rate, or 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, outbreaks of armed conflicts, including the continuation or
expansion of the armed conflicts between the Israelis and Palestinians, 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.
The share repurchase program authorizes repurchases 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:
- we had approximately $1.9 billion in consolidated debt, of which
approximately $696 million was secured by mortgages or capital leases;
- we had a ratio of consolidated debt (net of cash) to market
capitalization of 60.7%;
12
- we had a ratio of consolidated debt (net of cash) to investment in
hotels, as defined by us, of 42.8%; and
- 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 totalled
$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 you. For example, it
could:
- make it more difficult for us to satisfy our obligations with respect to
the notes;
- 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;
- require us to agree to additional restrictions and limitations on our
business operations and capital structure to obtain additional or
continued financing;
- increase our vulnerability to adverse economic and industry conditions as
well as fluctuations in interest rates;
- 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;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
- place us at a competitive disadvantage compared to our competitors that
have less debt.
THE NOTES ARE EFFECTIVELY JUNIOR TO CERTAIN OF OUR AND OUR SUBSIDIARIES'
EXISTING DEBT
The Notes are unsecured and rank equally with our existing and future
unsecured senior debt, including the existing 9 1/2% notes. The Notes are
effectively subordinated to all of our and our consolidated subsidiaries'
secured debt and to all other debt of our non-guarantor subsidiaries. As of
December 31, 2001, we and our consolidated subsidiaries had approximately $696
million of secured debt, all of which was mortgage and capitalized lease debt
and effectively senior to the notes to the extent of the value of the underlying
assets.
As of December 31, 2001, our non-guarantor subsidiaries had no other debt.
The Notes and our other existing 9 1/2% notes have substantially the same
covenants and other terms and conditions as our 7 3/8% and 7 5/8% senior notes
due 2004 and 2007, respectively, and our 8 1/2% senior notes due 2011, except
that the redemption provisions of the Notes and our other existing 9 1/2% notes
are different from these other notes and the repurchase of additional capital
stock is subject to certain additional restrictions.
13
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 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
taxable REIT subsidiaries, referred to as TRSs, to acquire 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 Operations, L.L.C., or 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 these leases and termination of the related management
agreements,
14
413,585 shares of FelCor common stock valued at approximately $10 million were
issued to Six Continents Hotels. We acquired the remaining 88 leases held by Six
Continents Hotels, effective July 1, 2001. We have contributed these 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, see "Business and Properties -- Management
Agreements".
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 the Notes and our existing Notes and the
agreements governing our line of credit contain various restrictive covenants
including, among others, provisions restricting us from:
- incurring indebtedness;
- making distributions;
- making investments;
- engaging in transactions with affiliates;
- incurring liens;
- merging or consolidating with another person;
- disposing of all or substantially all of our assets; or
- 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 these 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.
15
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,
including the Notes. 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:
- competition from other hotels;
- construction of more hotel rooms in a particular area than needed to meet
demand;
- cost increases and shortages of gasoline, electricity, jet fuel and other
energy sources and increases in other travel expenses that reduce
business and leisure travel;
- adverse effects of declines in general and local economic activity;
- fluctuations in our revenue caused by the seasonal nature of the hotel
industry;
- adverse effects of a downturn in the hotel and travel industries; and
- 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 these 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 this assertion to be justified,
if a lender was successful in proving a default, we may be required to either
provide the terrorism insurance or repay the loan.
16
We have geographic concentrations that may create risks from regional
economic and weather conditions. Approximately 54.4% of our hotel 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
FelCor's 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
17
operated under each of the indicated brands, based on room revenues for the year
ended December 31, 2001:
<Table>
- - Embassy Suites Hotels 40.1%
- - Holiday Inns 28.6%
- - Crowne Plaza 11.5%
</Table>
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:
- wage and benefit costs;
- repair and maintenance expenses;
- the costs of gas and electricity;
- the costs of liability insurance; and
- 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 FINANCING 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
18
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 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 contained in our Form 10-K
for the year ended December 31, 2001. 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. FelCor has
operated and intends to continue to operate in a manner that is intended to
qualify it 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,
FelCor cannot be certain that it has 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 FelCor to tax. Each
year, a REIT must pay out to its shareholders at least 90%, of its taxable
income, other than any net capital gain. To the extent that FelCor satisfies the
applicable distribution requirement, but distributes less than 100% of its
taxable income, it will be subject to federal corporate income tax on its
undistributed taxable income. In addition, FelCor will be subject to a 4%
nondeductible tax if the actual amount it pays out to its shareholders in a
calendar year is less than a minimum amount specified under federal tax laws.
FelCor's only source of funds to make such distributions comes from
distributions to FelCor from FelCor LP. Accordingly, FelCor may be required to
borrow money or sell assets to make distributions sufficient to pay out enough
of its taxable income to satisfy the applicable distribution requirement and to
avoid corporate income tax and the 4% tax in a particular year.
19
Failure to qualify as a REIT would subject FelCor to federal income
tax. If FelCor fails to qualify as a REIT in any taxable year, FelCor would be
subject to federal income tax on its taxable income. We might need to borrow
money or sell hotels in order to pay this tax. If we cease to be a REIT, we no
longer would be required to distribute most of our taxable income to our
shareholders. 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.
Failure to have distributed earnings and profits of Bristol Hotel Company
in 1998 could cause FelCor 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 FelCor in 1998, Arthur Andersen
LLP prepared and provided to FelCor its computation of Bristol's accumulated
earnings and profits through the date of the merger, and FelCor made a
corresponding special distribution to its shareholders. 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 FelCor, FelCor 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:
- the amount of gain that we recognize at the time of the sale; or
- 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 assets 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:
- adverse changes in general or local economic or real estate market
conditions;
- changes in zoning laws;
- changes in traffic patterns and neighborhood characteristics;
- increases in assessed valuation and real estate tax rates;
- increases in the cost of property insurance;
- governmental regulations and fiscal policies;
- the potential for uninsured or underinsured property losses;
20
- the impact of environmental laws and regulations; and
- 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.
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 our hotels will not be affected
by new information or changed circumstances, by the condition of properties in
the vicinity of the 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.
UNDER CERTAIN CIRCUMSTANCES, COURTS MAY VOID THE GUARANTEES UNDER FRAUDULENT
TRANSFER LAWS
Federal and state fraudulent conveyance laws allow courts, under specific
circumstances, to void guarantees and require noteholders to return payments
received from guarantors in the event of the bankruptcy or other financial
difficulty of the subsidiary guarantor. Under federal bankruptcy law and
comparable provisions of state fraudulent transfer laws, a guarantee of the
Notes could be voided, or claims in respect of a guarantee could be subordinated
to all other debt of the guarantor, if, among other things, at the time the
guarantor incurred the debt evidenced by its guarantee, the guarantor:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such guarantee; and
- was insolvent or was rendered insolvent by reason of such incurrence; or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed (or reasonably should have believed) that
it would incur, debts beyond its ability to pay such debts as they
mature.
21
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The measure of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor of the Notes
would be considered insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets; or
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
matured; or
- it could not pay its debts as they become due.
A court is likely to find that a guarantor of the Notes did not receive
fair consideration or reasonably equivalent value for its guarantee to the
extent that its liability under the guarantee is greater than the direct benefit
it received from the issuance of Notes. By its terms, each guarantee of the
Notes will limit the liability of the guarantor to the maximum amount that it
can pay without the guarantee being deemed a fraudulent transfer. A court may
not give effect to this limitation on liability. In that event, a court may find
that the issuance of the guarantee rendered the subsidiary guarantor insolvent.
If a court avoids the guarantee or holds it unenforceable, you will cease to
have a claim against the guarantor and will be solely a creditor of FelCor LP.
If the limitation on liability is effective, the amount that the guarantor is
found to have guaranteed might be so low that there will not be sufficient funds
to pay the Notes in full.
YOU CANNOT BE SURE THAT AN ACTIVE PUBLIC TRADING MARKET WILL EXIST FOR THE NEW
NOTES.
There is currently a limited trading market for the Notes. We do not intend
to list the New Notes on any securities exchange. Although we expect the New
Notes to be eligible for trading in The PORTAL Market, we cannot assure you that
an active trading market for the New Notes will develop. The placement agents
have advised us that they intend to make a market in the New Notes. However,
they are not obligated to do so and may discontinue market-making at any time
without notice.
The liquidity of any market for the New Notes will depend upon various
factors, including:
- the number of holders of the New Notes;
- the interest of securities dealers in making a market for the New Notes;
- the overall market for high yield securities;
- our financial performance and prospects; and
- the prospects for companies in our industry generally.
Accordingly, we cannot assure you that an active trading market will
develop for the New Notes. If the New Notes are traded after their initial
issuance, they may trade at a discount from the initial offering price of the
Old Notes, depending upon prevailing interest rates and other factors, including
those listed above.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Notes. Any market for the New Notes may be subject to similar
disruptions. Any such disruptions may adversely affect you as a holder of the
New Notes.
22
THE EXCHANGE OFFER
PURPOSE AND EFFECT
FelCor LP sold the Old Notes on December 3, 2001 to the initial purchasers,
pursuant to a purchase agreement. The initial purchasers subsequently resold the
Old Notes under Rule 144A under the Securities Act. As part of the offering of
the Old Notes, we entered into a registration rights agreement. The registration
rights agreement requires, unless the exchange offer is not permitted by
applicable law or SEC policy, that we
- use our best efforts to cause the registration statement to become
effective and to have the exchange offer consummated within 180 days
following December 3, 2001; and
- upon effectiveness of the registration statement, commence the exchange
offer and keep the exchange offer open for at least 20 business days and
not more than 30 business days.
Except as provided below, upon the completion of the exchange offer, our
obligations with respect to the registration of the Old Notes and the New Notes
will terminate. A copy of the registration rights agreement previously has been
filed with the SEC, and this summary of the material provisions of the
registration rights agreement does not purport to be complete. In the event the
exchange offer is not consummated on or prior to June 1, 2002, the interest rate
on the Old Notes will increase to 10.0% per annum until such exchange offer has
been completed in accordance with the terms of the registration rights
agreement. Following the completion of the exchange offer, except as set forth
in the paragraph immediately below, holders of Old Notes not tendered will not
have any further registration rights and those Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for the Old Notes could be adversely affected upon consummation of the
exchange offer.
In order to participate in the exchange offer, a holder must represent to
us, among other things, that (i) the New Notes acquired pursuant to the exchange
offer are being obtained in the ordinary course of business of the holder, (ii)
the holder is not engaging in and does not intend to engage in a distribution of
the New Notes, (iii) the holder does not have an arrangement or understanding
with any person to participate in the distribution of the New Notes and (iv) the
holder is not an "affiliate," as defined under Rule 405 promulgated under the
Securities Act, of FelCor LP, FelCor or the subsidiary guarantors. Under certain
circumstances specified in the registration rights agreement, we may be required
to file a "shelf" registration statement for a continuous offering pursuant to
Rule 415 under the Securities Act in respect of resales of the Old Notes. See
"Description of the Notes and Guarantees -- Registration Rights." For purposes
of the foregoing, "Transfer Restricted Securities" means each Old Note until (i)
the date on which such Old Note has been exchanged by a person other than a
broker-dealer for a New Note in the exchange offer, (ii) following the exchange
by a broker-dealer in the exchange offer of an Old Note for a New Note, the date
on which such New Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of this prospectus,
(iii) the date on which such Old Note has been effectively registered under the
Securities Act and disposed of in accordance with such "shelf" registration
statement or (iv) the date on which such Old Note is distributed to the public
pursuant to Rule 144 under the Securities Act or may be distributed to the
public pursuant to Rule 144(k) under the Securities Act. See "-- Procedures for
Tendering Old Notes."
Based on an interpretation by the SEC's staff set forth in no-action
letters issued to third parties unrelated to us, we believe that, with the
exceptions set forth below, New Notes issued pursuant to the exchange offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any holder which is an "affiliate" of
FelCor, FelCor LP or the subsidiary guarantors within the meaning of Rule 405
promulgated under the Securities Act, or a broker-dealer who purchased Old Notes
directly from FelCor LP to resell pursuant to Rule 144A or any other available
exemption promulgated under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the New Notes are acquired in the ordinary course of business of the holder
and the holder does not have an arrangement or understanding with any person to
23
participate in the distribution of such New Notes. Any holder who tenders in the
exchange offer for the purpose of participating in a distribution of the New
Notes cannot rely on this interpretation by the SEC's staff and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Each broker-dealer that receives
New Notes for its own account in exchange for Old Notes, where such Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
Broker-dealers who acquired Old Notes directly from us and not as a result of
market-making activities or other trading activities may not rely on the SEC
staff's interpretations discussed above or participate in the exchange offer and
must comply with the registration and prospectus delivery requirements of the
Securities Act in order to sell the Old Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the completion of the exchange offer, holders of Old Notes who
did not tender their Old Notes, or who did not properly tender their Old Notes,
will not have any further registration rights and such Old Notes will continue
to be subject to restrictions on transfer. Accordingly, the liquidity of the
market for a holder's Old Notes could be adversely affected upon expiration of
the exchange offer if such holder elects to not participate in the exchange
offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, we will accept for exchange any
and all Old Notes that are validly tendered on or prior to 5:00 p.m. New York
City time, on the expiration date. We will issue $1,000 principal amount of New
Notes in exchange for each $1,000 principal amount of the outstanding Old Notes
accepted in the exchange offer. Holders who have tendered their Old Notes may
withdraw their tender of Old Notes at any time prior to 5:00 p.m., New York City
time, on the expiration date. The exchange offer is not conditioned upon any
minimum principal amount of Old Notes being tendered for exchange. However, the
exchange offer is subject to the terms and provisions of the registration rights
agreement. See "-- Conditions of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders of Old Notes may tender less than the aggregate principal
amount represented by the Old Notes they hold, provided that they appropriately
indicate this fact on the letter of transmittal accompanying the tendered Old
Notes.
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes, except that the New Notes have been registered under
the Securities Act and will not bear legends restricting their transfer. The New
Notes will evidence the same debt as the Old Notes and will be issued pursuant
to, and entitled to the benefits of, the indenture pursuant to which the Old
Notes were issued.
As of the date of this prospectus, $100 million in aggregate principal
amount of the Old Notes is outstanding. As of April , 2002, Cede & Co., was
the only registered holder of the Old Notes. Cede & Co. held the Old Notes for
of its participants. We have fixed the close of business on April , 2002, as
the record date for purposes of determining the persons to whom we will mail
this prospectus and the letter of transmittal initially. Only a holder of the
Old Notes, or such holder's legal representative or attorney-in-fact, may
participate in the exchange offer. We will not fix a record date for determining
holders of the Old Notes entitled to participate in the exchange offer. We
believe that, as of the date of this prospectus, no such holder is our
affiliate, as defined in Rule 405 under the Securities Act.
We will be deemed to have accepted validly tendered Old Notes when, as and
if we have given oral or written notice thereof to the exchange agent. The
exchange agent will act as agent for the tendering holders of Old Notes and for
the purpose of receiving the New Notes from us.
24
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of other events set forth in this prospectus or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder as promptly as practicable after the
expiration date.
Holders who tender Old Notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the exchange offer. We will pay all charges and expenses, other than
certain applicable taxes, in connection with the exchange offer. See "-- Fees
and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date shall be May , 2002, at 5:00 p.m., New York City
time, unless we, in our sole discretion, extend the exchange offer, in which
case the expiration date shall be the latest date and time to which the exchange
offer is extended, but shall not be later than , 2002.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will make a public announcement
thereof, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
We reserve the right, in our sole discretion,
- to delay accepting any Old Notes;
- to extend the exchange offer;
- if any of the conditions set forth below under "-- Conditions of the
Exchange Offer" shall not have been satisfied, to terminate the exchange
offer, by giving oral or written notice of such delay, extension, or
termination to the exchange agent; and
- to amend the terms of the exchange offer in any manner.
If we amend the exchange offer in a manner we determine to constitute a
material change, we will promptly disclose such amendments by means of a
prospectus supplement that we will distribute to the registered holders of the
Old Notes. Modification of the exchange offer, including, but not limited to,
- extension of the period during which the exchange offer is open; and
- satisfaction of the conditions set forth below under "-- Conditions of
the Exchange Offer"
may require that at least five business days remain in the exchange offer.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we shall not be
required to accept for exchange, or to issue New Notes in exchange for, any Old
Notes and may terminate or amend the exchange offer if at any time before the
acceptance of such Old Notes for exchange or the exchange of the New Notes for
the Old Notes, we determine that the exchange offer violates applicable law, any
applicable interpretation of the staff of the SEC or any order of any
governmental agency or court of competent jurisdiction.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us, in whole or in part, at any time and from time to time in our sole
discretion. The failure by us at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any such right and each such right shall
be deemed an ongoing right which may be asserted at any time and from time to
time.
In addition, we will not accept for exchange any Old Notes tendered, and no
New Notes will be issued in exchange for any such Old Notes, if at such time any
stop order shall be threatened or in effect
25
with respect to the registration statement, of which this prospectus constitutes
a part, or the qualification of the indenture under the Trust Indenture Act of
1939. In any such event, we are required to use every reasonable effort to
obtain the withdrawal of any stop order at the earliest possible time.
ACCRUED INTEREST
The New Notes will bear interest at a rate equal to 9 1/2% per annum, which
interest shall accrue from March 15, 2002 or from the most recent interest
payment date with respect to the Old Notes to which interest was paid or duly
provided for. See "Description of the Notes and Guarantees -- General."
PROCEDURES FOR TENDERING OLD NOTES
Only a holder of Old Notes may tender the Old Notes in the exchange offer.
To tender in the exchange offer a holder must (a) except as set forth under
"-- Book-Entry Transfer," complete, sign, and date the letter of transmittal, or
a copy thereof, have the signatures thereon guaranteed if required by the letter
of transmittal, and mail or otherwise deliver the letter of transmittal or copy
to the exchange agent prior to the expiration date, or (b) tender through DTC
pursuant DTC's Automated Tender Offer Program, or ATOP. In addition, unless the
holder is tendering through ATOP, (i) certificates for the Old Notes must be
received by the exchange agent along with the letter of transmittal prior to the
expiration date, (ii) a timely confirmation of a book-entry transfer, called a
book-entry confirmation, of such Old Notes, if that procedure is available, into
the exchange agent's account at DTC, which is a book-entry transfer facility,
pursuant to the procedure for book-entry transfer described below, must be
received by the exchange agent prior to the expiration date or (iii) the holder
must comply with the guaranteed delivery procedures described below. To be
tendered effectively, the letter of transmittal and other required documents
must be received by the exchange agent at the address set forth under "-- The
Exchange Agent; Assistance" prior to the expiration date.
The exchange agent and DTC have confirmed that the exchange offer is
eligible for ATOP. Accordingly, DTC participants may electronically transmit
their acceptance of the exchange offer by causing DTC to transfer their Old
Notes to the exchange agent in accordance with ATOP procedures for such a
transfer. DTC will then send an agent's message (as described below) to the
exchange agent. Beneficial holders desiring to tender their Old Notes on the
expiration date should note that such beneficial holders must allow sufficient
time for completion of the ATOP procedures during normal business hours of DTC,
and prior to the time that the exchange offer expires, on such date. The term
"agent's message" means a message, transmitted by DTC to and received by the
exchange agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the tendering participant,
which acknowledgment states that such participant has received and agrees to be
bound by the letter of transmittal, and that the Company may enforce such letter
of transmittal, as the case may be, against such participant.
The tender by a holder that is not withdrawn before the expiration date
will constitute an agreement between that holder and us in accordance with the
terms and subject to the conditions set forth herein and in the letter of
transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO US. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUSTS COMPANIES OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
26
Any beneficial owner whose Old Notes are registered in the name of a
broker-dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the registered owner's behalf, the beneficial owner
must, prior to completing and executing the letter of transmittal and delivering
the registered owner's Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in the beneficial owner's name or obtain a
properly completed bond power from the registered owner. The transfer of
registered ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an eligible institution (as described) unless
Old Notes tendered pursuant to the letter are tendered (i) by a registered
holder who has not completed the box entitled "Special Issuance and Delivery
Instructions" on the letter of transmittal or (ii) for the account of an
eligible institution. If signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantee
must be by any eligible guarantor institution that is a member of or participant
in the Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act, each of which is an "eligible
institution."
If the letter of transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, the Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as that registered holder's name appears on the Old Notes.
If the letter of transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to us of
their authority to so act must be submitted with the letter of transmittal
unless waived by us.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
us in our sole discretion, which determination shall be final and binding.
FelCor reserves the absolute right to reject any and all Old Notes not properly
tendered or any Old Notes FelCor's acceptance of which would, in the opinion of
counsel for us, be unlawful. FelCor also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Old Notes.
FelCor's interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as we shall
determine. Although we intend to notify holders of defects or irregularities
with respect to tenders of Old Notes, neither FelCor, the exchange agent, nor
any other person shall incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such defects or irregularities have been cured or waived. Any Old Notes received
by the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following , 2002, unless the
exchange offer is extended.
In addition, we reserve the right in our sole discretion to purchase or
make offers to purchase any Old Notes that remain outstanding after the
expiration date or, as set forth under "-- Conditions of the Exchange Offer," to
terminate the exchange offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions, or
otherwise. The terms of any such purchases or offers could differ from the terms
of the exchange offer.
By tendering, each holder will represent to us that, among other things,
(i) the New Notes acquired pursuant to the exchange offer are being obtained in
the ordinary course of business of the person receiving such New Notes, whether
or not such person is the registered holder, (ii) the holder is not engaging in
and does not intend to engage in a distribution of such New Notes, (iii) the
holder does not have an arrangement or understanding with any person to
participate in the distribution of such New
27
Notes and (iv) the holder is not an "affiliate," as defined under Rule 405 of
the Securities Act, of FelCor, FelCor LP or any of the subsidiary guarantors.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the exchange agent of certificates for such Old Notes or a timely book-entry
confirmation of such Old Notes into the exchange agent's account at the
book-entry transfer facility, a properly completed and duly executed letter of
transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of an
agreement to be bound by the letter of transmittal), and all other required
documents. If any tendered Old Notes are not accepted for any reason set forth
in the terms and conditions of the exchange offer or if Old Notes are submitted
for a greater principal amount than the holder desires to exchange, such
unaccepted or non-exchanged Old Notes will be returned without expense to the
tendering holder thereof (or, in the case of Old Notes tendered by book-entry
transfer into the exchange agent's account at the book-entry transfer facility
pursuant to the book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such
book-entry transfer facility) as promptly as practicable after the expiration or
termination of the exchange offer.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the Old Notes at the book-entry transfer facility for purposes of the
exchange offer within two business days after the date of this prospectus, and
any financial institution that is a participant in the book-entry transfer
facility's systems may make book-entry delivery of Old Notes being tendered by
causing the book-entry transfer facility to transfer such Old Notes into the
exchange agent's account at the book-entry transfer facility in accordance with
such book-entry transfer facility's procedures for transfer. Although delivery
of Old Notes may be effected through book-entry transfer at the book-entry
transfer facility, the letter of transmittal or copy thereof, with any required
signature guarantees and any other required documents, must, in any case other
than as set forth in the following paragraph, be transmitted to and received by
the exchange agent at the address set forth under "-- The Exchange Agent;
Assistance" on or prior to the expiration date or the guaranteed delivery
procedures described below must be complied with.
Holders who are tendering by book-entry transfer to the exchange agent's
account at DTC may execute their tender through ATOP by transmitting their
acceptance to DTC in accordance with DTC's ATOP procedures; DTC will then verify
the acceptance, execute a book-entry delivery to the exchange agent's account at
DTC and send an agent's message to the exchange agent. Delivery of the agent's
message by DTC to the exchange agent will satisfy the terms of the exchange
offer in lieu of execution and delivery of a letter of transmittal by the
participant identified in the agent's message. Accordingly, the letter of
transmittal need not be completed by a holder tendering through ATOP.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available, or who cannot deliver their Old Notes or any other
documents required by the letter of transmittal to the Exchange Agent prior to
the expiration date, may tender their Old Notes according to the guaranteed
delivery procedures set forth in the letter of transmittal. Pursuant to such
procedures:
(1) the holder tenders through an eligible institution and signs a
notice of guaranteed delivery;
(2) on or prior to the expiration date, the exchange agent receives
from the holder and the eligible institution a written or facsimile copy of
a properly completed and duly executed notice of guaranteed delivery,
substantially in the form provided by us, setting forth the name and
address of
28
the holder, the certificate number or numbers of the tendered Old Notes,
and the principal amount of tendered Old Notes, stating that the tender is
being made thereby and guaranteeing that, within five business days after
the date of delivery of the notice of guaranteed delivery, the tendered Old
Notes, a duly executed letter of transmittal and any other required
documents will be deposited by the eligible institution with the exchange
agent; and
(3) such properly completed and executed documents required by the
letter of transmittal and the tendered Old Notes in proper form for
transfer are received by the exchange agent within five business days after
the expiration date.
Any holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the exchange agent receives
the notice of guaranteed delivery and letter of transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the expiration date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the exchange offer, we
will accept any and all Old Notes that are properly tendered in the exchange
offer prior to 5:00 p.m., New York City time, on the expiration date. The New
Notes issued pursuant to the exchange offer will be delivered promptly after
acceptance of the Old Notes. For purposes of the exchange offer, we shall be
deemed to have accepted validly tendered Old Notes, when, as, and if we have
given oral or written notice thereof to the exchange agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the exchange offer will be made only after the exchange
agent timely receives such Old Notes, a properly completed and duly executed
letter of transmittal and all other required documents; provided, however, we
reserve the absolute right to waive any defects or irregularities in the tender
or conditions of the exchange offer. If we do not accept any tendered Old Notes
for any reason, we will return such unaccepted Old Notes without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the exchange offer.
WITHDRAWAL RIGHTS
Holders may withdraw tenders of Old Notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date. For the withdrawal to be effective,
the exchange agent must receive a written notice of withdrawal at its address
set forth on the back cover page of this prospectus. The notice of withdrawal
must:
- specify the name of the person, the depositor, who tendered the Old Notes
to be withdrawn or, in the case of Old Notes tendered by book-entry
transfer, the name of the participant for whose account such Old Notes
were tendered and such participant's account number at DTC to be credited
with the withdrawn Old Notes;
- identify the Old Notes to be withdrawn, including the certificate number
or numbers and principal amount of withdrawn Old Notes;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such Old Notes were tendered,
including any required signature guarantees, or be accompanied by a bond
power in the name of the person withdrawing the tender, in satisfactory
form as determined by us in our sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an eligible
institution together with the other documents required upon transfer by
the indenture or, in the case of Old Notes tendered by a DTC participant
through ATOP, be signed by such participant in the same manner as the
participant's name is listed on the applicable agent's message; and
- specify the name in which such Old Notes are to be registered, if
different from the person who deposited the Old Notes, pursuant to such
documents of transfer.
29
We shall determine all questions as to the validity, form and eligibility,
including time of receipt, of such withdrawal notices in our sole discretion.
The Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the exchange offer. Any Old Notes that have been
tendered for exchange but are withdrawn will be returned to their holder,
without cost to such holder, as soon as practicable after withdrawal. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under "-- Procedures for Tendering Old Notes" at any time on or prior
to the expiration date.
THE EXCHANGE AGENT; ASSISTANCE
SunTrust Bank is the exchange agent. All tendered Old Notes, executed
letters of transmittal and other related documents should be directed to the
exchange agent. Questions and requests for assistance and requests for
additional copies of this prospectus, the letter of transmittal and other
related documents should be addressed to the exchange agent as follows:
<Table>
BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT COURIER:
SunTrust Bank SunTrust Bank
Attention: George T. Hogan, Attention: George T. Hogan,
Corporate Trust Department Corporate Trust Department
25 Park Place, 24th Floor 25 Park Place, 24th Floor
Atlanta, Georgia 30303-2900 Atlanta, Georgia 30303-2900
or or
SunTrust Bank SunTrust Bank
c/o Computershare c/o Computershare
Attention: Corporate Trust Department Attention: Mary Ann Luisi, Corporate
Wall Street Plaza Trust Department
88 Pine Street, 19th Floor Wall Street Plaza
New York, New York 10005 88 Pine Street, 19th Floor
New York, New York 10005
</Table>
BY FACSIMILE:
(404) 588-7335 (GA)
or
(212) 701-7648 (NY)
Confirm by Telephone: (404) 588-7591 (GA); (212) 701-7673 (NY)
FEES AND EXPENSES
We will bear all expenses incident to the consummation of the exchange
offer and compliance with the registration rights agreement, including, without
limitation: (1) all registration and filing fees, including fees and expenses of
compliance with state securities or Blue Sky laws; (2) printing expenses,
including expenses of printing certificates for the New Notes in a form eligible
for deposit with DTC and of printing prospectuses; (3) messenger, telephone and
delivery expenses; (4) fees and disbursements of our counsel; (5) fees and
disbursements of independent certified public accountants; (6) rating agency
fees; (7) our internal expenses, including all salaries and expenses of our
officers and employees performing legal or accounting duties; and (8) fees and
expenses, if any, incurred in connection with the listing of the New Notes on a
securities exchange.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptance of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
30
We will pay all transfer taxes, if any, applicable to the exchange of Old
Notes pursuant to the exchange offer. If, however, a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the exchange offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption is not submitted
with the letter of transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
ACCOUNTING TREATMENT
We will record the New Notes at the same carrying value as the Old Notes,
as reflected in our accounting records on the date of the exchange. Accordingly,
we will not recognize any gain or loss for accounting purposes. We will amortize
expenses of the exchange offer over the term of the New Notes.
31
CAPITALIZATION
The following table sets forth the capitalization of FelCor LP at December
31, 2001.
<Table>
<Caption>
DECEMBER 31,
2001
ACTUAL
--------------
(IN THOUSANDS)
Short-term debt:
Current portion of mortgage and capital lease debt........ $ 12,922
----------
Total short-term debt............................. 12,922
----------
Long-term debt:
Line of credit............................................ 49,674
Senior notes:
7 3/8% due 2004(1)..................................... 174,633
7 5/8% due 2007(1)..................................... 124,419
9 1/2% due 2008(2)..................................... 496,997
9 1/2% due 2008(3)..................................... 98,528
8 1/2% due 2011(4)..................................... 297,655
Mortgage and capital lease debt........................... 682,930
Other debt................................................ 650
----------
Total long-term debt.............................. 1,925,486
Redeemable units at redemption value...................... 150,479
Preferred units........................................... 293,265
Partners' capital......................................... 1,475,550
----------
Total capitalization................................... $3,857,702
==========
</Table>
- ------------
(1) Amount is shown net of approximately $1.0 million in aggregate unamortized
discount.
(2) References our other existing 9 1/2% senior notes; amount is shown net of
approximately $3.1 million in aggregate unamortized discount.
(3) References the Old Notes; amount is shown net of approximately $1.5 million
in aggregate unamortized discount.
(4) Amount is shown net of approximately $2.4 million in aggregate unamortized
discount.
32
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth selected historical and pro forma
consolidated financial information for FelCor LP and FelCor. The selected
historical information is presented as of and for the years ended December 31,
1997, 1998, 1999, 2000 and 2001. We derived the historical consolidated
financial information for the years ended December 31, 1997, 1998, 1999, 2000
and 2001 from our consolidated financial statements and the notes thereto,
audited by PricewaterhouseCoopers LLP, independent accountants. Certain
reclassifications have been made to previously reported amounts to conform to
current year presentation with no effect to previously reported net income,
stockholders' equity or partners' capital. The summary unaudited pro forma
financial information for the year ended December 31, 2001 is presented for
illustrative purposes only and is not necessarily indicative of what our actual
results of operations would have been had the transactions described below been
consummated on the date indicated.
The unaudited pro forma statement of operations and other data is presented
as if the following occurred on January 1, 2001: (i) our acquisition of 88 hotel
leases held by Six Continents Hotels, on July 1, 2001; and (ii) the completion
of the offering of the Old Notes and the application of the net proceeds to
repay borrowings under our line of credit. These pro forma assumptions differ
from those applicable to the pro forma information presented in "Management's
Discussion and Analysis of Financial Condition and Results of Operations". The
pro forma information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" was prepared solely to facilitate
the comparison of our results of operations for 2000 and 2001.
You should read the following in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Unaudited Pro
Forma Consolidated Financial Information" and the Consolidated Financial
Statements and notes thereto included elsewhere in this prospectus or
incorporated herein by reference.
FELCOR LODGING LIMITED PARTNERSHIP
<Table>
<Caption>
PRO FORMA
ACTUAL (UNAUDITED)
-------------------------------------------------------------- ------------
YEAR ENDED DECEMBER 31, YEAR ENDED
-------------------------------------------------------------- DECEMBER 31,
1997 1998(1) 1999 2000(2) 2001(3) 2001(4)
---------- ---------- ---------- ---------- ---------- ------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $ 169,688 $ 332,600 $ 493,087 $ 539,964 $1,200,971 $1,442,974
Net income (loss)........................... $ 69,467 $ 121,339 $ 135,776 $ 66,391 $ (50,144) $ (48,230)
Net income (loss) applicable to
unitholders............................... $ 57,670 $ 99,916 $ 111,041 $ 41,709 $ (74,744) $ (72,830)
Diluted earnings per unit:
Net income (loss) applicable to
unitholders before extraordinary
charge.................................. $ 1.68 $ 1.93 $ 1.59 $ 0.74 $ (1.19) $ (1.18)
Net income (loss) applicable to
unitholders............................. $ 1.67 $ 1.87 $ 1.57 $ 0.67 $ (1.21)
Weighted average units outstanding........ 34,467 53,323 70,561 62,556 61,635 61,635
OTHER DATA:
Net cash flow provided by operating
activities................................ $ 97,478 $ 192,583 $ 282,365 $ 277,304 $ 130,965
Net cash flow (used in) provided by
investing activities...................... $ (687,860) $ (550,498) $ (205,517) $ (34,766) $ 38,747
Net cash flow provided by (used in)
financing activities...................... $ 600,132 $ 375,064 $ (75,417) $ (252,601) $ (67,060)
Net cash distributions per unit(5).......... $ 2.10 $ 2.545 $ 2.20 $ 2.20 $ 1.70
Funds From Operations(6).................... $ 129,815 $ 217,363 $ 286,895 $ 288,636 $ 183,657 $ 184,301
EBITDA(7)................................... $ 165,613 $ 306,361 $ 432,689 $ 470,861 $ 369,591 $ 373,053
Ratio of earnings to fixed charges(8)....... 3.2x 2.7x 2.1x 1.5x 0.7x 0.7x
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in hotels, net of accumulated
depreciation.............................. $1,489,764 $3,964,484 $4,035,344 $3,750,275 $3,664,712
Total assets................................ $1,673,364 $4,175,383 $4,255,751 $4,103,603 $4,088,929
Total debt, net of discount................. $ 476,819 $1,594,734 $1,833,954 $1,838,241 $1,938,408
Redeemable units............................ $ 102,933 $ 67,595 $ 52,338 $ 205,800 $ 150,479
Total partners' capital..................... $1,049,016 $2,337,375 $2,212,651 $1,880,599 $1,768,815
</Table>
33
FELCOR LODGING TRUST INCORPORATED
<Table>
<Caption>
PRO FORMA
ACTUAL (UNAUDITED)
-------------------------------------------------------------- ------------
YEAR ENDED DECEMBER 31, YEAR ENDED
-------------------------------------------------------------- DECEMBER 31,
1997 1998(1) 1999 2000(2) 2001(3) 2001(4)
---------- ---------- ---------- ---------- ---------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $ 169,688 $ 332,600 $ 493,087 $ 539,964 $1,200,971 $1,442,974
Net income (loss)........................... $ 63,650 $ 114,839 $ 131,080 $ 61,699 $ (39,276) $ (37,456)
Net income (loss) applicable to common
shareholders.............................. $ 51,853 $ 93,416 $ 106,345 $ 37,017 $ (63,876) $ (62,056)
Diluted earnings per share:
Net income (loss) applicable to common
shareholders before extraordinary
charge.................................. $ 1.65 $ 1.92 $ 1.59 $ 0.74 $ (1.19) $ (1.18)
Net income (loss) applicable to common
shareholders............................ $ 1.64 $ 1.86 $ 1.57 $ 0.67 $ (1.21)
Weighted average common shares
outstanding............................. 31,610 50,314 67,581 55,519 52,622 52,622
OTHER DATA:
Net cash flow provided by operating
activities................................ $ 97,478 $ 192,583 $ 282,365 $ 277,304 $ 130,965
Net cash flow (used in) provided by
investing activities...................... $ (687,860) $ (550,498) $ (205,517) $ (34,766) $ 38,747
Net cash flow provided by (used in)
financing activities...................... $ 600,132 $ 375,064 $ (75,417) $ (252,601) $ (67,060)
Net cash distributions per common
share(5).................................. $ 2.10 $ 2.545 $ 2.20 $ 2.20 $ 1.70
Funds From Operations(6).................... $ 129,815 $ 217,363 $ 286,895 $ 288,636 $ 183,657 $ 184,301
EBITDA(7)................................... $ 165,613 $ 306,361 $ 432,689 $ 470,861 $ 369,591 $ 373,053
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in hotels, net of accumulated
depreciation.............................. $1,489,764 $3,964,484 $4,035,344 $3,750,275 $3,664,712
Total assets................................ $1,673,364 $4,175,383 $4,255,751 $4,103,603 $4,088,929
Total debt, net of discount................. $ 476,819 $1,594,734 $1,833,954 $1,838,241 $1,938,408
Minority interest in FelCor Partnership..... $ 73,451 $ 87,353 $ 90,078 $ 252,294 $ 236,100
Total stockholders' equity.................. $1,078,498 $2,317,617 $2,174,911 $1,834,105 $1,683,194
</Table>
- ------------
(1) On July 28, 1998, FelCor 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. FelCor subsequently
contributed all assets and liabilities it acquired in the merger to us in
exchange for approximately 31 million of our common units.
(2) In the second quarter of 2000, we recorded a $63 million loss related to the
decision to sell certain non-strategic hotel assets, which is reflected in
the income statements presented for the period.
(3) 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, revenues were
comprised mainly of percentage lease revenues. Additionally, for the year
ended December 31, 2001, we recorded approximately $78 million of
non-recurring expenses made up of lease termination costs of $37 million,
merger termination costs of $20 million, merger related financing costs of
$6 million, swap termination expense of $7 million, loss on hotels held for
sale of $7 million, $1 million of extraordinary loss from the write-off of
deferred loan costs and abandoned project write-offs of $1 million.
(4) Net income (loss) on a pro forma basis is presented before extraordinary
items, and includes $78 million of non-recurring expenses incurred for the
year ended December 31, 2001.
(5) In the fourth quarter of 2001, we paid distributions of $0.05 per unit. This
reduction from the $0.55 per unit quarterly distribution 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 one-time distribution of
accumulated but undistributed earnings and profits as a result of Bristol
Hotel Company merging with and into FelCor, in addition to the annual
dividend of $2.20 per common unit. The amount of the one-time distribution
was $0.345 per common unit.
(6) We consider Funds From Operations to be a key measure of a REIT's
performance, which should be considered along with, but not as an
alternative to, net income and cash flow as a measure of 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, or NAREIT,
defines Funds From Operations as net income or loss, computed in accordance
with GAAP,
34
excluding gains or losses from extraordinary items in accordance with GAAP
and sales of depreciable operating properties, plus real estate related
depreciation and amortization and after comparable adjustments for our
portion of these items related to unconsolidated entities and joint
ventures. We believe that Funds From Operations is 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, it
provides investors with an indication of our ability to incur and service
debt, to make capital expenditures, and to fund other cash needs. We compute
Funds From Operations in accordance with standards established by NAREIT,
except that we add back the loss on hotels held for sale, lease termination
costs, merger termination costs, non-recurring merger financing costs, loss
on hotels held for sale, abandoned projects and swap termination expense to
derive Funds From Operations. This may not be comparable to Funds From
Operations 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 Funds From
Operations for the loss on hotels held for sale, lease termination costs,
merger termination costs, non-recurring merger financing costs, loss on
hotels held for sale, abandoned projects and swap termination expense. Funds
From Operations does not represent cash generated from operating activities
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 is it indicative
of funds available to fund our cash needs, including its ability to make
cash distributions. Funds From Operations may include funds that may not be
available for discretionary use by our management due to requirements to
conserve funds for capital expenditures and property acquisitions and other
commitments and uncertainties.
The computation of Funds From Operations for FelCor LP and FelCor yields the
same result. The following table details our computation of Funds From
Operations for FelCor LP.
<Table>
<Caption>
PRO FORMA
ACTUAL (UNAUDITED)
---------------------------------------------------- ------------
YEAR ENDED DECEMBER 31, YEAR ENDED
---------------------------------------------------- DECEMBER 31,
1997 1998 1999 2000 2001 2001
-------- -------- -------- -------- -------- ------------
(IN THOUSANDS)
Net income................................ $ 69,467 $121,339 $135,776 $ 66,391 $(50,144) $ (48,230)
Lease termination costs................... 36,604 36,604
Swap termination costs.................... 7,049 7,049
Merger costs:
Termination costs....................... 19,919 19,919
Financing costs......................... 5,486 5,486
Gain on sale.............................. (2,595)
Loss on hotels held for sale.............. 63,000 7,000 7,000
Abandoned projects........................ 837 837
Series B redeemable preferred
distributions........................... (8,373) (12,937) (12,937) (12,937) (12,937)
Extraordinary charge from write-off of
deferred financing fees................. 185 3,075 1,113 3,865 1,270
Depreciation.............................. 50,798 90,835 152,948 160,745 157,692 157,692
Depreciation from unconsolidated
entities................................ 9,365 10,487 9,995 10,167 10,881 10,881
-------- -------- -------- -------- -------- ----------
Funds From Operations..................... $129,815 $217,363 $286,895 $288,636 $183,657 184,301
======== ======== ======== ======== ======== ==========
Weighted average units outstanding(a)..... 39,157 58,013 75,251 67,239 66,675 66,675
</Table>
- ------------
(a) Weighted average units outstanding are computed including dilutive
options, unvested stock grants and assuming conversion of Series A
preferred units to common units.
35
(7) EBITDA is computed by adding Funds From Operations, interest expense, our
portion of interest expense from unconsolidated entities, amortization
expense and our Series B redeemable preferred distributions. EBITDA is
presented because it provides useful information regarding our ability to
service debt. EBITDA should not be considered as an alternative measure of
operating results or cash flow from operations, as determined in accordance
with GAAP. EBITDA as presented by us may not be comparable to other
similarly titled measures used by other companies. The computation of EBITDA
for FelCor LP and FelCor yields the same result. A reconciliation of Funds
From Operations to EBITDA for FelCor LP is as follows:
<Table>
<Caption>
PRO FORMA
ACTUAL (UNAUDITED)
---------------------------------------------------- ------------
YEAR ENDED DECEMBER 31, YEAR ENDED
---------------------------------------------------- DECEMBER 31,
1997 1998 1999 2000 2001 2001
-------- -------- -------- -------- -------- ------------
(IN THOUSANDS)
Funds From Operations..................... $129,815 $217,363 $286,895 $288,636 $183,657 $184,301
Interest expense.......................... 28,792 73,182 125,435 158,620 161,226 164,044
Interest expense from unconsolidated
entities................................ 5,895 6,521 6,729 9,188 9,678 9,678
Amortization expense...................... 1,111 922 693 1,480 2,093 2,093
Series B redeemable preferred
distributions........................... 8,373 12,937 12,937 12,937 12,937
-------- -------- -------- -------- -------- --------
EBITDA.................................... $165,613 $306,361 $432,689 $470,861 $369,591 $373,053
======== ======== ======== ======== ======== ========
</Table>
(8) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income from continuing operations plus fixed charges,
excluding capitalized interest, and fixed charges consist of interest,
whether expensed or capitalized, and amortization of loan costs. For the
year ended December 31, 2001, and the pro forma year ended December 31,
2001, earnings were insufficient to cover fixed charges by $44 million and
$43 million, respectively, because of $78 million of non-recurring expenses
included in those periods.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References to "we," "us," "our" and similar words in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
references to FelCor Lodging Limited Partnership and its consolidated
subsidiaries.
GENERAL
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, or 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 unitholders.
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).......................... $(48.9)(1) $ 66.4(2) (173.6) $135.8 (51.1)
</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 $1
million, 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.
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
37
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, or occupancy, of
4.1 percentage points to 68.0% partially offset by the slight increase of 0.6%
in average daily rate, or 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 distribution
on our units to $0.05 per unit, resulting in aggregate distribution of $1.70 per
unit 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. Funds from
operations, or FFO is expected to be within the range of $27 to $30 million for
the first quarter of 2002, and earnings before interest, taxes, depreciation and
amortization, or 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, we issued
approximately 417,000 units, 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.
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 which FelCor issued 413,585 shares of its common stock valued at
approximately $10 million, and we issued a corresponding number of partnership
units to FelCor, of which $1.7 million was included in lease termination costs
and the remainder had been
38
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 us 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 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,
FelCor's 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 FelCor board of directors
regarding this transaction. The acquisition of leases from Six Continents Hotels
was negotiated, on an arms-length basis, by FelCor's 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 FelCor's 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.
39
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.
We recorded a net loss applicable to unitholders of $75 million in 2001,
compared to a net income of $42 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
40
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:
- Our acquisition of DJONT for 416,667 units valued at approximately $10
million;
- Our acquisition of 12 hotel leases, together with their associated
management contracts, from Six Continents Hotels for which FelCor issued
413,585 shares of its common stock valued at approximately $10 million;
and
- Our acquisition of the remaining 88 hotel leases held by Six Continents
Hotels.
FELCOR LODGING LIMITED PARTNERSHIP
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........................................ (3,585) (3,570)
Gain on sale of assets.................................... 3,417 4,388
---------- ----------
Net income (loss) before extraordinary items................ (8,808) 57,842
Preferred distributions..................................... (24,600) (24,682)
---------- ----------
Net income (loss) applicable to unitholders before
extraordinary items....................................... $ (33,408) $ 33,160
========== ==========
</Table>
41
FELCOR LODGING LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
FELCOR LP
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................................... (3,585) (3,585)
Gain on sale of assets............................... 3,417 3,417
---------- ---------- ----------
Net income (loss) before extraordinary items........... (48,874) 40,066 (8,808)
Preferred distributions................................ (24,600) (24,600)
---------- ---------- ----------
Net income (loss) applicable to unitholders before
extraordinary items.................................. $ (73,474) $ 40,066 $ (33,408)
========== ========== ==========
</Table>
42
FELCOR LODGING LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
FELCOR LP
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)(c) 11,484
Minority interests................................... (3,570) (3,570)
Gain on sale of assets............................... 4,388 4,388
-------- ------------ ----------
Net income (loss) before extraordinary items........... 70,256 (12,414) 57,842
Preferred distributions................................ (24,682) (24,682)
-------- ------------ ----------
Net income (loss) applicable to unitholders before
extraordinary items.................................. $ 45,574 $ (12,414) $ 33,160
======== ============ ==========
</Table>
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) 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.
43
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.
Comparison of the Years Ended December 31, 2000 and 1999
For the year ended December 31, 2000, we recorded net income of $66 million
compared to $136 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 $129 million.
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,
and 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.
We generally seek 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.
44
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:
- 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.
- The average interest rate on our indebtedness increased from about 7% in
1999 to nearly 8% in 2000.
- 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.
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 distributions 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
45
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.
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).................................. $(50,144) $ 66,391 $135,776
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
-------- -------- --------
FFO................................................ $183,657 $288,636 $286,895
======== ======== ========
Weighted average 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 distributions.......................... 12,937 12,937 12,937
-------- -------- --------
EBITDA...................................................... $369,591 $470,861 $432,689
======== ======== ========
</Table>
- ---------------
(1) Weighted average units outstanding are computed including dilutive options,
unvested stock grants, and assuming conversion of Series A preferred units
to units.
46
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to unitholders 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
unitholders required for FelCor to maintain its 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 units to our available cash flow.
Accordingly, distributions to holders of our units and FelCor's 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
senior unsecured notes that were issued under the same indenture as the Old
Notes. The proceeds were used initially to pay down our line of credit. In
October 2001, we exchanged these 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.
47
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 the Old Notes.
The Old 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 the
Old 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
48
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. 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>
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 distribution 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 distributions per unit 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 fund FelCor so
it may purchase shares of its capital stock, or to meet distribution
requirements imposed on a REIT under the Internal Revenue Code, to the extent
that working capital and cash flow from our investments are insufficient for
such purposes.
FelCor's board of directors has authorized FelCor to repurchase up to $300
million of its outstanding common shares. Stock repurchases may, at the
discretion of its management, be made from time to time at prevailing prices in
the open market or through privately negotiated transactions. Beginning in
January
49
2001, through March 27, 2001, FelCor repurchased approximately 179,000 shares of
its outstanding common stock on the open market for approximately $4 million.
The stock repurchase program has been suspended, and since March 27, 2001,
FelCor has not repurchased any additional shares of its 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:
- Interest coverage ratio of 2.3x for the twelve month period ended
December 31, 2001
- Borrowing capacity of $565.2 million under our line of credit
- Consolidated debt equal to 42.8% of our investment in hotels, at cost
- Fixed interest rate debt equal to 88% of our total debt
- Weighted average maturity of fixed interest rate debt of approximately
6.8 years
- Mortgage debt to total assets of 16.8%
- Debt of approximately $13 million maturing in 2002
- Debt of approximately $35 million maturing in 2003
- 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>
50
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
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
51
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 venture's 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.
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
------- ------- -------- ------- -------
LIABILITIES
Debt:
Fixed rate................................ $12,922 $34,904 $189,229 $42,635 $14,216
Average interest rate.................. 7.88% 7.43% 7.41% 7.46% 8.04%
Floating rate............................. $ 49,674
Average interest rate(a)............... 7.10%
Discount accretion..........................
Total debt..................................
INTEREST RATE SWAPS:
Fixed to floating......................... $175,000
Average pay rate....................... 5.08%
Average receive rate................... 7.38%
</Table>
52
<Table>
<Caption>
THEREAFTER TOTAL FAIR VALUE
---------- ---------- ----------
LIABILITIES
Debt:
Fixed rate............................................. $1,601,946 $1,895,852 $1,664,696
Average interest rate............................... 8.66% 8.48%
Floating rate.......................................... $ 650 $ 50,324 $ 50,324
Average interest rate(a)............................ 8.26% 7.11%
Discount accretion....................................... $ (7,768)
Total debt............................................... $1,938,408
INTEREST RATE SWAPS:
Fixed to floating...................................... $ 175,000 $ (1,466)
Average pay rate....................................
Average receive rate................................
</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
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 unitholders.
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
53
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.
- 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.
- 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.
- 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.
- 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 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 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. We amortized
54
excess cost of $2.5, $2.1 and $2.1 million in 2001, 2000 and 1999, respectively.
We do not believe that SFAS 142 will have a material impact on our 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.
55
BUSINESS AND PROPERTIES
FELCOR AND FELCOR LP
We are one of the nation's largest hotel REITs, with ownership interests in
183 hotels at December 31, 2001, with nearly 50,000 rooms and suites. 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, Six Continents
Hotels and 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, 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.
THE INDUSTRY
The United States hotel industry improved in profitability 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. This period followed 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. 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 on March
1, 2002, supply growth slowed to 2.0% in 2001 as room demand declined by 3.5%.
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 in 2001, 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
56
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.
Smith Travel Research also categorizes hotels based upon their relative
market positions, as measured by 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, Midprice U.S. hotels
and U.S. hotels as reported by Smith Travel Research for the periods indicated.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999 1999 1997
------- ------- ------- ------ -------
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>
- ------------
(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
57
and maintaining the financial flexibility to take advantage of opportunities
that may arise in the future. In 2002, we have seen improving revenue trends. In
the near term, however, 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 $13.0 million in 2002 and
$35 million in 2003. We intend to continue actively to 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 cost flow from our hotels.
- 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 succeeded to Promus' equity interest in us having an aggregate
value of approximately $17 million at December 31, 2001, its 50% joint
venture interest with us in the ownership of 12 hotels and its 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.
- 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.
- 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, and were 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:
- 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
- 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
58
-- 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 successfully to 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 has 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. We currently anticipate 2002 maintenance capital
expenditures of between $40 and $50 million, depending upon the pace of the
anticipated economic recovery.
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
represent 8.3% of our total rooms, but only 4.2% of 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.
RECENT DEVELOPMENTS
Since December 31, 2001, we:
- repaid approximately $10 million under our line of credit; and
- issued and sold an aggregate of 1,025,800 depositary shares, each
representing 1/100th of a share of FelCor's 9% Series B cumulative
redeemable preferred stock, for net proceeds of approximately $24
million, used initially for general corporate purposes.
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.
59
In addition, these provisions allow REITs, subject to certain limitations,
to own, directly or indirectly, up to 100% of the stock of a 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. Hotels leased to a
TRS still must be managed, however, 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) FelCor acquires additional stock in the taxable
subsidiary. Such existing taxable subsidiaries can be 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 TRS, 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, 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
shareholders' 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 leases held by
Six Continents Hotels on July 1, 2001. As 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 its common stock.
60
HOTEL BRANDS
The following table includes descriptive information about our properties
as of December 31, 2001:
<Table>
<Caption>
NUMBER OF PROPERTIES (1)
------------------------
Hilton Brands:
Embassy Suites Hotels..................................... 59
Doubletree and Doubletree Guest Suites.................... 13
Hampton Inn............................................... 7
Hilton and Hilton Suites.................................. 1
Homewood Suites........................................... 1
Six Continents Brands:
Holiday Inn............................................... 44
Crowne Plaza and Crowne Plaza Suites...................... 18
Holiday Inn Select........................................ 10
Holiday Inn Express....................................... 5
Starwood Brands:
Sheraton and Sheraton Suites.............................. 10
Westin.................................................... 1
Other Brands................................................ 14
---
Total Hotels...................................... 183
===
</Table>
- ---------------
(1) Includes 13 hotels designated as held for sale.
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:
- two-room suites, containing two telephones, a mini-refrigerator, coffee
maker, microwave oven, wet bar, and two color televisions;
- complimentary, cooked-to-order breakfast;
- complimentary cocktails during two hours every evening, subject to local
laws and regulations, in an atrium environment; and
- business centers equipped with fax and copy machines.
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.
61
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 that 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 were operated under other brands,
as follows:
- Hampton Inn (7 hotels);
- Holiday Inn Express (5 hotels);
- Fairfield Inn (5 hotels);
- Harvey Hotel (4 hotels);
- Courtyard by Marriott (2 hotels);
- Hilton Suites (1 hotel);
- Homewood Suites (1 hotel);
- Westin (1 hotel); and
- Independents (3 hotels).
62
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
</Table>
63
<Table>
<Caption>
LOCATION FRANCHISE BRAND ROOMS/SUITES
- -------- --------------- ------------
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
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
</Table>
64
<Table>
<Caption>
LOCATION FRANCHISE BRAND ROOMS/SUITES
- -------- --------------- ------------
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
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
</Table>
65
<Table>
<Caption>
LOCATION FRANCHISE BRAND ROOMS/SUITES
- -------- --------------- ------------
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
Toronto (Yorkdale), Canada.............................. Holiday Inn 370
Toronto (Airport), Canada............................... Holiday Inn Select 444
</Table>
66
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 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:
- Doubletree -- between 2% and 3% of the hotel's total sales per month;
- Sheraton -- 2% of the hotel's total revenue per accounting period; and
- Embassy Suites Hotels -- 2% of adjusted gross income payable monthly.
67
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 if the hotel meets specified performance standards. The
TRSs may elect not to continue to operate the hotels under the brand beyond the
expiration of the initial term. This election, however, will give Six Continents
Hotels the right to force us to sell the 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 are 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.
Each management agreement is generally terminable upon the occurrence of
standard events of default or if the hotel fails to meet certain financial
expectations. Upon termination by either party for any reason, the TRS generally
will pay all amounts due and owing under the management agreement through the
effective date of 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 defaults under the agreement resulting in its
termination, 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 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. This consent cannot
be unreasonably withheld. A change in control of either party will generally
require the other's consent, and this consent cannot 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 agreement, 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.
68
Our typical Embassy Suites Hotels franchise license agreement provides for
a term of 20 years, but we have the 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 or the operation of the applicable hotel, we may be
liable, under certain circumstances, for liquidated damages equal to the fees
paid to the franchisor with respect to that hotel during the three preceding
years.
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 property owners 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 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. See "Risk
Factors -- We will encounter risks that may adversely affect real estate
ownership -- Compliance with environmental laws may adversely affect our
financial condition."
TAX STATUS
FelCor elected to be taxed as a REIT under the federal income tax laws,
commencing with its initial taxable year ended December 31, 1994. As a REIT,
FelCor generally is not subject to federal income taxation at the corporate
level on its taxable income that is distributed to its shareholders. FelCor may,
however, be subject to certain state and local taxes on its 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 FelCor's election to be taxed as a REIT,
FelCor's charter imposes restrictions on the ownership and transfer of shares of
its common stock. FelCor LP expects to make distributions on its units
sufficient to enable FelCor to meet its distribution obligations as a REIT.
FelCor has adopted the calendar year as its taxable year.
69
EMPLOYEES
FelCor LP has no employees. Management functions of FelCor LP are performed
by FelCor as the sole general partner. Mr. Corcoran entered into an employment
agreement with FelCor 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 FelCor's other executive officers has an employment
agreement with FelCor. In addition to Mr. Corcoran, FelCor 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.
PERSONNEL AND OFFICE SHARING ARRANGEMENTS
We share executive offices with FelCor, Inc., a private company controlled
by Mr. Corcoran and, prior to January 1, 2001, we also shared offices with
DJONT. Each entity bears an allocated share of the costs thereof, including but
not limited to rent, salaries of certain personnel, other than Mr. Corcoran, who
is compensated solely by FelCor, office supplies, telephones and depreciation of
office furniture, fixtures and equipment. FelCor LP reimburses FelCor for its
share of such allocated costs. Such allocations of shared costs are subject to
the approval of a majority of the independent directors of FelCor. For the year
ended December 31, 2000, we bore $7.5 million, or approximately 89.4% of all
allocable expenses under this arrangement. During 2001, FelCor, Inc., paid
approximately $45,000 of such expenses, and we bore the balance of such
expenses.
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 that 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.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
LINE OF CREDIT
On July 26, 2001, we entered into an amended and restated credit agreement,
pursuant to which we provided for an increase in our line of credit from $600
million to $615 million, excluding an additional $85 million that was subject to
completion of the MeriStar merger. The Chase Manhattan Bank serves as
administrative agent, and The Chase Manhattan Bank of Canada serves as an
additional administrative agent, under the line of credit. 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. The line of credit provides for
borrowings by FelCor and FelCor LP, as the U.S. borrower, and by our Canadian
subsidiary, as the Canadian borrower, and is guaranteed by certain of our
subsidiaries, which are also guarantors of the 7 3/8%, 7 5/8% and 8 1/2% senior
notes and the existing 9 1/2% notes, and will be guarantors of the New Notes
offered by this prospectus. We subsequently amended the line of credit in
November 2001.
Borrowings by the U.S. borrower under the line of credit bear interest, at
our option:
- at a base rate equal to the higher of the base rate announced from time
to time by The Chase Manhattan Bank and 0.5% plus the Federal funds rate,
in either case plus an applicable margin of 0% to 1.750%; or
- at a Eurodollar rate based upon the 1, 2, 3, 6, 9 or 12-month LIBOR plus
an applicable margin of 0.875% to 3.250%.
Borrowings by the Canadian borrower under the line of credit, at our
option, may be in the form of:
- Canadian Prime Rate Loans, which bear interest at a prime rate equal to
the greater of the per annum rate of interest quoted, published and
commonly known as the "prime rate" of The Chase Manhattan Bank of Canada
and the 30-day Canadian Dollar Bankers' Acceptance rate, or CDOR Rate,
plus 1.0%, in either case plus an applicable margin of 0% to 1.000%; or
- Bankers' Acceptance Loans, which are purchased at a discount to face
amount at a discount rate generally equal to the CDOR Rate plus an
acceptance fee calculated on the face amount at a rate per annum equal to
the applicable margin that would be payable with respect to a comparable
Eurodollar rate loan.
The applicable margin varies depending upon our long-term senior unsecured
actual debt rating or leverage ratio. At December 31, 2001, the margin was
0.625% in the case of base rate/prime rate borrowings and 2.125% in the case of
Eurodollar rate borrowings. At December 31, 2001, borrowings outstanding under
our line of credit aggregated $49.7 million and bore interest at a weighted
average interest rate of 4.48% per annum.
Our line of credit requires us to comply with certain financial tests and
to maintain certain financial ratios, including our unsecured interest expense
coverage, fixed charge coverage ratio, maintenance of tangible net worth,
limitations on total indebtedness, limitations on total secured indebtedness,
adjusted net operating income and limitations on recourse secured indebtedness.
Under the November 2001 amendment to the line of credit, we obtained a
relaxation of some of these covenants through September 30, 2002, in
consideration for accepting some tighter restrictions on some of our affirmative
and negative covenants, as described below.
Failure to satisfy any of the financial covenants would constitute an event
of default, notwithstanding our ability to meet our debt service obligations. An
event of default also includes, without limitation, a cross-default to other
indebtedness, bankruptcy and a change of control.
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 guaranty leases of
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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 amendment to the line of credit, we agreed to some further limitations
through September 30, 2002. These limitations included our agreement not to
acquire any hotel properties or invest in any joint ventures through December
31, 2001. After that date, 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. 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.
7 3/8% AND 7 5/8% SENIOR NOTES
In October 1997, we issued $175 million aggregate principal amount of
7 3/8% senior notes due 2004 and $125 million aggregate principal amount of
7 5/8% senior notes due 2007. These senior notes were issued under an indenture
containing covenants and other terms and conditions substantially similar to
those governing the Old Notes; however, the indenture governing the Old Notes
contains additional restrictions upon the redemption of senior notes issued
thereunder and the repurchase of capital stock. See "Description of the Notes
and Guarantees."
8 1/2% SENIOR NOTES
In June 2001, we issued $600 million aggregate principal amount of our
8 1/2% senior notes due 2011. These senior notes were issued under an indenture
containing covenants and other terms and conditions substantially similar to
those governing the Old Notes; however, the indenture governing the 8 1/2%
senior notes contains different redemption features. In addition, under the
terms of the indenture governing the 8 1/2% senior notes, we were required to
redeem $300 million in aggregate principal amount of those notes in October 2001
as a result of the termination of the MeriStar merger.
EXISTING 9 1/2% SENIOR NOTES
In September 2000 and January 2001, we issued $500 million aggregate
principal amount of our 9 1/2% senior notes due 2008. These existing 9 1/2%
senior notes have the same terms and conditions as the Old Notes and are
governed by the same indenture. See "Description of the Notes and Guarantees."
MORTGAGE DEBT
Our mortgage debt contains affirmative covenants that are generally equal
to or less restrictive than those in our line of credit. Most of our mortgage
debt is non-recourse to us, subject to certain exceptions.
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DESCRIPTION OF THE NOTES AND GUARANTEES
The Old Notes were, and the New Notes will be, issued by FelCor LP under
the Indenture dated September 15, 2000 among FelCor LP, FelCor, the Subsidiary
Guarantors and SunTrust Bank, as trustee. The terms of the Old Notes and the New
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939. The New Notes are substantially
identical to the terms and provisions of the Old Notes, except for certain
transfer restrictions and registration rights relating to the Old Notes. The
term "Notes" refers to all notes issued under the Indenture, including the Old
Notes, the New Notes and our existing 9 1/2% senior notes. There is currently
outstanding under the Indenture an aggregate principal amount of $600 million of
the Notes, including $100 million in principal amount of the Old Notes.
The following description is a summary of the material provisions of the
Indenture. It does not restate the Indenture in its entirety. Because this is a
summary, we urge you to read the Indenture and the relevant portions of the
Trust Indenture Act because they, and not this description, define your rights
as holders of the Old Notes or the New Notes. We have previously filed copies of
the Indenture with the SEC. You may request a copy of the Indenture by
contacting us at the address set forth under "Where You Can Find More
Information."
You can find the definitions of certain terms used in this description
under the subheading "-- Certain Definitions." For purposes of this section
only, references to FelCor LP and FelCor do not include their respective
subsidiaries.
GENERAL
The Old Notes are in the aggregate principal amount of $100 million. The
Old Notes are, and the New Notes will be, unsecured senior obligations of FelCor
LP. The Notes mature on September 15, 2008. The Old Notes and the New Notes bear
yearly interest at 9 1/2%. Interest accrues from the most recent interest
payment date to which interest has been paid or provided for and is payable
semiannually to holders of record at the close of business on the March 1 or the
September 1, immediately preceding the interest payment date on March 15 and
September 15 of each year. The initial interest payment date of the Old Notes
was March 15, 2002. The initial interest payment date for the New Notes will be
September 15, 2002. Interest on the New Notes will accrue from March 15, 2002,
or from the date of the last payment of interest on the Old Notes, whichever is
later. No additional interest will be paid on Old Notes tendered and accepted
for exchange.
Notwithstanding anything to the contrary contained herein, upon the
occurrence of, and during the continuance of, a Ratings Downgrade, the Notes
will bear yearly interest at 10.0%. As of the date of this prospectus, the
ratings on our existing senior debt were "BB-" by Standard & Poor's Rating
Services and "Ba3" by Moody's Investor Services, Inc. Any lowering of these
ratings by those ratings services will trigger the increase in the yearly
interest rate on the Notes.
Principal of, premium, if any, and interest on the Notes are payable, and
the Notes may be exchanged or transferred, at the office or agency of FelCor LP
in the Borough of Manhattan, The City of New York, which initially will be the
corporate trust office of the trustee c/o Computershare, Wall Street Plaza, 88
Pine Street, 19th Floor, New York, New York 10005, as agent for the trustee;
provided that, at the option of FelCor LP, payment of interest may be made by
check mailed to the holders at their addresses as they appear in the security
register for the Notes.
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple. See
"-- Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of the Notes, but FelCor LP may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection with a registration of transfer.
Subject to the covenants described below under "Covenants" and applicable
law, FelCor LP may issue additional Notes under the Indenture. The existing
Notes, including the Old Notes and the New
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Notes, and any additional notes subsequently issued under the Indenture are and
will be treated as a single class for all purposes under the Indenture.
GUARANTEES AND SUBSIDIARY GUARANTORS
The Old Notes are, and the New Notes will be, guaranteed on an unsecured
senior basis by FelCor and the Subsidiary Guarantors. At present, the Subsidiary
Guarantors consist of FelCor/CSS Hotels, L.L.C., FelCor/LAX Hotels, L.L.C.,
FelCor Eight Hotels, L.L.C., FelCor/CSS Holdings, L.P., FelCor/St. Paul
Holdings, L.P., FelCor/LAX Holdings, L.P., FelCor Hotel Asset Company, L.L.C.,
FelCor Nevada Holdings L.L.C., FHAC Nevada Holdings, L.L.C., FHAC Texas
Holdings, L.P., FelCor Omaha Hotel Company, L.L.C., FelCor Country Villa Hotel,
L.L.C., FelCor Moline Hotel, L.L.C., FelCor Canada Co., FelCor TRS Holdings,
L.P. and Kingston Plantation Development Corp., each of which is a guarantor
with respect to the Line of Credit and the existing 7 3/8%, 7 5/8%, 8 1/2% and
9 1/2% senior notes. The guarantees are unconditional regardless of the
enforceability of the Notes and the Indenture.
FelCor currently conducts no other business and has no significant assets
other than its general partner interest and an indirect limited partner interest
in FelCor LP. Four of the Subsidiary Guarantors that are limited partnerships
own directly an aggregate of 25 of the hotels and own general partner interests
in a partnership that owns directly one additional hotel in which FelCor and
FelCor LP have an interest. Four of the Subsidiary Guarantors that are limited
liability companies directly own an aggregate of 51 of the hotels and own direct
or indirect membership interests in other entities that own an aggregate of 22
of the hotels, including seven hotels that are owned directly by a limited
partnership that is a Subsidiary Guarantor and six hotels that are owned
directly by FelCor Canada Co., another Subsidiary Guarantor. None of the
remaining seven Subsidiary Guarantors directly owns any hotel properties or
engages in any business other than the ownership of partnership and membership
interests in other entities. FelCor LP and certain of the Subsidiary Guarantors
own additional subsidiaries, none of which is material to FelCor LP.
Each future Restricted Subsidiary that subsequently guarantees Indebtedness
of FelCor LP or FelCor that ranks equally with or subordinate in right of
payment to the Notes will be required to execute a Subsidiary Guarantee. See
"-- Limitation on Issuances of Guarantees by Restricted Subsidiaries."
OPTIONAL REDEMPTION
Optional Redemption. Except as described below, FelCor LP does not have
the right to redeem any Notes prior to September 15, 2004. The Notes are
redeemable at the option of FelCor LP, in whole or in part, at any time, and
from time to time, on and after September 15, 2004, upon not less than 30 days'
nor more than 60 days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the 12-month
period commencing September 15 of the years indicated below, in each case
together with accrued and unpaid interest thereon to the redemption date:
<Table>
<Caption>
REDEMPTION
YEAR PRICE
- ---- ----------
2004...................................................... 104.750
2005...................................................... 103.167
2006...................................................... 101.583
2007 and thereafter....................................... 100.000%
</Table>
Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to September 15, 2003, FelCor LP may, at its option, use the
net cash proceeds of one or more Equity Offerings (as defined below) to redeem
up to 35% of the principal amount of the Notes issued under the
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Indenture, including the Old Notes and the New Notes, at a redemption price of
109.5% of the principal amount thereof plus accrued and unpaid interest thereon,
if any, to the date of redemption; provided that:
(1) at least 65% of the principal amount of Notes issued under the
Indenture remains outstanding immediately after the redemption; and
(2) FelCor LP makes the redemption not more than 90 days after the
consummation of any such Equity Offering.
"Equity Offering" means a public or private offering of Capital Stock
(other than Disqualified Stock) of FelCor or FelCor LP; provided that the
proceeds received by FelCor or FelCor LP directly or indirectly from the
offering are not less than $50 million.
SELECTION AND NOTICE OF REDEMPTION
In the event that FelCor LP chooses to redeem less than all of the Notes,
selection of the Notes for redemption will be made by the trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed; or,
(2) on a pro rata basis, by lot or by such method as the trustee shall
deem fair and appropriate.
No Notes of a principal amount of $1,000 or less shall be redeemed in part.
If a partial redemption is made with the proceeds of an Equity Offering, the
trustee will select the Notes to be redeemed only on a pro rata basis or on as
nearly a pro rata basis as is practicable (subject to DTC procedures) unless
such method is otherwise prohibited. Notice of redemption will be mailed by
first-class mail at least 30 but not more than 60 days before the redemption
date to each holder of Notes to be redeemed at its registered address. Unless
FelCor LP defaults in the payment of the redemption price, on and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption.
SINKING FUND
There are no sinking fund payments for the Notes.
REGISTRATION RIGHTS
In December 2001, FelCor LP and FelCor agreed with the initial purchasers
of the Old Notes, for the benefit of the holders, that FelCor LP and FelCor
would use their best efforts, at their cost, to file and cause to become
effective a registration statement with respect to a registered exchange offer
to exchange the Old Notes for an issue of notes that will be senior notes of
FelCor LP, with terms identical to the Old Notes, except that the exchange notes
would not have legends restricting transfer. The exchange offer being made by
this prospectus and the registration statement of which this prospectus
constitutes a part are intended to satisfy the foregoing obligations of FelCor
LP and FelCor. The agreement with the initial purchasers requires this exchange
offer to remain open for at least 20 business days after the date notice of the
exchange offer is mailed to the holders of Old Notes.
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to us, we believe that, with the
exceptions set forth below, New Notes issued pursuant to the exchange offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by their holders, other than any holder which is our "affiliate"
within the meaning of Rule 405 promulgated under the Securities Act, or a
broker-dealer who purchased Old Notes directly from FelCor LP to resell pursuant
to Rule 144A or any other available exemption promulgated under the Securities
Act, without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that the New Notes are acquired in the ordinary
course of business of the holder and the holder does not have an arrangement or
understanding with any person to participate in the distribution of the New
Notes. Any holder who tenders in this exchange offer for the purpose of
75
participating in a distribution of the New Notes cannot rely on this
interpretation by the Commission's staff and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer that receives New Notes for its
own account in exchange for Old Notes that were acquired by it as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the New Notes. See
"Plan of Distribution." Broker-dealers who acquired Old Notes directly from us
and not as a result of market-making activities or other trading activities may
not rely on the staff's interpretations discussed above or participate in this
exchange offer and must comply with the prospectus delivery requirements of the
Securities Act in order to sell the Old Notes.
If this exchange offer is not consummated by June 1, 2002, the annual
interest rate borne by the Old Notes will be increased by 0.5% until the
exchange offer is consummated or the SEC declares a shelf registration covering
the resale of the Old Notes.
FelCor LP and FelCor are entitled to close the exchange offer 20 business
days after its commencement; provided that FelCor LP has accepted all Old Notes
validly tendered in accordance with the terms of the exchange offer. Old Notes
not tendered in this exchange offer will bear interest at the rate set forth on
the cover page of this prospectus and will be subject to all of the terms and
conditions specified in the Indenture and to the transfer restrictions described
in "Transfer Restrictions" in the offering memorandum relating to the Old Notes.
This description of some of the provisions of the registration rights
agreement is a summary only. We urge you to read the registration rights
agreement because it defines your rights regarding registration of the Old
Notes. A copy of the registration rights agreement has previously been filed
with the SEC. You may request a copy of this agreement by contacting us at the
address set forth under "Where You Can Find More Information."
RANKING
The Notes, including the Old Notes and the New Notes, are unsecured senior
obligations of FelCor LP and rank equally in right of payment with other
unsecured Senior Indebtedness of FelCor LP. The Notes are effectively
subordinated to all of our and our consolidated Subsidiaries' secured
Indebtedness and to all other Indebtedness of the non-guarantor Subsidiaries.
Our secured Indebtedness includes only mortgage and capitalized lease debt. As
of December 31, 2001, we and our consolidated Subsidiaries had approximately
$696 million of mortgage and capitalized lease debt, which is effectively senior
to the Notes to the extent of the value of the underlying assets.
As of December 31, 2001, our non-guarantor Subsidiaries had no other
Indebtedness.
CERTAIN DEFINITIONS
Set forth below are definitions of certain terms contained in the Indenture
that are used in this description. Please refer to the Indenture for the
definition of other capitalized terms used in this description that are not
defined below.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition from such Person by a Restricted Subsidiary and not incurred
by such Person in connection with, or in anticipation of, such Person becoming a
Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness of
such Person that is redeemed, defeased, retired or otherwise repaid at the time
of or immediately upon consummation of the transactions by which such Person
becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of FelCor, FelCor LP and their respective Restricted
Subsidiaries for such period determined on a consolidated basis in conformity
with GAAP plus the minority interest in FelCor LP, if applicable;
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provided that the following items shall be excluded in computing Adjusted
Consolidated Net Income, without duplication:
(1) the net income of any Person, other than FelCor LP, FelCor or a
Restricted Subsidiary, except to the extent of the amount of dividends or
other distributions actually paid to FelCor LP, FelCor or any of their
respective Restricted Subsidiaries by such Person during such period;
(2) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary;
(3) any after-tax gains or losses attributable to Asset Sales;
(4) for so long as the Notes are not rated Investment Grade, any
amount paid or accrued as dividends on Preferred Stock of FelCor LP, FelCor
or any Restricted Subsidiary owned by Persons other than FelCor or FelCor
LP and any of their respective Restricted Subsidiaries; and
(5) all extraordinary gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of FelCor LP, FelCor and their respective Restricted Subsidiaries (less
applicable depreciation, amortization and other valuation reserves), except to
the extent resulting from write-ups of capital assets (excluding write-ups in
connection with accounting for acquisitions in conformity with GAAP), after
deducting from the total amount of assets:
(1) all current liabilities of FelCor LP, FelCor and their respective
Restricted Subsidiaries, excluding intercompany items, and
(2) all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles,
all as set forth on the most recent quarterly or annual consolidated balance
sheet of FelCor LP or FelCor and their respective Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the SEC or provided to the
trustee pursuant to the "SEC Reports and Reports to Holders" covenant.
"Adjusted Total Assets" means, for any Person, the sum of:
(1) Total Assets for such Person as of the end of the calendar quarter
preceding the Transaction Date as set forth on the most recent quarterly or
annual consolidated balance sheet of FelCor LP or FelCor and their
respective Restricted Subsidiaries, prepared in conformity with GAAP and
filed with the SEC or provided to the trustee pursuant to the "SEC Reports
and Reports to Holders" covenant, and
(2) any increase in Total Assets following the end of such quarter
including, without limitation, any increase in Total Assets resulting from
the application of the proceeds of any additional Indebtedness.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means:
(1) an investment by FelCor LP or FelCor or any of their respective
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be
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merged into or consolidated with FelCor LP or FelCor or any of their
respective Restricted Subsidiaries; provided that such Person's primary
business is related, ancillary, incidental or complementary to the
businesses of FelCor LP or FelCor or any of their respective Restricted
Subsidiaries on the date of such investment; or
(2) an acquisition by FelCor LP or FelCor or any of their respective
Restricted Subsidiaries from any other Person that constitutes
substantially all of a division or line of business, or one or more hotel
properties, of such Person; provided that the property and assets acquired
are related, ancillary, incidental or complementary to the businesses of
FelCor LP or FelCor or any of their respective Restricted Subsidiaries on
the date of such acquisition.
"Asset Disposition" means the sale or other disposition by FelCor LP or
FelCor or any of their respective Restricted Subsidiaries, other than to FelCor
LP, FelCor or another Restricted Subsidiary, of:
(1) all or substantially all of the Capital Stock of any Restricted
Subsidiary, or
(2) all or substantially all of the assets that constitute a division
or line of business, or one or more hotel properties, of FelCor LP or
FelCor or any of their respective Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition, including by
way of merger, consolidation or sale-leaseback transaction, in one transaction
or a series of related transactions by FelCor LP or FelCor or any of their
Restricted Subsidiaries to any Person other than FelCor LP or FelCor or any of
their respective Restricted Subsidiaries of:
(1) all or any of the Capital Stock of any Restricted Subsidiary other
than sales permitted under clause (4) of the "Limitation on the Issuance
and Sale of Capital Stock of Restricted Subsidiaries" covenant described
below,
(2) all or substantially all of the property and assets of an
operating unit or business of FelCor LP or FelCor or any of their
respective Restricted Subsidiaries, or
(3) any other property and assets of FelCor LP or FelCor or any of
their respective Restricted Subsidiaries outside the ordinary course of
business of FelCor LP or FelCor or such Restricted Subsidiary and, in each
case, that is not governed by the provisions of the Indenture applicable to
mergers, consolidations and sales of assets of FelCor LP and FelCor;
provided that "Asset Sale" shall not include:
- sales or other dispositions of inventory, receivables and other current
assets,
- sales, transfers or other dispositions of assets with a fair market value
not in excess of $1 million in any transaction or series of related
transactions, or
- sales or other dispositions of assets for consideration at least equal to
the fair market value of the assets sold or disposed of, to the extent
that the consideration received would satisfy the second bullet of clause
(1) of the second paragraph of the "Limitation on Asset Sales" covenant.
"Average Life" means at any date of determination with respect to any debt
security, the quotient obtained by dividing:
(1) the sum of the products of:
- the number of years from such date of determination to the dates
of each successive scheduled principal payment of such debt
security, and
- the amount of such principal payment, by
(2) the sum of all such principal payments.
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"Capital Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated, whether
voting or non-voting), including partnership interests, whether general or
limited, in the equity of such Person, whether outstanding on the Closing Date
or issued thereafter, including, without limitation, all Common Stock, Preferred
Stock and Units.
"Capitalized Lease" means, as applied to any Person, any lease of any
property, whether real, personal or mixed, of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease as reflected on the balance sheet
of such Person in accordance with GAAP.
"Change of Control" means such time as:
(1) a "person" or "group" (as such terms are defined in Sections 13(d)
and 14(d)(2) of the Securities and Exchange Act of 1934 (the "Exchange
Act")), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 35% of the total voting power of the
Voting Stock of FelCor or, other than by FelCor, of FelCor LP on a fully
diluted basis; or
(2) individuals who on the Closing Date constitute the Board of
Directors (together with any new or replacement directors whose election by
the Board of Directors or whose nomination by the Board of Directors for
election by FelCor's shareholders was approved by a vote of at least a
majority of the members of the Board of Directors then still in office who
either were members of the Board of Directors on the Closing Date or whose
election or nomination for election was so approved) cease for any reason
to constitute a majority of the members of the Board of Directors then in
office.
"Closing Date" means September 15, 2000, the date on which the Notes were
first issued under the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) that have no preference on liquidation or with respect to
distributions over any other class of Capital Stock, including partnership
interests, whether general or limited, of such Person's equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income:
(1) Consolidated Interest Expense,
(2) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses
or sales of assets),
(3) depreciation expense,
(4) amortization expense, and
(5) all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an accrual
or reserve is, or is required by GAAP to be, made),
less all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for FelCor LP, FelCor and their respective
Restricted Subsidiaries in conformity with GAAP; provided that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
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EBITDA shall be reduced (to the extent not otherwise reduced in accordance with
GAAP) by an amount equal to:
- the amount of the Adjusted Consolidated Net Income attributable to such
Restricted Subsidiary multiplied by
- the percentage ownership interest in the income of such Restricted
Subsidiary not owned on the last day of such period by FelCor LP or
FelCor or any of their respective Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, without duplication,
the aggregate amount of interest expense in respect of Indebtedness during such
period, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP including, without
limitation:
- amortization of original issue discount on any Indebtedness and the
interest portion of any deferred payment obligation, calculated in
accordance with GAAP;
- all commissions, discounts and other fees and expenses owed with respect
to letters of credit and bankers' acceptance financing;
- the net costs associated with Interest Rate Agreements and Indebtedness
that is Guaranteed or secured by assets of FelCor LP, FelCor or any of
their respective Restricted Subsidiaries; and
- all but the principal component of rentals in respect of capitalized
lease obligations paid, accrued or scheduled to be paid or to be accrued
by FelCor LP, FelCor and their respective Restricted Subsidiaries;
excluding (A) the amount of such interest expense of any Restricted Subsidiary
if the net income of such Restricted Subsidiary is excluded in the calculation
of Adjusted Consolidated Net Income pursuant to clause (2) of the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income
pursuant to clause (2) of the definition thereof) and (B) any premiums, fees and
expenses (and any amortization thereof) payable in connection with the offering
of the Notes or paid in connection with any other Indebtedness outstanding on
June 30, 2000, all as determined on a consolidated basis (without taking into
account Unrestricted Subsidiaries) in conformity with GAAP.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is:
(1) required to be redeemed prior to the Stated Maturity of the Notes,
(2) redeemable at the option of the holder of such class or series of
Capital Stock, other than Units, at any time prior to the Stated Maturity
of the Notes, or
(3) convertible into or exchangeable for Capital Stock referred to in
clause (1) or (2) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the Notes;
provided that any Capital Stock that would not constitute Disqualified Stock but
for provisions thereof giving holders thereof the right to require such Person
to repurchase or redeem such Capital Stock upon the occurrence of an "asset
sale" or "change of control" occurring prior to the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in "Limitation
on Asset Sales" and "Repurchase of Notes upon a Change of Control"
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covenants described below and such Capital Stock specifically provides that such
Person will not repurchase or redeem any such stock pursuant to such provision
prior to FelCor LP's repurchase of the Notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below.
"DJONT" means DJONT Operations, L.L.C., a Delaware limited liability
company.
"Fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
"Funds From Operations" for any period means the consolidated net income of
FelCor LP, FelCor and their respective Restricted Subsidiaries for such period
in conformity with GAAP excluding gains or losses from debt restructurings which
would be extraordinary items in accordance with GAAP and sales of depreciable
operating property, plus depreciation of real property (including furniture and
equipment) and after adjustments for unconsolidated partnerships and joint
ventures plus the minority interest in FelCor LP, if applicable; provided that
for purposes of the payment of any dividend or distribution by FelCor LP or
FelCor, "Funds From Operations" shall be equal to $80 million plus the amount
thereof computed for the period commencing with the first day of the fiscal
quarter in which the Closing Date occurs and ending on the last day of the last
fiscal quarter preceding the payment of such dividend or distribution.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to:
- the amortization of any expenses incurred in connection with the offering
of the Notes, and
- except as otherwise provided, the amortization of any amounts required or
permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Government Securities" means direct obligations of, obligations guaranteed
by, or participations in pools consisting solely of obligations of or
obligations guaranteed by, the United States of America for the payment of which
obligations or guarantee the full faith and credit of the United States of
America is pledged and that are not callable or redeemable at the option of the
issuer thereof.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services (unless such purchase
arrangements are on arm's-length terms and are entered into in the ordinary
course of business), to take-or-pay, or to maintain financial statement
conditions or otherwise), or
(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
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"Guarantors" means FelCor and the Subsidiary Guarantors, collectively.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(1) all indebtedness of such Person for borrowed money,
(2) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments,
(3) the face amount of letters of credit or other similar instruments
(excluding obligations with respect to letters of credit (including trade
letters of credit) securing obligations (other than obligations described
in (1) or (2) above or (5), (6) or (7) below) entered into in the ordinary
course of business of such Person to the extent such letters of credit are
not drawn upon or, if drawn upon, to the extent such drawing is reimbursed
no later than the third Business Day following receipt by such Person of a
demand for reimbursement),
(4) all unconditional obligations of such Person to pay the deferred
and unpaid purchase price of property or services, which purchase price is
due more than six months after the date of placing such property in service
or taking delivery and title thereto or the completion of such services,
except Trade Payables,
(5) all Capitalized Lease Obligations,
(6) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at that date of determination and (B)
the amount of such Indebtedness,
(7) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person, and
(8) to the extent not otherwise included in this definition or the
definition of Consolidated Interest Expense, obligations under Currency
Agreements and Interest Rate Agreements.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations of the type described
above and, with respect to obligations under any Guarantee, the maximum
liability upon the occurrence of the contingency giving rise to the obligation;
provided that:
- the amount outstanding at any time of any Indebtedness issued with
original issue discount shall be deemed to be the face amount with
respect to such Indebtedness less the remaining unamortized portion of
the original issue discount of such Indebtedness at the date of
determination in conformity with GAAP, and
- Indebtedness shall not include any liability for federal state, local or
other taxes.
"Interest Coverage Ratio" means, on any Transaction Date, the ratio of:
- the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters prior to such Transaction Date for which reports have
been filed with the SEC or provided to the Trustee pursuant to the "SEC
Reports and Reports to Holders" covenant ("Four Quarter Period") to
- the aggregate Consolidated Interest Expense during such Four Quarter
Period.
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In making the foregoing calculation,
(1) pro forma effect shall be given to any Indebtedness Incurred or
repaid (other than in connection with an Asset Acquisition or Asset
Disposition) during the period ("Reference Period") commencing on the first
day of the Four Quarter Period and ending on the Transaction Date (other
than Indebtedness Incurred or repaid under a revolving credit or similar
arrangement to the extent of the commitment thereunder (or under any
predecessor revolving credit or similar arrangement) in effect on the last
day of such Four Quarter Period unless any portion of such Indebtedness is
projected, in the reasonable judgment of the senior management of FelCor LP
or FelCor, to remain outstanding for a period in excess of 12 months from
the date of the Incurrence thereof), in each case as if such Indebtedness
had been Incurred or repaid on the first day of such Reference Period;
(2) Consolidated Interest Expense attributable to interest on any
Indebtedness (whether existing or being Incurred) computed on a pro forma
basis and bearing a floating interest rate shall be computed as if the rate
in effect on the Transaction Date (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months or, if shorter, at least equal
to the remaining term of such Indebtedness) had been the applicable rate
for the entire period;
(3) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving pro forma effect to the application of
proceeds of any Asset Disposition and any Indebtedness Incurred or repaid
in connection with any such Asset Acquisitions or Asset Dispositions) that
occur during such Reference Period but subsequent to the end of the related
Four Quarter Period as if they had occurred and such proceeds had been
applied on the first day of such Reference Period; and
(4) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of
proceeds of any asset disposition and any Indebtedness Incurred or repaid
in connection with any such asset acquisitions or asset dispositions) that
have been made by any Person that has become a Restricted Subsidiary or has
been merged with or into FelCor LP or FelCor or any of their respective
Restricted Subsidiaries during such Reference Period but subsequent to the
end of the related Four Quarter Period and that would have constituted
Asset Dispositions or Asset Acquisitions during such Reference Period but
subsequent to the end of the related Four Quarter Period had such
transactions occurred when such Person was a Restricted Subsidiary as if
such asset dispositions or asset acquisitions were Asset Dispositions or
Asset Acquisitions and had occurred on the first day of such Reference
Period; provided that to the extent that clause (3) or (4) of this sentence
requires that pro forma effect be given to an Asset Acquisition or Asset
Disposition, such pro forma calculation shall be based upon the four full
fiscal quarters immediately preceding the Transaction Date of the Person,
or division or line of business, or one or more hotel properties, of the
Person that is acquired or disposed of to the extent that such financial
information is available.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement with respect to interest rates.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including without limitation by way of Guarantee or
similar arrangement, but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the consolidated balance sheet of FelCor LP, FelCor and their respective
Restricted Subsidiaries) or capital contribution to (by means of any transfer of
cash or other property (tangible or intangible) to others or any payment for
property or services solely for the account or use of others, or
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otherwise), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include:
(1) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary, and
(2) the fair market value of the Capital Stock (or any other
Investment), held by FelCor LP or FelCor or any of their respective
Restricted Subsidiaries of (or in) any Person that has ceased to be a
Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause
(3) of the "Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries" covenant;
provided that the fair market value of the Investment remaining in any Person
that has ceased to be a Restricted Subsidiary shall be deemed not to exceed the
aggregate amount of Investments previously made in such Person valued at the
time such Investments were made, less the net reduction of such Investments. For
purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on
Restricted Payments" covenant described below:
- "Investment" shall include the fair market value of the assets (net of
liabilities (other than liabilities to FelCor LP or FelCor or any of
their respective Restricted Subsidiaries)) of any Restricted Subsidiary
at the time such Restricted Subsidiary is designated an Unrestricted
Subsidiary,
- the fair market value of the assets (net of liabilities (other than
liabilities to FelCor LP or FelCor or any of their respective Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary shall be
considered a reduction in outstanding Investments, and
- any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer.
"Investment Grade" means a rating of the Notes by both S&P and Moody's,
each such rating being in one of such agency's four highest generic rating
categories that signifies investment grade (i.e. BBB- (or the equivalent) or
higher by S&P and Baa3 (or the equivalent) or higher by Moody's); provided, in
each case, such ratings are publicly available; provided, further, that in the
event Moody's or S&P is no longer in existence for purposes of determining
whether the Notes are rated "Investment Grade," such organization may be
replaced by a nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) designated by FelCor LP and FelCor, notice
of which shall be given to the Trustee.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Line of Credit" means the credit facility established pursuant to the
Seventh Amended and Restated Credit Agreement dated as of July 26, 2001 among
FelCor LP, FelCor, and FelCor Canada Co., as borrowers, the lenders party
thereto, The Chase Manhattan Bank, as Administrative Agent, The Chase Manhattan
Bank of Canada, as an Additional Administrative Agent, 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.,
Wells Fargo Bank, National Association and Salomon Smith Barney Inc., as
Co-Documentation Agents, together with all other agreements, instruments and
documents executed or delivered pursuant thereto or in connection therewith, in
each case as such agreements, instruments or documents may be amended,
supplemented, extended, renewed, replaced or otherwise modified from time to
time; provided that, with respect to an agreement providing for the refinancing
of Indebtedness under the Line of Credit, such agreement shall be the Line of
Credit under the Indenture only if a notice to that effect is delivered by
FelCor LP and FelCor to the trustee.
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"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means:
(1) with respect to any Asset Sale, the proceeds of such Asset Sale in
the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or
cash equivalents (except to the extent such obligations are financed or
sold with recourse to FelCor LP or FelCor or any of their respective
Restricted Subsidiaries) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of:
- brokerage commissions and other fees and expenses (including fees and
expenses of counsel and investment bankers) related to such Asset
Sale,
- provisions for all taxes actually paid or payable as a result of such
Asset Sale by FelCor LP, FelCor and their respective Restricted
Subsidiaries, taken as a whole,
- payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured
by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale, and
- amounts reserved by FelCor LP, FelCor and their respective Restricted
Subsidiaries against any liabilities associated with such Asset Sale,
including without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such
Asset Sale, all as determined on a consolidated basis in conformity
with GAAP, and
(2) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the
extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent
such obligations are financed or sold with recourse to FelCor LP or FelCor
or any of their respective Restricted Subsidiaries) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants's fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant
and other fees incurred in connection with such issuance or sale and net of
tax paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by FelCor LP, from the
holders commenced by mailing a notice to the trustee and each holder stating:
(1) the covenant pursuant to which the offer is being made and that
all Notes validly tendered will be accepted for payment on a pro rata
basis;
(2) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed) ("Payment Date");
(3) that any Note not tendered will continue to accrue interest
pursuant to its terms;
(4) that, unless FelCor LP defaults in the payment of the purchase
price, any Note accepted for payment pursuant to the Offer to Purchase
shall cease to accrue interest on and after the Payment Date;
(5) that holders electing to have a Note purchased pursuant to the
Offer to Purchase will be required to surrender the Note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately
preceding the Payment Date;
85
(6) that holders will be entitled to withdraw their election if the
Payment Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such holder, the principal
amount of Notes delivered for purchase and a statement that such holder is
withdrawing his election to have such Notes purchased; and
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral multiples
thereof.
On the Payment Date, FelCor LP shall
- accept for payment on a pro rata basis Notes or portions thereof tendered
pursuant to an Offer to Purchase; and
- deposit with the Paying Agent money sufficient to pay the purchase price
of all Notes or portions thereof so accepted;
- and shall promptly thereafter deliver, or cause to be delivered, to the
trustee all Notes or portions thereof so accepted together with an
Officers' Certificate specifying the Notes or portions thereof accepted
for payment by FelCor LP.
The Paying Agent shall promptly mail to the holders of Notes so accepted
payment in an amount equal to the purchase price, and the trustee shall promptly
authenticate and mail to such holders a new Note equal in principal amount to
any unpurchased portion of any Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. FelCor LP will publicly announce the results of an
Offer to Purchase as soon as practicable after the Payment Date. FelCor LP will
comply with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that FelCor LP is required to repurchase Notes pursuant to an Offer
to Purchase.
"Permitted Investment" means:
(1) an Investment in FelCor LP or FelCor or any of their Restricted
Subsidiaries or a Person that will, upon the making of such Investment,
become a Restricted Subsidiary or be merged or consolidated with or into or
transfer or convey all or substantially all its assets to, FelCor LP or
FelCor or any of their Restricted Subsidiaries; provided that such person's
primary business is related, ancillary, incidental or complementary to the
businesses of FelCor LP or FelCor or any of their respective Restricted
Subsidiaries on the date of such Investment;
(2) Temporary Cash Investments;
(3) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; and
(4) stock, obligations or securities received in satisfaction of
judgments.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated, whether
voting or non-voting) that have a preference on liquidation or with respect to
distributions over any other class of Capital Stock, including preferred
partnership interests, whether general or limited, or such Person's preferred or
preference stock, whether outstanding on the Closing Date or issued thereafter,
including, without limitation, all series and classes of such preferred or
preference stock.
"Ratings Downgrade" means a rating of the Notes (1) by S&P and Moody's
lower than, in the case of S&P, BB- and, in the case of Moody's, Ba3; provided
in each case such ratings are publicly available or
86
(2) by S&P or Moody's lower than, in the case of S&P, BB- or, in the case of
Moody's, Ba3; provided that in any such case such rating is the only rating
publicly available.
"Restricted Subsidiary" means any Subsidiary of FelCor LP or FelCor other
than an Unrestricted Subsidiary.
"Secured Indebtedness" means any Indebtedness secured by a Lien upon the
property of FelCor LP or FelCor or any of their respective Restricted
Subsidiaries, other than Indebtedness secured by a Stock Pledge to the extent
such Indebtedness does not exceed 50% of Adjusted Total Assets.
"Senior Indebtedness" means the following obligations of FelCor LP or
FelCor or any of their respective Restricted Subsidiaries, whether outstanding
on the Closing Date or thereafter Incurred:
(1) all Indebtedness and all other monetary obligations (including
expenses fees and other monetary obligations) of FelCor LP and FelCor under
the Line of Credit;
(2) all Indebtedness and all other monetary obligations of FelCor LP
or FelCor or any of their respective Restricted Subsidiaries (other than
the Notes), including principal and interest on such Indebtedness, unless
such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued is expressly
subordinated in right of payment to the Notes; and
(3) Subsidiary Debt.
Senior Indebtedness will also include interest accruing subsequent to
events of bankruptcy of FelCor LP and FelCor and their respective Restricted
Subsidiaries at the rate provided for the document governing such Senior
Indebtedness, whether or not such interest is an allowed claim enforceable
against the debtor in a bankruptcy case under bankruptcy law.
"Significant Subsidiary" means, at any determination date, any Restricted
Subsidiary that, together with its Subsidiaries:
(1) for the most recent fiscal year of FelCor LP and FelCor, accounted
for more than 10% of the consolidated revenues of FelCor LP, FelCor and
their respective Restricted Subsidiaries, or
(2) as of the end of such fiscal year, was the owner of more than 10%
of the consolidated assets of FelCor LP, FelCor and their respective
Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements thereof for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means:
(1) with respect to any debt security, the date specified in such debt
security as the fixed date on which the final installment of principal of
such debt security is due and payable, and
(2) with respect to any scheduled installment of principal of or
interest on any debt security, the date specified in such debt security as
the fixed date on which such installment is due and payable.
"Stock Pledge" means a first priority security interest in the equity
interests of subsidiaries of FelCor and/or FelCor LP.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person and the accounts of which
would be consolidated with those of such Person in its consolidated financial
statements in accordance with GAAP, if such statements were prepared as of such
date.
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"Subsidiary Debt" means all unsecured Indebtedness of which a Restricted
Subsidiary is the primary obligor.
"Subsidiary Guarantee" means a Guarantee by each Subsidiary Guarantor for
payment of the Notes by such Subsidiary Guarantor. The Subsidiary Guarantee will
be an unsecured senior obligation of each Subsidiary Guarantor and will be
unconditional regardless of the enforceability of the Notes and the Indenture.
Notwithstanding the foregoing, each Subsidiary Guarantee by a Subsidiary
Guarantor shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon any sale, exchange or transfer, to
any Person not an Affiliate of FelCor LP or FelCor, of all of the Capital Stock
owned by FelCor LP, FelCor and their respective Restricted Subsidiaries in, or
all or substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not then prohibited by the Indenture).
"Subsidiary Guarantor" means each of the following:
(1) FelCor/CSS Hotels, L.L.C., a Delaware limited liability company;
(2) FelCor/LAX Hotels, L.L.C., a Delaware limited liability company;
(3) FelCor/CSS Holdings, L.P., a Delaware limited partnership;
(4) FelCor/St. Paul Holdings, L.P., a Delaware limited partnership;
(5) FelCor/LAX Holdings, L.P., a Delaware limited partnership;
(6) FelCor Eight Hotels, L.L.C., a Delaware limited liability company;
(7) FelCor Hotel Asset Company, L.L.C., a Delaware limited liability
company;
(8) FelCor Nevada Holdings L.L.C., a Nevada limited liability company;
(9) FHAC Nevada Holdings, L.L.C., a Nevada limited liability company;
(10) FHAC Texas Holdings, L.P., a Texas limited partnership;
(11) FelCor Omaha Hotel Company, L.L.C., a Delaware limited liability
company;
(12) FelCor Country Villa Hotel, L.L.C., a Delaware limited liability
company;
(13) FelCor Moline Hotel, L.L.C., a Delaware limited liability
company;
(14) FelCor Canada Co., a Nova Scotia unlimited liability company;
(15) FelCor TRS Holdings, L.P., a Delaware limited partnership;
(16) Kingston Plantation Development Corp., a Delaware corporation;
and
(17) each other Restricted Subsidiary that executes a Subsidiary
Guarantee in compliance with the "Limitation on Issuances of Guarantees by
Restricted Subsidiaries" covenant below.
"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof,
(2) time deposits accounts, certificates of deposit and money market
deposits maturing within 180 days of the date of acquisition thereof issued
by a bank or trust company which is organized under the laws of the United
States of America, any state thereof, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50 million
and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor,
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above,
(4) commercial paper, maturing not more than 90 days after the date of
acquisition, issued by a corporation (other than an Affiliate of FelCor LP
or FelCor) organized and in existence under the
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laws of the United States of America, any state of the United States of
America with a rating at the time as of which any investment therein is
made of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P, and
(5) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or Moody's.
"Total Assets" means the sum of:
(1) Undepreciated Real Estate Assets, and
(2) all other assets of FelCor LP, FelCor and their respective
Restricted Subsidiaries on a consolidated basis determined in conformity
with GAAP (but excluding intangibles and accounts receivables).
"Total Unencumbered Assets" as of any date means the sum of:
(1) those Undepreciated Real Estate Assets not securing any portion of
Secured Indebtedness, and
(2) all other assets (but excluding intangibles and accounts
receivable) of FelCor LP, FelCor and their respective Restricted
Subsidiaries not securing any portion of Secured Indebtedness determined on
a consolidated basis in accordance with GAAP.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with the respect to the Incurrence of any
Indebtedness by FelCor LP or FelCor or any of their respective Restricted
Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to
any Restricted Payment, the date such Restricted Payment is to be made.
"Undepreciated Real Estate Assets" means, as of any date, the cost (being
the original cost to FelCor LP or FelCor or any of their respective Restricted
Subsidiaries plus capital improvements) of real estate assets of FelCor LP,
FelCor and their Restricted Subsidiaries on such date, before depreciation and
amortization of such real estate assets, determined on a consolidated basis in
conformity with GAAP.
"Units" means the limited partnership units of FelCor LP, that by their
terms are redeemable at the option of the holder thereof and that, if so
redeemed, at the election of FelCor are redeemable for cash or Common Stock of
FelCor.
"Unrestricted Subsidiary" means
(1) any Subsidiary of FelCor LP or FelCor that at the time of
determination shall be designated an Unrestricted Subsidiary by the Board
of Directors in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Restricted Subsidiary (including
any newly acquired or newly formed Subsidiary of FelCor LP or FelCor) to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, FelCor LP or FelCor or any of their
respective Restricted Subsidiaries; provided that:
- any Guarantee by FelCor LP or FelCor or any of their respective
Restricted Subsidiaries of any Indebtedness of the Subsidiary being so
designated shall be deemed an "Incurrence" of such
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Indebtedness and an "Investment" by FelCor LP or FelCor or such
Restricted Subsidiary (or all, if applicable) at the time of such
designation;
- either (i) the Subsidiary to be so designated has total assets of $1,000
or less or (ii) if such Subsidiary has assets greater than $1,000, such
designation would be permitted under the "Limitation on Restricted
Payments" covenant described below; and
- if applicable, the Incurrence of Indebtedness and the Investment referred
to in the first bullet of this proviso would be permitted under the
"Limitation on Indebtedness" and "Limitation on Restricted Payments"
covenants described below.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that:
- no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation; and
- all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately after such designation would, if Incurred at such time, have
been permitted to be Incurred (and shall be deemed to have been Incurred)
for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced to the trustee
by promptly filing with the trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"Unsecured Indebtedness" means any Indebtedness of FelCor LP or FelCor or
any of their respective Restricted Subsidiaries that is not Secured
Indebtedness.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by individuals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Indenture contains, among others, the following covenants, provided
that the Indenture will provide that the "Limitation on Liens," the "Limitation
on Sale-Leaseback Transactions," the "Limitation on Restricted Payments," the
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries," the "Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries," the "Limitation on Issuances of Guarantees by
Restricted Subsidiaries," and the "Limitation on Transactions with Affiliates"
covenants will not be applicable in the event, and only for so long as, the
Notes are rated Investment Grade and no Default or Event of Default has occurred
and is continuing.
Limitation on Indebtedness
(1) Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor
will permit any of their respective Restricted Subsidiaries to, Incur any
Indebtedness if, immediately after giving effect to the Incurrence of such
additional Indebtedness, the aggregate principal amount of all outstanding
Indebtedness of FelCor LP, FelCor and their respective Restricted Subsidiaries
on a consolidated basis determined in accordance with GAAP is greater than 60%
of Adjusted Total Assets.
(2) Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor
will permit any of their respective Restricted Subsidiaries to, Incur any
Subsidiary Debt or any Secured Indebtedness if, immediately after giving effect
to the Incurrence of such additional Subsidiary Debt or Secured
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Indebtedness, the aggregate principal amount of all outstanding Subsidiary Debt
and Secured Indebtedness of FelCor LP, FelCor and their respective Restricted
Subsidiaries on a consolidated basis is greater than 45% of Adjusted Total
Assets.
(3) Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor
will permit any of their respective Restricted Subsidiaries to, Incur any
Indebtedness (other than the existing 7 3/8% and 7 5/8% senior notes, the
Subsidiary Guarantees relating to the existing 7 3/8% and 7 5/8% senior notes
and other Indebtedness existing on the Closing Date); provided that FelCor LP or
FelCor or any of their respective Restricted Subsidiaries may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Interest Coverage Ratio of FelCor
LP, FelCor and their respective Restricted Subsidiaries on a consolidated basis
would be greater than 2.0 to 1.
(4) Notwithstanding paragraphs (1), (2) or (3), FelCor LP or FelCor or any
of their respective Restricted Subsidiaries (except as specified below) may
Incur each and all of the following:
(A) Indebtedness outstanding under the Line of Credit at any time in
an aggregate principal amount not to exceed $700 million less any amount of
such Indebtedness permanently repaid as provided under the "Limitation on
Asset Sales" covenant described below;
(B) Indebtedness owed to:
- FelCor LP or FelCor evidenced by an unsubordinated promissory note, or
- to any Restricted Subsidiary;
provided that any event which results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to FelCor LP or FelCor or any other Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of
such Indebtedness not permitted by this clause (B);
(C) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, outstanding Indebtedness (other than
Indebtedness Incurred under clause (A), (B), (D) or (F) of this paragraph
(4)) and any refinancings thereof in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that ranks equally with or
subordinate in right of payment to, the Notes shall only be permitted under
this clause (C) if:
- in case the Notes are refinanced in part or the Indebtedness to be
refinanced ranks equally with the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which
such new Indebtedness is outstanding, ranks equally with or is
expressly made subordinate in right of payment to the remaining Notes,
- in case the Indebtedness to be refinanced is subordinated in right of
payment to the Notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the Notes at least to the extent
that the Indebtedness to be refinanced is subordinated to the Notes,
and
- such new Indebtedness, determined as of the date of Incurrence of such
new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of
such new Indebtedness is at least equal to the remaining Average Life
of the Indebtedness to be refinanced or refunded; and
provided further that in no event may Indebtedness of FelCor LP or FelCor
that ranks equally with or subordinate in right of payment to the Notes be
refinanced by means of any Indebtedness of any Restricted Subsidiary
pursuant to this clause (C);
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(D) Indebtedness:
- in respect of performance, surety or appeal bonds provided in the
ordinary course of business,
- under Currency Agreements and Interest Rate Agreements; provided that
such agreements (i) are designed solely to protect FelCor LP or FelCor
or any of their respective Restricted Subsidiaries against
fluctuations in foreign currency exchange rates or interest rates and
(ii) do not increase the Indebtedness of the obligor outstanding at
any time other than as a result of fluctuations in foreign currency
exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder, and
- arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from Guarantees or letters
of credit, surety bonds or performance bonds securing any obligations
of FelCor LP or FelCor or any of their respective Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition),
in a principal amount not to exceed the gross proceeds actually
received by FelCor LP, FelCor and their respective Restricted
Subsidiaries on a consolidated basis in connection with such
disposition;
(E) Indebtedness of FelCor LP or FelCor, to the extent the net
proceeds thereof are promptly:
- used to purchase Notes tendered in an Offer to Purchase made as a
result of a Change in Control, or
- deposited to defease the Notes as described below under "Defeasance;"
or
(F) Guarantees of the Notes and the existing 7 7/8% and 7 5/8% notes
and Guarantees of Indebtedness of FelCor LP or FelCor by any of their
respective Restricted Subsidiaries provided the guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuances of Guarantees by Restricted Subsidiaries" covenant described
below.
(5) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that FelCor LP or FelCor or any
of their respective Restricted Subsidiaries may Incur pursuant to this
"Limitation on Indebtedness" covenant shall not be deemed to be exceeded, with
respect to any outstanding Indebtedness due solely to the result of
fluctuations in the exchange rates of currencies.
(6) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant,
- Indebtedness Incurred under the Line of Credit on or prior to the Closing
Date shall be treated as Incurred pursuant to clause (A) of paragraph (4)
of this "Limitation on Indebtedness" covenant,
- Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included, and
- any Liens granted pursuant to the equal and ratable provisions referred
to in the "Limitation on Liens" covenant described below shall not be
treated as Indebtedness.
For purposes of determining compliance with this "Limitation on Indebtedness"
covenant, in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described in the above clauses (other
than Indebtedness referred to in the second bullet in this paragraph (6)),
each of FelCor LP and FelCor, in its sole discretion, shall classify such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses; provided that FelCor LP and FelCor must
classify such item of Indebtedness in an identical fashion.
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Maintenance of Total Unencumbered Assets
FelCor LP, FelCor and their respective Restricted Subsidiaries will
maintain Total Unencumbered Assets of not less than 150% of the aggregate
outstanding principal amount of the Unsecured Indebtedness of FelCor LP, FelCor
and their respective Restricted Subsidiaries on a consolidated basis.
Limitation on Liens
Neither FelCor LP nor FelCor shall secure any Indebtedness under the Line
of Credit by a Lien unless contemporaneously therewith effective provision is
made to secure the notes equally and ratably with the Indebtedness under the
Line of Credit for so long as the Indebtedness under the Line of Credit is
secured by such Lien.
Limitation on Sale-Leaseback Transactions
Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will
permit any of their respective Restricted Subsidiaries to, enter into any
sale-leaseback transaction involving any of its assets or properties whether now
owned or hereafter acquired, whereby any of them sells or transfers such assets
or properties and then or thereafter leases such assets or properties or any
substantial part thereof.
The foregoing restriction does not apply to any sale-leaseback transaction
if:
(1) the lease is for a period, including renewal rights, of not in
excess of three years;
(2) the lease secures or relates to industrial revenue or pollution
control bonds;
(3) the transaction is solely between FelCor LP or FelCor and any
Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; or
(4) FelCor LP or FelCor or any of their respective Restricted
Subsidiaries, within 12 months after the sale or transfer of any assets or
properties is completed, applies an amount not less than the net proceeds
received from such sale in accordance with clause (1) or (2) of the second
paragraph of the "Limitation on Asset Sales" covenant described below.
Limitation on Restricted Payments
Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will
permit any of their respective Restricted Subsidiaries to, directly or
indirectly:
(1) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock held by Persons other than FelCor LP or FelCor
or any of their respective Restricted Subsidiaries, other than:
- dividends or distributions payable solely in shares of its Capital
Stock (other than Disqualified Stock) or in options, warrants or other
rights to acquire shares of such Capital Stock, and
- pro rata dividends or distributions on Common Stock of FelCor LP or
any Restricted Subsidiary held by minority stockholders;
(2) purchase, redeem, retire or otherwise acquire for value any shares
of Capital Stock of:
- FelCor LP, FelCor or an Unrestricted Subsidiary (including options,
warrants or other rights to acquire such shares of Capital Stock) held
by any Person other than FelCor LP or FelCor or any of their
respective Restricted Subsidiaries unless in connection with such
purchase the Unrestricted Subsidiary is designated as a Restricted
Subsidiary, or
- a Restricted Subsidiary (including options, warrants or other rights
to acquire such shares of Capital Stock) held by an Affiliate of
FelCor LP or FelCor (other than a Wholly Owned Restricted Subsidiary)
or any holder (or any Affiliate of such holder) of 5% or more of the
Capital Stock of FelCor LP or FelCor;
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(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of FelCor LP or FelCor that is
subordinated in right of payment to the Notes; or
(4) make an Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (1) through
(4) above being collectively "Restricted Payments") if, at the time of, and
after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be
continuing,
(B) FelCor LP or FelCor could not Incur at least $1.00 of
Indebtedness under the paragraphs (1), (2) and (3) of the "Limitation on
Indebtedness" covenant, or
(C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) made after the Closing Date shall exceed the sum of:
- 95% of the aggregate amount of the Funds From Operations (or, if
the Funds From Operations is a loss, minus 100% of the amount of
such loss) (determined by excluding income resulting from transfers
of assets by FelCor LP or FelCor or any of their respective
Restricted Subsidiaries to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter in which the
Closing Date occurs and ending on the last day of the last fiscal
quarter preceding the Transaction Date for which reports have been
filed with the SEC or provided to the Trustee pursuant to the "SEC
Reports and Reports to Holders" covenant, plus
- the aggregate Net Cash Proceeds received by FelCor LP or FelCor
after the Closing Date from the issuance and sale permitted by the
Indenture of its Capital Stock (other than Disqualified Stock) to a
Person who is not a Subsidiary of FelCor LP or FelCor, including an
issuance or sale permitted by the Indenture of Indebtedness of
FelCor LP or FelCor for cash subsequent to the Closing Date upon
the conversion of such Indebtedness into Capital Stock (other than
Disqualified Stock) of FelCor LP or FelCor, or from the issuance to
a Person who is not a Subsidiary of FelCor LP or FelCor of any
options, warrants or other rights to acquire Capital Stock of
FelCor LP or FelCor (in each case, exclusive of any Disqualified
Stock or any options, warrants or other rights that are redeemable
at the option of the holder, or are required to be redeemed, prior
to the Stated Maturity of the Notes), plus
- an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of
loans or advances, or other transfers of assets, in each case to
FelCor LP or FelCor or any of their respective Restricted
Subsidiaries or from the Net Cash Proceeds from the sale of any
such Investment (except, in each case, to the extent any such
payment or proceeds are included in the calculation of Funds From
Operations) or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments") not to exceed, in each case, the
amount of Investments previously made by FelCor LP, FelCor and
their respective Restricted Subsidiaries in such Person or
Unrestricted Subsidiary, plus
- the purchase price of noncash tangible assets acquired in exchange
for an issuance of Capital Stock (other than Disqualified Stock) of
FelCor LP or FelCor subsequent to the Closing Date.
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Notwithstanding the foregoing, FelCor LP or FelCor may declare or pay any
dividend or make any distribution that is necessary to maintain FelCor's status
as a REIT under the Code if:
- the aggregate principal amount of all outstanding Indebtedness of FelCor
LP or FelCor on a consolidated basis at such time is less than 60% of
Adjusted Total Assets, and
- no Default or Event of Default shall have occurred and be continuing.
The foregoing provisions shall not be violated by reason of:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, or in exchange for, Indebtedness Incurred
under clause (C) of paragraph (4) of the "Limitation on Indebtedness"
covenant;
(3) the repurchase, redemption or other acquisition of Capital Stock
of FelCor LP or FelCor or an Unrestricted Subsidiary (or options, warrants
or other rights to acquire such Capital Stock) in exchange for, or out of
the proceeds of a substantially concurrent issuance of, shares of Capital
Stock (other than Disqualified Stock) of FelCor LP or FelCor (or options,
warrants or other rights to acquire such Capital Stock);
(4) the making of any principal payment on, or the repurchase,
redemption, retirement, defeasance or other acquisition for value of,
Indebtedness of FelCor LP or FelCor which is subordinated in right of
payment to the Notes in exchange for, or out of the proceeds of, a
substantially concurrent issuance of, shares of the Capital Stock (other
than Disqualified Stock) of FelCor LP or FelCor (or options, warrants or
other rights to acquire such Capital Stock);
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of FelCor LP or FelCor;
(6) Investments in any Person or Persons in an aggregate amount not to
exceed $150 million; or
(7) Restricted Payments in an aggregate amount not to exceed $200
million, provided that at the time of, and after giving effect to, the
proposed Restricted Payment, FelCor LP and FelCor could have incurred at
least $1.00 of Indebtedness under paragraphs (1), (2) and (3) of the
"Limitation on Indebtedness" covenant;
provided that, except in the case of clauses (1) and (3), no Default or
Event of Default shall have occurred and be continuing or occur as a direct
consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to this paragraph (other than the
Restricted Payment referred to in clause (2) of this paragraph, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (3) or (4)
of this paragraph, an Investment referred to in clause (6) of this paragraph or
a Restricted Payment referred to in clause (7) of this paragraph), and the Net
Cash Proceeds from any issuance of Capital Stock referred to in clauses (3) and
(4), shall be included in calculating whether the conditions of clause (C) of
the first paragraph of this "Limitation on Restricted Payments" covenant have
been met with respect to any subsequent Restricted Payments.
Notwithstanding anything to the contrary contained in this "Limitation on
Restricted Payments" covenant, except in the case of clauses (3) and (5) of the
immediately preceding paragraph, in no case shall FelCor LP, FelCor or any of
their respective Restricted Subsidiaries, directly or indirectly, purchase,
redeem or otherwise acquire any Capital Stock unless at the time of, and after
giving effect to, such
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proposed Restricted Payment, the ratio of Indebtedness to Consolidated EBITDA of
FelCor LP, FelCor and their respective Restricted Subsidiaries on a consolidated
basis would be equal to or less than 4.85 to 1.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will
permit any of their respective Restricted Subsidiaries to, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction of any kind on the ability of any Restricted Subsidiary to:
- pay dividends or make any other distributions permitted by applicable law
on any Capital Stock of such Restricted Subsidiary owned by FelCor LP or
FelCor or any of their respective Restricted Subsidiaries,
- pay any Indebtedness owed to FelCor LP, FelCor or any other Restricted
Subsidiary,
- make loans or advances to FelCor LP, FelCor or any other Restricted
Subsidiary, or
- transfer its property or assets to FelCor LP, FelCor or any other
Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or restrictions:
(1) existing on the Closing Date in the Indenture, the Line of Credit
and any other agreement in effect on the Closing Date to the extent listed
on a schedule to the Indenture, and any extensions, refinancings, renewals
or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements
are no less favorable in any material respect to the holders than those
encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced;
(2) existing under or by reason of applicable law;
(3) existing with respect to any Person or the property or assets of
such Person acquired by FelCor LP, FelCor or any Restricted Subsidiary,
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any
Person or the property or assets of any Person other than such Person or
the property or assets of such Person so acquired;
(4) in the case of the last bullet in the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant:
- that restrict in a customary manner the subletting, assignment or
transfer of any property or asset that is a lease, license, conveyance
or contract or similar property or asset,
- existing by virtue of any transfer of, agreement to transfer, option
or right with respect to, or Lien on, any property or assets of FelCor
LP, FelCor or any Restricted Subsidiary not otherwise prohibited by
the Indenture, or
- arising or agreed to in the ordinary course of business, not relating
to any Indebtedness, and that do not, individually or in the
aggregate, detract from the value of property or assets of FelCor LP,
FelCor or any Restricted Subsidiary in any manner material to FelCor
LP, FelCor and their respective Restricted Subsidiaries taken as a
whole;
(5) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary; or
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(6) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued if:
- the encumbrance or restriction applies only in the event of a payment
default or a default with respect to a financial covenant contained in
such Indebtedness or agreement,
- the encumbrance or restriction is not materially more disadvantageous
to the holders of the Notes than is customary in comparable financings
(as determined by FelCor LP and FelCor), and
- each of FelCor LP and FelCor determines that any such encumbrance or
restriction will not materially affect such Persons' ability to make
principal or interest payments on the Notes.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent FelCor
LP, FelCor or any Restricted Subsidiary from:
- creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the "Limitation on Liens" covenant, or
- restricting the sale or other disposition of property or assets of FelCor
LP or FelCor or any of their respective Restricted Subsidiaries that
secure Indebtedness of FelCor LP, FelCor or any of their respective
Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
Neither FelCor LP nor FelCor will sell, and neither FelCor LP nor FelCor
will permit any of their respective Restricted Subsidiaries, directly or
indirectly, to issue or sell, any shares of Capital Stock of a Restricted
Subsidiary (including options, warrants or other rights to purchase shares of
such Capital Stock) except:
(1) to FelCor LP, FelCor or a Wholly Owned Restricted Subsidiary;
(2) issuances of director's qualifying shares or sales to individuals
of shares of Restricted Subsidiaries, to the extent required by applicable
law or to the extent necessary to obtain local liquor licenses;
(3) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Subsidiary and any
Investment in such Person remaining after giving effect to such issuance or
sale would have been permitted to be made under the "Limitation on
Restricted Payments" covenant if made on the date of such issuance or sale,
or
(4) sales of not greater than 20% of the Capital Stock of a
newly-created Restricted Subsidiary made in connection with, or in
contemplation of, the acquisition or development by such Restricted
Subsidiary of one or more properties to any Person that is, or is an
Affiliate of, the entity that provides, franchise management or other
services, as the case may be, to one or more properties owned by such
Restricted Subsidiary.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
Neither FelCor LP nor FelCor will permit any of their respective Restricted
Subsidiaries, directly or indirectly, to Guarantee any Indebtedness of FelCor LP
or FelCor which ranks equally with or subordinate in right of payment to the
Notes ("Guaranteed Indebtedness"), unless:
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Subsidiary
Guarantee by such Restricted Subsidiary, and
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(2) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against FelCor
LP, FelCor or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee;
provided that this paragraph shall not be applicable to any Guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of, such
person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness:
- ranks equally with the Notes, then the Guarantee of such Guaranteed
Indebtedness shall rank equally with, or subordinate to, the Subsidiary
Guarantee, or
- is subordinate to the Notes, then the Guarantee of such Guaranteed
Indebtedness shall be subordinated to the Subsidiary Guarantee at least
to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon:
(1) any sale, exchange or transfer, to any Person not an Affiliate of
FelCor LP or FelCor, of all of Capital Stock held by FelCor LP, FelCor and
their respective Restricted Subsidiaries in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer
is not prohibited by the Indenture), or
(2) the release or discharge of the Guarantee which resulted in the
creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such Guarantee.
Limitation on Transactions with Affiliates
Neither FelCor LP nor FelCor will, and neither FelCor LP nor FelCor will
permit any of their respective Restricted Subsidiaries to, directly or
indirectly, enter into, renew or extend any transaction (including, without
limitations, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any holder (or any Affiliate of such holder) of
5% or more of any class of Capital Stock of FelCor LP or FelCor or with any
Affiliate of FelCor LP or FelCor or any of their respective Restricted
Subsidiaries, except upon fair and reasonable terms no less favorable to FelCor
LP, FelCor or such Restricted Subsidiary than could be obtained, at the time of
such transaction or, if such transaction is pursuant to a written agreement, at
the time of the execution of the agreement providing therefor, in a comparable
arm's-length transaction with a Person that is not such a holder or an
Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(1) transactions (A) approved by a majority of the independent
directors of FelCor or (B) for which FelCor LP, FelCor or any Restricted
Subsidiary delivers to the trustee a written opinion of a nationally
recognized investment banking firm stating that the transaction is fair to
FelCor LP, FelCor or such Restricted Subsidiary from a financial point of
view;
(2) any transaction solely between FelCor LP or FelCor and any of
their respective Wholly Owned Restricted Subsidiaries or solely between
Wholly Owned Restricted Subsidiaries;
(3) the payment of reasonable and customary fees and expenses to
directors of FelCor who are not employees of FelCor;
(4) any payments or other transactions pursuant to any tax-sharing
agreement between FelCor LP or FelCor and any other Person with which
FelCor LP or FelCor files a consolidated tax return or with which FelCor LP
or FelCor is part of a consolidated group for tax purposes; or
(5) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant.
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Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "Limitation on Transactions
with Affiliates" covenant and not covered by (2) through (5) of the immediately
foregoing paragraph,
- the aggregate amount of which exceeds $2 million in value or relates to
the leasing of one or more hotel properties to DJONT, must be approved or
determined to be fair in the manner provided for in clause (1)(A) or (B)
above, and
- the aggregate amount of which exceeds $5 million in value, must be
determined to be fair in the manner provided for in clause (1)(B) above.
Limitation on Asset Sales
Neither FelCor LP nor FelCor will, and neither FelCor LP or FelCor will
permit any of their respective Restricted Subsidiaries to, consummate any Asset
Sale, unless:
(1) the consideration received by FelCor LP, FelCor or such Restricted
Subsidiary is at least equal to the fair market value of the assets sold or
disposed of, and
(2) at least 75% of the consideration received consists of cash or
Temporary Cash Investments; provided, with respect to the sale of one or
more hotel properties that up to 75% of the consideration may consist of
indebtedness of the purchaser of such hotel properties; provided, further,
that such indebtedness is secured by a first priority Lien on the hotel
property or properties sold.
In the event and to the extent that the Net Cash Proceeds received by
FelCor LP, FelCor or such Restricted Subsidiary from one or more Asset Sales
occurring on or after the Closing Date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of FelCor LP, FelCor and their respective Restricted
Subsidiaries has been filed with the SEC or provided to the Trustee pursuant to
the "SEC Reports and Reports to Holders" covenant), then FelCor LP or FelCor
shall or shall cause the relevant Restricted Subsidiary to:
(1) within 12 months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets:
- apply an amount equal to such excess Net Cash Proceeds to permanently
reduce Senior Indebtedness of FelCor LP, FelCor, or any Restricted
Subsidiary or Indebtedness of any other Restricted Subsidiary, in each
case owing to a Person other than FelCor LP, FelCor or any of their
respective Restricted Subsidiaries, or
- invest an equal amount, or the amount not so applied pursuant to the
foregoing bullet (or enter into a definitive agreement committing to
so invest within 12 months after the date of such agreement), in
property or assets (other than current assets) of a nature or type or
that are used in a business (or in a Restricted Subsidiary having
property and assets of a nature or type, or engaged in a business)
similar or related to the nature or type of the property and assets
of, or the business of, FelCor LP or FelCor or any of their respective
Restricted Subsidiaries existing on the date of such investment, and
(2) apply (no later than the end of the 12-month period referred to in
clause (1)) such excess Net Cash Proceeds (to the extent not applied
pursuant to clause (1)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant.
The amount of such excess Net Cash Proceeds required to be applied (or to
be committed to be applied) during such 12-month period as set forth in clause
(1) of the preceding sentence and not applied as so required by the end of such
period shall constitute "Excess Proceeds." If, as of the first day of any
calendar month, the aggregate amount of Excess Proceeds not previously subject
to an Offer to Purchase pursuant to this "Limitation on Asset Sales" covenant
totals at least $10 million, FelCor LP must
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commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the Notes, plus, in
each case, accrued interest (if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
FelCor LP must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount of the Notes, plus
accrued interest (if any) to the Payment Date.
There can be no assurance that FelCor LP will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
any covenant that may be contained in other securities of FelCor LP or FelCor
that might be outstanding at the time). The above covenant requiring FelCor LP
to repurchase the Notes will, unless consents are obtained, require FelCor LP to
repay all indebtedness then outstanding which by its terms would prohibit such
Note repurchase, either prior to or concurrently with such Note repurchase.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not FelCor LP or FelCor is then required to file reports with
the SEC, FelCor LP and FelCor shall file with the SEC all such reports and other
information as they would be required to file with the SEC by Sections 13(a) or
15(d) under the Exchange Act if they were subject thereto; provided that, if
filing such documents by FelCor LP or FelCor with the SEC is not permitted under
the Exchange Act, FelCor LP or FelCor shall provide such documents to the
trustee and upon written request supply copies of such documents to any
prospective holder; provided, further, that if the rules and regulations of the
SEC permit FelCor LP and FelCor to file combined reports or information pursuant
to the Exchange Act, FelCor LP and FelCor may file combined reports and
information. FelCor LP and FelCor shall supply the trustee and each holder or
shall supply to the trustee for forwarding to each such holder, without cost to
such holder, copies of such reports and other information.
EVENTS OF DEFAULT
Events of Default under the Indenture include the following:
(1) default in the payment of principal of, or premium, if any, on any
Note when they are due and payable at maturity, upon acceleration,
redemption or otherwise;
(2) default in the payment of interest on any Note when they are due
and payable, and such default continues for a period of 30 days;
(3) default in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of FelCor LP and FelCor or the failure by
FelCor LP to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of
Control" covenants;
(4) FelCor LP or FelCor defaults in the performance of or breaches any
other covenant or agreement of FelCor LP or FelCor in the Indenture or
under the Notes (other than a default specified in clause (1), (2) or (3)
above) and such default or breach continues for a period of 30 consecutive
days after written notice by the trustee or the holders of 25% or more in
aggregate principal amount of the Notes;
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(5) there occurs with respect to any issue or issues of Indebtedness
of FelCor LP or FelCor or any Significant Subsidiary having an outstanding
principal amount of $10 million or more in the aggregate for all such
issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created,
- an event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and
such Indebtedness has not been discharged in full or such acceleration
has not been rescinded or annulled within 30 days of such acceleration
and/or
- the failure to make a principal payment at the final (but not any
interim) fixed maturity and such defaulted payment shall not have been
made, waived or extended within 30 days of such payment default;
(6) any final judgment or order (not covered by insurance) for the
payment of money in excess of $10 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not covered by insurance):
- shall be rendered against FelCor LP or FelCor or any Significant
Subsidiary and shall not be paid or discharged, and
- and there shall be any period of 60 consecutive days following entry
of the final judgment or order that causes the aggregate amount for
all such final judgments or orders outstanding and not paid or
discharged against all such Persons to exceed $10 million during which
a stay of enforcement of such final judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect;
(7) a court having jurisdiction in the premises enters a decree or
order for:
- relief in respect of FelCor LP or FelCor or any Significant Subsidiary
in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect,
- appointment of a receiver, liquidator, assignee custodian, trustee,
sequestrator or similar official of FelCor LP or FelCor or any
Significant Subsidiary or for all or substantially all of the property
and assets of FelCor LP or FelCor or any Significant Subsidiary, or
- the winding up or liquidation of the affairs of FelCor LP or FelCor or
any Significant Subsidiary and, in each case, such decree or order
shall remain unstayed and in effect for a period of 60 consecutive
days; or
(8) FelCor LP or FelCor or any Significant Subsidiary:
- commences a voluntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under such law,
- consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of FelCor LP or FelCor or Significant Subsidiary or for all
or substantially all of the property and assets of FelCor LP or FelCor
or any Significant Subsidiary, or
- effects any general assignment for the benefit of its creditors.
If an Event of Default (other than an Event of Default specified in clause
(7) or (8) above that occurs with respect to FelCor LP or FelCor) occurs and is
continuing under the Indenture, the trustee or the holders of at least 25% in
aggregate principal amount of the Notes then outstanding, by written notice to
FelCor LP and FelCor (and to the trustee if such notice is given by the
holders), may, and the trustee at the request of the holders of at least 25% in
aggregate principal amount of the Notes then outstanding shall, declare the
principal of, premium, if any, and accrued interest on the Notes to be
immediately due
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and payable. Upon a declaration of acceleration, such principal of, premium, if
any, and accrued interest shall be immediately due and payable. In the event of
a declaration of acceleration because an Event of Default set forth in clause
(5) above has occurred and is continuing, such declaration of acceleration shall
be automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (5) shall be remedied or cured by FelCor LP,
FelCor or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto.
If an Event or Default specified in clause (7) or (8) above occurs with
respect to FelCor LP or FelCor, the principal of, premium, if any, and accrued
interest on the Notes then outstanding shall automatically become and be
immediately due and payable without any declaration or other act on the part of
the trustee or any holder. The holders of at least a majority in principal
amount of the outstanding Notes by written notice to FelCor LP, FelCor and to
the trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if:
- all existing Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the Notes that have become
due solely by such declaration of acceleration, have been cured or
waived, and
- the rescission would not conflict with any judgment or decree of a court
of competent jurisdiction.
As to the waiver of defaults, see "-- Modification and Waiver."
The holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee. However, the trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the trustee
in personal liability, or that the trustee determines in good faith may be
unduly prejudicial to the rights of holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from holders of Notes. A holder
may not pursue any remedy with respect to the Indenture or the Notes unless:
(1) the holder gives the trustee written notice of a continuing Event
of Default;
(2) the holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the trustee to pursue the
remedy;
(3) such holder or holders offer the trustee indemnity satisfactory to
the trustee against any costs, liability or expense;
(4) the trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the holders of a majority in aggregate
principal amount of the outstanding Notes do not give the trustee a
direction that is inconsistent with the request.
However, such limitations do not apply to the right of any holder of a Note
to receive payment of the principal of, premium, if any, or interest on, such
Note or to bring suit for the enforcement of any such payment on or after the
due date expressed in the Notes, which right shall not be impaired or affected
without the consent of the holder.
The Indenture requires certain officers of FelCor LP and FelCor to certify,
on or before a date not more than 90 days after the end of each fiscal year,
that a review has been conducted of the activities of FelCor LP and FelCor and
their respective Restricted Subsidiaries and of their performance under the
Indenture and that FelCor LP and FelCor have fulfilled all obligations
thereunder, or, if there has been a default in fulfillment of any such
obligation, specifying each such default and the nature and status thereof.
FelCor LP and FelCor will also be obligated to notify the trustee of any default
or defaults in the performance of any covenants or agreements under the
Indenture.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
Neither FelCor LP nor FelCor will merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into FelCor LP or FelCor unless:
(1) FelCor LP or FelCor shall be the continuing Person, or the Person
(if other than FelCor LP or FelCor) formed by such consolidation or into
which FelCor LP or FelCor is merged or that acquired or leased such
property and assets of FelCor LP or FelCor shall be an entity organized and
validly existing under the laws of the United States of America or any
state or jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the trustee, all of the obligations of
FelCor LP or FelCor on the Notes and under the Indenture;
(2) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction on a pro forma
basis FelCor LP or FelCor, or any Person becoming the successor obligor of
the Notes, as the case may be, could Incur at least $1.00 of Indebtedness
under paragraphs (1), (2) and (3) of the "Limitation on Indebtedness"
covenant; provided that this clause (3) shall not apply to a consolidation
or merger with or into a Wholly Owned Restricted Subsidiary with a positive
net worth; provided that, in connection with any such merger or
consolidation, no consideration (other than Capital Stock (other than
Disqualified Stock) in the surviving Person or FelCor LP or FelCor) shall
be issued or distributed to the holders of Capital Stock of FelCor LP or
FelCor; and
(4) FelCor LP or FelCor delivers to the trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate
compliance with clause (3)) and an Opinion of Counsel, in each case stating
that such consolidation, merger or transfer and such supplemental indenture
complies with this provision and that all conditions precedent provided for
herein relating to such transaction have been complied with; provided that
clause (3) above does not apply if, in the good faith determination of the
Board of Directors of FelCor LP or FelCor, whose determination shall be
evidenced by a Board Resolution, the principal purpose of such transaction
is to change the state of domicile of FelCor LP or FelCor; and provided,
further, that any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture provides that FelCor LP, FelCor
and the Subsidiary Guarantors will be deemed to have paid and will be discharged
from any and all obligations in respect of the Notes or any Subsidiary Guarantee
on the 123rd day after the deposit referred to below, and the provisions of the
Indenture will no longer be in effect with respect to the Notes (except for,
among other things: certain obligations to register the transfer or exchange of
the Notes; to replace stolen, lost or mutilated Notes; to maintain paying
agencies and to hold monies for payment in trust) if, among other things,
(1) FelCor LP has deposited with the trustee, in trust, money and/or
U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes,
(2) FelCor LP has delivered to the trustee:
(A) either
- an Opinion of Counsel to the effect that holders will not recognize
income, gain or loss for federal income tax purposes as a result of
FelCor LP's exercise of its option under this
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"Defeasance" provision and will be subject to federal income tax on
the same amount and in the same manner and at the same times as
would have been the case if such deposit, defeasance and discharge
had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service
to the same effect unless there has been a change in applicable
federal income tax law after the Closing Date such that a ruling is
no longer required, or
- a ruling directed to the trustee received from the Internal Revenue
Service to the same effect as the aforementioned Opinion of
Counsel, and
(B) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and
after the passage of 123 days following the deposit, the trust fund will
not be subject to the effect of Section 547 of the United States
Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law,
(3) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, shall have occurred and be continuing on the
date of such deposit or during the period ending on the 123rd day after the
date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or
instrument to which FelCor LP, FelCor or any of their respective Restricted
Subsidiaries is a party or by which FelCor LP, FelCor or any of their
respective Restricted Subsidiaries are bound, and
(4) if at such time the Notes are listed on a national securities
exchange, FelCor LP has delivered to the trustee an Opinion of Counsel to
the effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clause (3) under "Consolidation, Merger and Sale of
Assets," and all the covenants described herein under "Covenants," clause (3)
under "Events of Default" with respect to such clause (3) under "Consolidation,
Merger and Sale of Assets," clause (4) under "Events of Default" with respect to
such other covenants and clauses (5) and (6) under "Events of Default" shall be
deemed not to be Events of Default upon, among other things:
(1) the deposit with the trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal
in respect thereof in accordance with their terms will provide money in an
amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance
with the terms of the Indenture and the Notes,
(2) the satisfaction of the provisions described in clauses (2)(B),
(3) and (4) of the preceding paragraph titled "Defeasance and Discharge,"
and
(3) the delivery by FelCor LP to the trustee of an Opinion of Counsel
to the effect that, among other things, the holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance of certain covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit and
defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event FelCor LP
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, FelCor LP, FelCor
and the Subsidiary Guarantors will remain liable for such payments.
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MODIFICATION AND WAIVER
Subject to certain limited exceptions, modifications and amendments of the
Indenture may be made by FelCor LP, FelCor and the trustee with the consent of
the holders of not less than a majority in aggregate principal amount of the
then outstanding Notes; provided that no such modification or amendment may,
without the consent of each holder affected thereby:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any Note,
(2) reduce the principal amount of, or premium, if any, or interest
on, any Note,
(3) change the place of payment of principal of, or premium, if any,
or interest on, any Note,
(4) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any Note,
(5) reduce the above-stated percentages of outstanding Notes the
consent of whose holders is necessary to modify or amend the Indenture,
(6) waive a default in the payment of principal of, premium, if any,
or interest on the Notes,
(7) voluntarily release a Guarantor of the Notes, or
(8) reduce the percentage or aggregate principal amount of outstanding
Notes the consent of whose holders is necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, PARTNERS, STOCKHOLDERS, OFFICERS,
DIRECTORS, OR EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of FelCor LP or FelCor in the Indenture, or in
any of the Notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, partner, stockholder, officer,
director, employee or controlling person of FelCor LP, FelCor or the Subsidiary
Guarantors or of any successor Person thereof. Each holder, by accepting the
Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the trustee will not be liable, except for the performance of such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939
incorporated by reference into the Indenture contain limitations on the rights
of the trustee, should it become a creditor of FelCor LP or FelCor, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The trustee is
permitted to engage in other transactions; provided that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form without interest coupons. Old Notes sold in reliance on Rule
144A are represented by the Global Old Notes. New Notes issued in exchange for
the Global Old Notes will be issued in the form of one or more Global New Notes
and will be deposited with the trustee as custodian for, and registered in the
name of a nominee of, DTC.
Old Notes originally purchased by or transferred to Institutional
Accredited Investors who are not qualified institutional buyers ("Non-Global
Purchasers") were in registered form without interest coupons
105
and represented by the Certificated Old Notes. New Notes issued in exchange for
the Certificated Old Notes will be issued in the form of one or more
Certificated New Notes.
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified institutional buyers may hold their
interests in a Global Note directly through DTC if they are participants in such
system, or indirectly through organizations that are participants in such
system.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture.
Payments of the principal of, and interest on, a Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither FelCor LP, FelCor, any Subsidiary Guarantor, the trustee nor any Paying
Agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in a
Global Note or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
FelCor LP expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. FelCor LP also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
FelCor LP expects that DTC will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in a Global Note is credited and only in respect of such portion
of the aggregate principal amount of Notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the Notes, DTC will exchange the applicable Global Note for
Certificated Notes, which it will distribute to its participants and which, in
the case of a Global Old Note, may be legended with respect to the restrictions
on transfer thereof.
FelCor LP understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among its participants, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither FelCor LP, FelCor, any
Subsidiary Guarantor, nor the trustee will have any responsibility for the
performance by DTC
106
or its participants or indirect participants of their respective obligations
under the rules and procedures governing its operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by FelCor LP within
90 days, FelCor LP will issue Certificated Notes, which, in the case of a Global
Old Note, may bear a legend with respect to the restrictions on transfer
thereof, in exchange for the Global Notes. Holders of an interest in a Global
Note may receive Certificated Notes, which, in the case of a Global Old Note,
may bear a legend with respect to the restrictions on transfer thereof, in
accordance with the DTC's rules and procedures in addition to those provided for
under the Indenture.
107
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes the material U. S. federal
income tax aspects of the exchange offer to holders of the Old Notes. This
discussion is for general information only and does not consider all aspects of
the exchange offer that might impact owners of the Old Notes in light of their
personal circumstances. This discussion deals only with Old Notes held as
"capital assets" within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended. "Capital assets" are generally property held for investment
and not for sale to customers in the ordinary course of a trade or business.
This discussion also does not address the U.S. federal income tax consequences
to holders subject to special treatment under the U.S. federal income tax laws,
such as dealers in securities, or foreign currency, tax-exempt entities, banks,
thrifts, insurance companies, persons that hold the Old Notes as part of a
"straddle", a "hedge" against currency risk or a "conversion transaction";
persons that have a "functional currency" other than the U.S. dollar, and
investors in pass-through entities. In addition, this discussion does not
address any of the United States federal income tax consequences of owning or
disposing of New Notes, nor does it address any tax consequences arising out of
the tax laws of any state, local or foreign jurisdiction.
This discussion is based upon the Internal Revenue Code of 1986, as
amended, existing and proposed regulations thereunder, Internal Revenue Service,
or IRS, rulings and pronouncements, reports of congressional committees,
judicial decisions and current administrative rulings and practice, all as in
effect on the date hereof, all of which are subject to change at any time, and
any such change may be applied retroactively in a manner that could adversely
affect the tax consequences described below. We have not and will not seek any
rulings or opinions from the IRS or counsel with respect to the matters
discussed below. There can be no assurance that the IRS will not take positions
concerning the tax consequences of the exchange offer which are different from
those discussed in this prospectus.
The exchange of Old Notes for New Notes pursuant to the exchange offer
should not constitute a taxable exchange. As a result, a holder (1) should not
recognize taxable gain or loss as a result of exchanging Old Notes for New Notes
pursuant to the exchange offer, (2) the holding period of the New Notes should
include the holding period of the Old Notes exchanged for the New Notes and (3)
the adjusted tax basis of the New Notes should be the same as the adjusted tax
basis of the Old Notes exchanged for the New Notes immediately before the
exchange.
THE FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS OF OLD NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED ABOVE IN LIGHT OF
THEIR PARTICULAR SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS, INCLUDING THE EFFECTS OF CHANGES IN SUCH LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
the Old Notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, starting on the expiration date and
ending 180 days after the expiration date, we will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale.
We will not receive any proceeds from any sales of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of the methods of
resale, at market prices prevailing
108
at the time of resale, at prices related to prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such New Notes. Any broker-dealer that resells New Notes that were received
by it for its own account pursuant to the exchange offer and any broker or
dealer that participates in a distribution of these New Notes may be deemed to
be an "underwriter" within the meaning of the Securities Act and any profit of
any such resale of New Notes and any commissions or concessions received by such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver, and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to our performance of, or
compliance with, the registration rights agreement and will indemnify the
holders of Old Notes, including any broker-dealers, and specified parties
related to these holders, against specified liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the legality of the New Notes will be
passed upon for FelCor and FelCor LP by Jenkens & Gilchrist, a Professional
Corporation, Dallas, Texas.
EXPERTS
The financial statements of FelCor and FelCor LP incorporated in this
prospectus by reference to the Annual Reports on Form 10-K of FelCor and FelCor
LP for the year ended December 31, 2001 have been so incorporated in reliance on
the reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
109
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
<Table>
<Caption>
PAGE
----
FELCOR LODGING LIMITED PARTNERSHIP
Pro Forma Consolidated Statements of Operations............. F-2
FELCOR LODGING TRUST INCORPORATED
Pro Forma Consolidated Statements of Operations............. F-6
</Table>
F-1
FELCOR LODGING LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited Pro Forma Consolidated Statements of Operations for
the year ended December 31, 2001 is based in part upon the Consolidated
Statements of Operations of FelCor LP, for the year ended December 31, 2001,
incorporated in this prospectus by reference, and in part upon the consolidated
statement of operations for the six months ended June 30, 2001 of Six Continents
Tenant, which was provided by Six Continents Tenant. The term "Six Continents
Tenant" refers to the consolidated subsidiaries of Six Continents Hotels that
held the leases of 88 of our hotels during the six months ended June 30, 2001.
The Pro Forma Consolidated Statements of Operations for the year ended
December 31, 2001 assumes that all the following occurred on January 1, 2001:
- our acquisition of 88 leases held by Six Continents Hotels on July 1,
2001;
- the completion of the offering of the Old Notes and the application of
the net proceeds to repay borrowings under our line of credit.
In the opinion of our management, all material adjustments necessary to
reflect the effects of the preceding transactions have been made. The unaudited
Pro Forma Consolidated Statements of Operations are presented for illustrative
purposes only and are not necessarily indicative of what the actual results of
operations would have been had the transactions described above occurred on the
indicated dates, nor do they purport to represent our results of operations for
future periods. The assumptions for these pro forma statements differ from those
applicable to the pro forma information presented in "Management's Discussion
and Analysis of Financial Condition and Results of Operations". The pro forma
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" was prepared solely to facilitate the
comparison of our results of operations for 2000 and 2001.
F-2
FELCOR LODGING LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER UNIT AMOUNTS)
<Table>
<Caption>
FELCOR LP
POST RMA
(A) ADJUSTMENTS PRO FORMA
---------- ----------- ----------
Revenues:
Room and suite revenue.................................... $1,136,615 $1,136,615
Food and beverage revenue................................. 228,592 228,592
Other operating departments............................... 74,777 74,777
Retail space rental and other revenue..................... 2,990 2,990
---------- ----------
Total revenues.............................................. 1,442,974 1,442,974
---------- ----------
Expenses:
Hotel operating expenses:
Room.................................................... 276,668 276,668
Food and beverage expenses.............................. 179,267 179,267
Other operating departments............................. 33,295 33,295
Management and incentive fees............................. 58,275 58,275
Other property operating costs............................ 399,700 399,700
Property taxes, insurance, and other...................... 142,567 142,567
Corporate expenses........................................ 13,699 13,699
Depreciation.............................................. 157,692 157,692
Lease termination costs................................... 36,604 36,604
Other merger termination costs............................ 19,919 19,919
---------- ----------
Total operating expenses.................................... 1,317,686 1,317,686
---------- ----------
Operating income............................................ 125,288 125,288
---------- ----------
Interest expense, net:
Recurring financing....................................... 158,343 $ 2,818(B) 161,161
Merger related financing.................................. 5,486 5,486
Swap termination costs...................................... 7,049 7,049
Loss on hotels held for sale................................ 7,000 7,000
---------- -------- ----------
Loss before equity in income from unconsolidated entities,
minority interests, and gain on sale of assets............ (52,590) (2,818) (55,408)
Equity in income from unconsolidated entities............... 7,346 7,346
Minority interests in other partnerships.................... (3,585) (3,585)
Gain on sale of assets, net................................. 3,417 3,417
---------- -------- ----------
Net loss before extraordinary items......................... (45,412) (2,818) (48,230)
Preferred distributions..................................... (24,600) (24,600)
---------- -------- ----------
Net loss before extraordinary items applicable to common
unitholders............................................... $ (70,012) $ (2,818) $ (72,830)
========== ======== ==========
Basic and diluted per unit data:
Net loss before extraordinary items applicable to common
unitholders............................................. $ (1.14) $ (1.18)
========== ==========
Weighted average units outstanding........................ 61,635 61,635
========== ==========
</Table>
See notes to pro forma consolidated statements of operations.
F-3
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(A) Represents FelCor LP's historical results of operations, excluding
extraordinary items, plus the pro forma effect of FelCor LP's acquisition
of 88 hotel leases from Six Continents Hotels as if the acquisition
occurred on January 1, 2001. The computation is as follows (in thousands,
except per unit amounts):
<Table>
<Caption>
FELCOR LP SIX CONTINENTS PRO FORMA FELCOR POST
HISTORICAL(1) TENANT(2) ADJUSTMENTS RMA TOTAL
------------- -------------- ----------- -----------
Revenues:
Room and suite revenue.......... $ 866,101 $270,514 $1,136,615
Food and beverage revenue....... 157,812 70,780 228,592
Other operating departments..... 58,931 15,846 74,777
Percentage lease revenue........ 115,137 $(115,137)(3)
Retail space rental and other
revenue...................... 2,990 2,990
---------- -------- --------- ----------
Total revenues.................... 1,200,971 357,140 (115,137) 1,442,974
---------- -------- --------- ----------
Expenses:
Hotel operating expenses:
Room......................... 212,857 63,811 276,668
Food and beverage expenses... 122,999 56,268 179,267
Other operating
departments................ 26,789 6,506 33,295
Management and incentive fees..... 38,534 19,741(4) 58,275
Other property operating costs.... 309,452 110,710 (20,462)(5) 399,700
Property taxes, insurance, and
other........................... 141,621 115,924 (114,978)(3) 142,567
Corporate expenses................ 12,678 1,021(6) 13,699
Depreciation...................... 157,692 157,692
Lease termination costs........... 36,604 36,604
Merger termination costs.......... 19,919 19,919
---------- -------- --------- ----------
Total operating expenses.......... 1,079,145 353,219 (114,678) 1,317,686
---------- -------- --------- ----------
Operating income.................. 121,826 3,921 (459) 125,288
---------- -------- --------- ----------
Interest expense, net:
Recurring financing............. 158,343 356 (356)(7) 158,343
Merger related financing........ 5,486 5,486
Swap termination costs............ 7,049 7,049
Loss on hotels held for sale...... 7,000 7,000
---------- -------- --------- ----------
Income (loss) before equity in
income from unconsolidated
entities, minority interests,
and gain on sale of assets...... (56,052) 3,565 (103) (52,590)
Equity in income from
unconsolidated entities......... 7,346 7,346
Minority interests................ (3,585) (3,585)
Gain on sale of assets, net....... 3,417 3,417
---------- -------- --------- ----------
Net income (loss) before
extraordinary items............. (48,874) 3,565 (103) (45,412)
Preferred distributions........... (24,600) (24,600)
---------- -------- --------- ----------
Net income (loss) before
extraordinary items applicable
to common unitholders........... $ (73,474) $ 3,565 $ (103) $ (70,012)
========== ======== ========= ==========
Basic and diluted per unit data:
Net loss before extraordinary
items applicable to common
unitholders.................. $ (1.19) $ (1.14)
========== ==========
Weighted average units
outstanding.................. 61,635 61,635
========== ==========
</Table>
F-4
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
- ---------------
(1) Represents the historical results of operations of FelCor LP for the
year ended December 31, 2001, excluding extraordinary items. Effective
July 1, 2001, FelCor completed a transaction to acquire the leases for
88 hotels that were previously leased to subsidiaries of Six Continents
Hotels. Accordingly, the revenues and expenses associated with these
hotels are included in FelCor LP's historical consolidated statements
of operations since July 1, 2001.
(2) Represents the historical results of operations of FelCor LP's 88
hotels leased to subsidiaries of Six Continents Hotels for the six
months ended June 30, 2001, excluding extraordinary items.
(3) Represents the elimination of historical percentage lease revenue and
expense between FelCor LP and Six Continents Hotels. The expense
elimination also includes a $180,000 adjustment of an estimate of
property tax expense.
(4) Represents the adjustment required to record the management fees at
their contractual rates. In the negotiation for the acquisition of the
88 leases and the new long-term management contracts with Six
Continents Hotels, FelCor LP was able to spread the cost of the lease
acquisition over the term of the management agreement, by agreeing to
pay management fees that are higher than those paid by FelCor to other
managers for comparable services. Management fees for the 88 hotels are
broken out between a base fee, computed at 2% of total hotel revenue
plus, with respect to hotels branded by Six Continents Hotels, 5% of
room revenue, and an incentive fee, computed using a formula
incorporating hotel net operating income and FelCor LP's return on its
investment in these hotels. The new management contracts transfer the
operating risk and reward of the hotels to FelCor LP, as compared to
the percentage leases, under which FelCor LP received percentage lease
revenue based solely on hotel revenues. Additionally, under the new
management contracts, FelCor LP has the ability to terminate management
contracts for hotels by substituting hotels with similar revenue
streams.
(5) Represents the elimination of historical franchise fees, which have
been replaced with management contracts; a write-off of inventories by
Six Continents Hotels at the date FelCor LP acquired the leases; and
adjustment for accounting fees to the contractual rate under the new
management contract with Six Continents Hotels.
(6) Represents estimated additional overhead associated with the
acquisition of the leases from Six Continents Hotels.
(7) Represents elimination of interest expense for the Six Continents
Tenant that was not transferred with the termination of the leases.
(B) Represents the net increase in interest expense resulting from the issuance
of the Old Notes and the application of net proceeds to repay indebtedness
under our line of credit.
F-5
FELCOR LODGING TRUST INCORPORATED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited Pro Forma Consolidated Statements of Operations for
the year ended December 31, 2001 is based in part upon the Consolidated
Statements of Operations of FelCor for the year ended December 31, 2001
incorporated in this prospectus by reference, and in part upon the consolidated
statement of operations for the six months ended June 30, 2001 of Six Continents
Tenant, which was provided by Six Continents Tenant.
The Pro Forma Consolidated Statements of Operations for the year ended
December 31, 2001 assumes that all the following occurred on January 1, 2001:
- our acquisition of 88 leases held by Six Continents Hotels effective July
1, 2001;
- the completion of the offering of the Old Notes and the application of
the net proceeds to repay borrowings under our line of credit.
In the opinion of FelCor's management, all material adjustments necessary
to reflect the effects of the preceding transactions have been made. The
unaudited Pro Forma Consolidated Statement of Operations is presented for
illustrative purposes only and is not necessarily indicative of what the actual
results of operations would have been had the transactions described above
occurred on the indicated dates, nor do they purport to represent our results of
operations for future periods. The assumptions for these pro forma statements
differ from those applicable to the pro forma information presented in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The pro forma information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" was prepared solely
to facilitate the comparison of our results of operations for 2000 and 2001.
F-6
FELCOR LODGING TRUST INCORPORATED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<Table>
<Caption>
FELCOR
POST RMA
(A) ADJUSTMENTS PRO FORMA
---------- ----------- ----------
Revenues:
Room and suite revenue.................................... $1,136,615 $1,136,615
Food and beverage revenue................................. 228,592 228,592
Other operating departments............................... 74,777 74,777
Retail space rental and other revenue..................... 2,990 2,990
---------- ----------
Total revenues.............................................. 1,442,974 1,442,974
---------- ----------
Expenses:
Hotel operating expenses:
Room.................................................... 276,668 276,668
Food and beverage expenses.............................. 179,267 179,267
Other operating departments............................. 33,295 33,295
Management and incentive fees............................. 58,275 58,275
Other property operating costs............................ 399,700 399,700
Property taxes, insurance, and other...................... 142,567 142,567
Corporate expenses........................................ 13,699 13,699
Depreciation.............................................. 157,692 157,692
Lease termination costs................................... 36,604 36,604
Merger termination costs.................................. 19,919 19,919
---------- ----------
Total operating expenses.................................... 1,317,686 1,317,686
---------- ----------
Operating income............................................ 125,288 125,288
---------- ----------
Interest expense, net:
Recurring financing....................................... 158,343 $ 2,818(B) 161,161
Merger related financing.................................. 5,486 5,486
Swap termination costs...................................... 7,049 7,049
Loss on hotels held for sale................................ 7,000 7,000
---------- -------- ----------
Loss before equity in income from unconsolidated entities,
minority interests, and gain on sale of assets............ (52,590) $ (2,818) (55,408)
Equity in income from unconsolidated entities............... 7,346 7,346
Minority interests.......................................... 6,779 410(C) 7,189
Gain on sale of assets, net................................. 3,417 3,417
---------- -------- ----------
Net loss before extraordinary items......................... (35,048) (2,408) (37,456)
Preferred distributions..................................... (24,600) (24,600)
---------- -------- ----------
Net loss before extraordinary items applicable to common
shareholders.............................................. $ (59,648) $ (2,408) $ (62,056)
========== ======== ==========
Basic and diluted per share data:
Net loss before extraordinary items applicable to common
shareholders............................................ $ (1.14) $ (1.18)
========== ==========
Weighted average shares outstanding....................... 52,622 52,622
========== ==========
</Table>
See notes to pro forma consolidated statements of operations.
F-7
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(A) Represents FelCor's historical results of operations, excluding
extraordinary items, plus the pro forma effect of FelCor's acquisition of
88 hotel leases from Six Continents Hotels as if the acquisition occurred
on January 1, 2001. The computation is as follows (in thousands, except per
share amounts):
<Table>
<Caption>
FELCOR
FELCOR SIX CONTINENTS PRO FORMA POST RMA
HISTORICAL(1) TENANT(2) ADJUSTMENTS TOTAL
------------- -------------- ----------- ----------
Revenues:
Room and suite revenue............................ $ 866,101 $270,514 $1,136,615
Food and beverage revenue......................... 157,812 70,780 228,592
Other operating departments....................... 58,931 15,846 74,777
Percentage lease revenue.......................... 115,137 $(115,137)(3)
Retail space rental and other revenue............. 2,990 2,990
---------- -------- --------- ----------
Total revenues...................................... 1,200,971 357,140 (115,137) 1,442,974
---------- -------- --------- ----------
Expenses:
Hotel operating expenses:
Room............................................ 212,857 63,811 276,668
Food and beverage expenses...................... 122,999 56,268 179,267
Other operating departments..................... 26,789 6,506 33,295
Management and incentive fees..................... 38,534 19,741(4) 58,275
Other property operating costs.................... 309,452 110,710 (20,462)(5) 399,700
Property taxes, insurance, and other.............. 141,621 115,924 (114,978)(3) 142,567
Corporate expenses................................ 12,678 1,021(6) 13,699
Depreciation...................................... 157,692 157,692
Lease termination costs........................... 36,604 36,604
Merger termination costs.......................... 19,919 19,919
---------- -------- --------- ----------
Total operating expenses............................ 1,079,145 353,219 (114,678) 1,317,686
---------- -------- --------- ----------
Operating income.................................... 121,826 3,921 (459) 125,288
---------- -------- --------- ----------
Interest expense, net:
Recurring financing............................... 158,343 356 (356)(7) 158,343
Merger related financing.......................... 5,486 5,486
Swap termination costs.............................. 7,049 7,049
Loss on hotels held for sale........................ 7,000 7,000
---------- -------- --------- ----------
Income (loss) before equity in income from
unconsolidated entities, minority interests, and
gain on sale of assets............................ (56,052) 3,565 (103) (52,590)
---------- -------- --------- ----------
Equity in income from unconsolidated entities....... 7,346 7,346
Minority interests.................................. 7,283 (504)(8) 6,779
Gain on sale of assets, net......................... 3,417 3,417
---------- -------- --------- ----------
Net income (loss) before extraordinary items........ (38,006) 3,565 (607) (35,048)
Preferred distributions............................. (24,600) (24,600)
---------- -------- --------- ----------
Net income (loss) before extraordinary items
applicable to common shareholders................. $ (62,606) $ 3,565 $ (607) $ (59,648)
========== ======== ========= ==========
Basic and diluted per share data:
Net loss before extraordinary items applicable to
common shareholders............................. $ (1.19) $ (1.14)
========== ==========
Weighted average shares outstanding............... 52,622 52,622
========== ==========
</Table>
- ---------------
(1) Represents the historical results of operations of FelCor for the year
ended December 31, 2001, excluding extraordinary items. Effective July
1, 2001, FelCor completed a transaction to acquire
F-8
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
the leases for 88 hotels that were previously leased to subsidiaries of
Six Continents Hotels, accordingly, the revenues and expenses
associated with these hotels are included in FelCor's historical
consolidated statements of operations since July 1, 2001.
(2) Represents the historical results of operations of FelCor's 88 hotels
leased to subsidiaries of Six Continents Hotels for the six months
ended June 30, 2001, excluding extraordinary items.
(3) Represents the elimination of historical percentage lease revenue and
expense between FelCor and Six Continents Hotels. The expense
elimination also includes a $180,000 adjustment of an estimate of
property tax expense.
(4) Represents the adjustment required to record the management fees at
their contractual rates. In the negotiation for the acquisition of the
88 leases and the new long-term management contracts with Six
Continents Hotels, FelCor was able to spread the cost of the lease
acquisition cost over the term of the management agreement, by agreeing
to pay management fees that are higher than those paid by FelCor to
other managers for comparable services. Management fees for the 88
hotels are broken out between a base fee, computed at 2% of total hotel
revenue plus, with respect to hotels branded by Six Continents Hotels,
5% of room revenue, and an incentive fee, computed using a formula
incorporating hotel net operating income and FelCor's return on its
investment in these hotels. The new management contracts transfer the
operating risk and reward of the hotels to FelCor, as compared to the
percentage leases, under which FelCor received percentage lease revenue
based solely on hotel revenues. Additionally, under the new management
contracts, FelCor has the ability to terminate management contracts for
hotels by substituting hotels with similar revenue streams.
(5) Represents the elimination of historical franchise fees, which have
been replaced with management contracts; a write-off of inventories by
Six Continents Hotels at the date FelCor acquired the leases; and
adjustment for accounting fees to the contractual rate under the new
management contract with Six Continents Hotels.
(6) Represents estimated additional overhead associated with the
acquisition of leases from Six Continents Hotels.
(7) Represents elimination of interest expense for the Six Continents
Tenant that was not transferred with the termination of the leases.
(8) Represents the adjustment to record FelCor's minority interest holders'
share of the revenues and expenses of the Six Continents Tenant lessee
and the proforma adjustments.
(B) Represents the net increase in interest expense resulting from the issuance
of the Old Notes and the application of the net proceeds to repay
indebtedness under our line of credit.
(C) Represents the adjustment to record FelCor's minority interest holders'
share of the change in interest expense.
F-9
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DELIVERED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THIS PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL,
HAND DELIVERY OR
OVERNIGHT COURIER:
SunTrust Bank
Attention: George T. Hogan,
Corporate Trust Department
25 Park Place, 24th Floor
Atlanta, Georgia 30303-2900
or
SunTrust Bank
c/o Computershare
Attention: Mary Ann Luisi,
Corporate Trust Department
Wall Street Plaza
88 Pine Street, 19th Floor
New York, New York 10005
or
BY FACSIMILE:
(404) 588-7335 (GA)
or
(212) 701-7648 (NY)
ORIGINALS OF ALL DOCUMENTS
SUBMITTED BY FACSIMILE SHOULD BE SENT
PROMPTLY BY HAND, OVERNIGHT COURIER,
OR REGISTERED OR CERTIFIED MAIL.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS ABOUT THE TRANSACTIONS WE DISCUSSED IN THIS PROSPECTUS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN THE DOCUMENTS WE INCORPORATE BY
REFERENCE. IF YOU ARE GIVEN ANY INFORMATION OR REPRESENTATIONS ABOUT THESE
MATTERS THAT IS NOT DISCUSSED OR INCORPORATED IN THIS PROSPECTUS, YOU MUST NOT
RELY ON THAT INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SECURITIES ANYWHERE OR TO ANYONE WHERE OR TO
WHOM WE ARE NOT PERMITTED TO OFFER OR SELL SECURITIES UNDER APPLICABLE LAW. THE
DELIVERY OF THIS PROSPECTUS OR THE SECURITIES OFFERED BY THIS PROSPECTUS DOES
NOT, UNDER ANY CIRCUMSTANCES, MEAN THAT THERE HAS NOT BEEN A CHANGE IN OUR
AFFAIRS SINCE THE DATE OF THIS PROSPECTUS. IT ALSO DOES NOT MEAN THAT THE
INFORMATION IN THIS PROSPECTUS OR IN THE DOCUMENTS WE INCORPORATE BY REFERENCE
IS CORRECT AFTER THIS DATE.
- ---------------------------------------------------------
OFFER TO EXCHANGE
ALL OUTSTANDING
9 1/2% SENIOR NOTES
DUE 2008
FOR
REGISTERED 9 1/2% SENIOR NOTES
DUE 2008
FELCOR LODGING
LIMITED PARTNERSHIP
PROSPECTUS
, 2002
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 6.7 of the Second Amended and Restated Agreement of Limited
Partnership of FelCor Lodging Limited Partnership ("FelCor LP"), as amended (the
"Partnership Agreement"), provides that, to the fullest extent permitted by law,
but subject to the limitations expressly provided in the Partnership Agreement,
FelCor Lodging Trust Incorporated ("FelCor"), or its successor or assigns, in
its capacity as the general partner of FelCor LP (the "General Partner"), and
any person who is or was an officer or director of the General Partner shall be
indemnified and held harmless by the Partnership from and against any and all
losses, claims, damages, liabilities (joint or several), expenses (including,
without limitation, legal fees and expenses), judgments, fines, settlements and
other amounts arising from any and all claims, demands, actions, suits or
proceedings, whether civil or criminal, administrative or investigative, in
which any such party may be involved, or is threatened to be involved, as a
party or otherwise, by reason of its status as (i) the General Partner, or any
of its affiliates, (ii) an officer, director, employee, partner, agent or
trustee of the General Partner, or any of its affiliates or (iii) a person
serving at the request of the Partnership in another entity in a similar
capacity; provided, that in each case such party acted in good faith, in a
manner which such party believed to be in, or not opposed to, the best interests
of the Partnership and, with respect to any criminal proceeding, had no
reasonable cause to believe its conduct was unlawful. Any indemnification
pursuant to Section 6.7 shall be made only out of the Partnership assets.
The charter of FelCor, generally, limits the liability of FelCor's
directors and officers to FelCor and the shareholders for money damages to the
fullest extent permitted from time to time by the laws of the State of Maryland.
The Maryland General Corporation Law ("MGCL") authorizes Maryland corporations
to limit the liability of directors and officers to the corporation and its
stockholders for money damages except (i) to the extent that it is proved that
the director or officer actually received an improper benefit or profit in
money, property or services, for the amount of the benefit or profit actually
received or (ii) to the extent that a judgment or other final adjudication
adverse to the director or officer is entered in a proceeding based on a finding
in the proceeding that the director's or officer's action, or failure to act,
was the result of active and deliberate dishonesty and was material to the cause
of action adjudicated in the proceeding.
The charter also provides, generally, for the indemnification of, and
advance of expense on behalf of, directors and officers, among others, to the
fullest extent permitted by Maryland law. The MGCL authorizes Maryland
corporations to indemnify present and past directors and officers of the
corporation or of another corporation for which they serve at the request of the
corporation against judgments, penalties, fines, settlements and reasonable
expenses (including attorneys' fees) actually incurred in connection with any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation in respect of which the person is adjudicated to be
liable to the corporation), in which they are made parties by reason of being or
having been directors or officers, unless it is proved that (i) the act or
omission of the person was material to the matter giving rise to the proceeding
and was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the person actually received an improper personal benefit in
money, property or services or (iii) in the case of any criminal proceeding, the
person had reasonable cause to believe that the act or omission was unlawful.
The MGCL also provides that, unless limited by the corporation's charter, a
corporation shall indemnify present and past directors and officers of the
corporation who are successful, on the merits or otherwise, in the defense of
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, against reasonable expenses
(including attorneys' fees) incurred in connection with the proceeding. FelCor's
charter does not limit the extent of this indemnity.
II-1
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Securities Act") may be permitted to directors and officers of FelCor
pursuant to the foregoing provisions or otherwise, FelCor has been advised that,
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
FelCor may purchase director and officer liability insurance for the
purpose of providing a source of funds to pay any indemnification described
above. The MGCL authorizes Maryland corporations to purchase and maintain
insurance for former or existing directors or officers of the corporation
against any liability assisted against and incurred by such person in that
capacity or arising out of such person's position, whether or not the
corporation would have the power to indemnify against liability under the MGCL.
FelCor's charter does not limit this authority to obtain insurance.
ITEM 21. EXHIBITS
(a) Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.1 -- Second Amended and Restated Agreement of Limited
Partnership of FelCor LP (filed as Exhibit 10.1 to
FelCor's Form 10-K for the year ended December 31, 2001
and incorporated herein by reference).
3.1.1 -- First Amendment to Second Amended and Restated Agreement
of Limited Partnership of Felcor LP (filed as Exhibit
10.1.1 to Felcor's Form 8-K, dated as of April 1, 2002
and filed April 4, 2002, and incorporated herein by
reference).
4.2 -- Indenture dated as of October 1, 1997 by and among FelCor
LP, FelCor, the Subsidiary Guarantors named therein and
SunTrust Bank, Atlanta, Georgia, as Trustee (filed as
Exhibit 4.1 to FelCor LP's Registration Statement on Form
S-4 (file no. 333-39595) and the other co-registrants
named therein and incorporated herein by reference).
4.2.1 -- First Amendment to Indenture dated as of February 5, 1998
by and among FelCor LP, FelCor, the Subsidiary Guarantors
named therein and SunTrust Bank, Atlanta, Georgia, as
Trustee (filed as Exhibit 4.2 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-39595) and the other
co-registrants named therein and incorporated herein by
reference).
4.2.2 -- Second Amendment to Indenture and First Supplemental
Indenture dated as of December 30, 1998, by and among
FelCor LP, FelCor, the Subsidiary Guarantors named
therein and SunTrust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4.7.2 to FelCor's Annual Report on Form
10-K for the year ended December 31, 1998 and
incorporated herein by reference).
4.2.3 -- Third Amendment to Indenture dated as of March 30, 1999
by and among FelCor LP, FelCor, the Subsidiary Guarantors
named therein and SunTrust Bank, Atlanta (filed as
Exhibit 4.7.3 to FelCor's Form 10-Q for the quarter ended
March 31, 1999 and incorporated herein by reference).
4.2.4 -- 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 (filed as Exhibit 4.2.4 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-47506) and the other
co-registrants named therein and incorporated herein by
reference).
4.2.5 -- 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 (filed as Exhibit 4.2.5 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-63092) and the other
co-registrants named therein and incorporated herein by
reference).
</Table>
II-2
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.3 -- 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 FelCor LP's Registration Statement on Form S-4
(file no. 333-47506) and the other co-registrants named
therein and incorporated herein by reference).
4.3.1 -- 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 (filed as Exhibit 4.3.1 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-63092) and the other
co-registrants named therein and incorporated herein by
reference).
4.4 -- 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 14, 2001 and
incorporated herein by reference).
4.4.1 -- 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 (filed as Exhibit 4.4.1 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-63092) and the other
co-registrants named therein and incorporated herein by
reference).
5.1* -- Opinion of Jenkens & Gilchrist, a Professional
Corporation.
12.1* -- Statements regarding Computation of Ratios
23.1 -- Consent of Jenkens & Gilchrist, a Professional
Corporation (included in Exhibit 5.1).
23.2* -- Consent of PricewaterhouseCoopers LLP.
24.1 -- Power of Attorney (included on signature page).
25.1* -- Statement of Eligibility of SunTrust Bank, as Trustee.
99.1* -- Form of Letter of Transmittal.
99.2* -- Form of Notice of Guaranteed Delivery.
</Table>
- ---------------
* Filed herewith.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
the 12th day of April, 2002.
FELCOR LODGING TRUST INCORPORATED
FELCOR LODGING LIMITED PARTNERSHIP
a Delaware limited partnership
(Co-Registrant)
By: FelCor Lodging Trust Incorporated
its General Partner
By:/s/ LAWRENCE D. ROBINSON
---------------------------------
Lawrence D. Robinson
Executive Vice President,
Secretary and General Counsel
II-4
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act
without the other, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities (until revoked in writing) to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
to file the same, together with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, to sign any
and all applications, registration statements, notices and other documents
necessary or advisable to comply with the applicable state securities laws, and
to file the same, together with all other documents in connection therewith,
with the appropriate state securities authorities, granting unto said
attorneys-in-fact and agents or any of them, or their or his substitutes or
substitute, full power and authority to perform and do each and every act and
thing necessary and advisable as fully to all intents and purposes as he might
or could perform and do in person, thereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD J. MCNAMARA Chairman of the Board and April 11, 2002
- ----------------------------------------------------- Director
Donald J. McNamara
/s/ THOMAS J. CORCORAN, JR. President and Chief Executive April 11, 2002
- ----------------------------------------------------- Officer and Director
Thomas J. Corcoran, Jr.
/s/ RICHARD J. O'BRIEN Executive Vice President and April 11, 2002
- ----------------------------------------------------- Chief Financial Officer
Richard J. O'Brien
/s/ LESTER C. JOHNSON Senior Vice President and April 11, 2002
- ----------------------------------------------------- Controller (Principal
Lester C. Johnson Accounting Officer)
/s/ MELINDA J. BUSH Director April 10, 2002
- -----------------------------------------------------
Melinda J. Bush
/s/ RICHARD S. ELLWOOD Director April 11, 2002
- -----------------------------------------------------
Richard S. Ellwood
Director
- -----------------------------------------------------
Richard O. Jacobson
/s/ CHARLES A. LEDSINGER, JR. Director April 11, 2002
- -----------------------------------------------------
Charles A. Ledsinger, Jr.
/s/ ROBERT H. LUTZ, JR. Director April 10, 2002
- -----------------------------------------------------
Robert H. Lutz, Jr.
/s/ CHARLES N. MATHEWSON Director April 11, 2002
- -----------------------------------------------------
Charles N. Mathewson
/s/ THOMAS A. MCCHRISTY Director April 10, 2002
- -----------------------------------------------------
Thomas A. McChristy
/s/ RICHARD C. NORTH Director April 12, 2002
- -----------------------------------------------------
Richard C. North
/s/ MICHAEL D. ROSE Director April 11, 2002
- -----------------------------------------------------
Michael D. Rose
</Table>
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
the 12th day of April, 2002.
FELCOR/CSS HOTELS, L.L.C.
a Delaware limited liability company
FELCOR/LAX HOTELS, L.L.C.
a Delaware limited liability company
FELCOR/CSS HOLDINGS, L.P.
a Delaware limited partnership
By: FelCor/CSS Hotels, L.L.C.
its general partner
FELCOR/ST. PAUL HOLDINGS, L.P.
a Delaware limited partnership
By: FelCor/CSS Hotels, L.L.C.
its general partner
FELCOR/LAX HOLDINGS, L.P.
a Delaware limited partnership
By: FelCor/LAX Hotels, L.L.C.
its general partner
FELCOR EIGHT HOTELS, L.L.C.
a Delaware limited liability company
FELCOR HOTEL ASSET COMPANY, L.L.C.
a Delaware limited liability company
FELCOR NEVADA HOLDINGS, L.L.C.
a Nevada limited liability company
FHAC NEVADA HOLDINGS, L.L.C.
a Nevada limited liability company
FHAC TEXAS HOLDINGS, L.P.
a Texas limited partnership
By: FelCor Hotel Asset Company,
L.L.C.
its general partner
FELCOR OMAHA HOTEL COMPANY, L.L.C.
a Delaware limited liability company
FELCOR COUNTRY VILLA HOTEL, L.L.C.
a Delaware limited liability company
FELCOR MOLINE HOTEL, L.L.C.
a Delaware limited liability company
FELCOR CANADA CO.
a Nova Scotia unlimited liability
company
FELCOR TRS HOLDINGS, L.P.
a Delaware limited partnership
By: FelCor TRS I, L.L.C.
its general partner
II-6
KINGSTON PLANTATION DEVELOPMENT
CORP.,
a Delaware corporation
(each a Co-Registrant)
By: /s/ LAWRENCE D. ROBINSON
----------------------------------
Lawrence D. Robinson
Executive Vice President,
Secretary and Director/Manager
II-7
POWER OF ATTORNEY
Each person whose signature appear below hereby constitutes and appoints
each of Thomas J. Corcoran, Jr. and Lawrence D. Robinson, with full power to act
without the other, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities (until revoked in writing)to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
to file the same, together with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, to sign any
and all applications, registration statements, notices and other documents
necessary or advisable to comply with the applicable state securities laws, and
to file the same, together with all other documents in connection therewith,
with the appropriate state securities authorities, granting unto said
attorneys-in-fact and agents or any of them, or their or his substitutes or
substitute, full power and authority to perform and do each and every act and
thing necessary and advisable as fully to all intents and purposes as he might
or could perform and do in person, thereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ THOMAS J. CORCORAN, JR. President and Director/Manager April 11, 2002
- -----------------------------------------------------
Thomas J. Corcoran, Jr.
/s/ LESTER C. JOHNSON Senior Vice President and April 11, 2002
- ----------------------------------------------------- Controller (Principal
Lester C. Johnson Financial Officer and
Principal Accounting Officer)
/s/ LAWRENCE D. ROBINSON Executive Vice President, April 11, 2002
- ----------------------------------------------------- Secretary and Director/Manager
Lawrence D. Robinson
/s/ THOMAS L. WIESE Director/Manager April 11, 2002
- -----------------------------------------------------
Thomas L. Wiese
</Table>
II-8
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.1 -- Second Amended and Restated Agreement of Limited
Partnership of FelCor LP (filed as Exhibit 10.1 to
FelCor's Form 10-K for the year ended December 31, 2001
and incorporated herein by reference).
3.1.1 -- First Amendment to Second Amended and Restated Agreement
of Limited Partnership of Felcor LP (filed as Exhibit
10.1.1 to Felcor's Form 8-K, dated as of April 1, 2002
and filed April 4, 2002, and incorporated herein by
reference).
4.2 -- Indenture dated as of October 1, 1997 by and among FelCor
LP, FelCor, the Subsidiary Guarantors named therein and
SunTrust Bank, Atlanta, Georgia, as Trustee (filed as
Exhibit 4.1 to FelCor LP's Registration Statement on Form
S-4 (file no. 333-39595) and the other co-registrants
named therein and incorporated herein by reference).
4.2.1 -- First Amendment to Indenture dated as of February 5, 1998
by and among FelCor LP, FelCor, the Subsidiary Guarantors
named therein and SunTrust Bank, Atlanta, Georgia, as
Trustee (filed as Exhibit 4.2 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-39595) and the other
co-registrants named therein and incorporated herein by
reference).
4.2.2 -- Second Amendment to Indenture and First Supplemental
Indenture dated as of December 30, 1998, by and among
FelCor LP, FelCor, the Subsidiary Guarantors named
therein and SunTrust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4.7.2 to FelCor's Annual Report on Form
10-K for the year ended December 31, 1998 and
incorporated herein by reference).
4.2.3 -- Third Amendment to Indenture dated as of March 30, 1999
by and among FelCor LP, FelCor, the Subsidiary Guarantors
named therein and SunTrust Bank, Atlanta (filed as
Exhibit 4.7.3 to FelCor's Form 10-Q for the quarter ended
March 31, 1999 and incorporated herein by reference).
4.2.4 -- 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 (filed as Exhibit 4.2.4 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-47506) and the other
co-registrants named therein and incorporated herein by
reference).
4.2.5 -- 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 (filed as Exhibit 4.2.5 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-63092) and the other
co-registrants named therein and incorporated herein by
reference).
4.3 -- 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 FelCor LP's Registration Statement on Form S-4
(file no. 333-47506) and the other co-registrants named
therein and incorporated herein by reference).
4.3.1 -- 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 (filed as Exhibit 4.3.1 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-63092) and the other
co-registrants named therein and incorporated herein by
reference).
4.4 -- 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 14, 2001 and
incorporated herein by reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.4.1 -- 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 (filed as Exhibit 4.4.1 to FelCor LP's Registration
Statement on Form S-4 (file no. 333-63092) and the other
co-registrants named therein and incorporated herein by
reference).
5.1* -- Opinion of Jenkens & Gilchrist, a Professional
Corporation.
12.1* -- Statements regarding Computation of Ratios
23.1 -- Consent of Jenkens & Gilchrist, a Professional
Corporation (included in Exhibit 5.1).
23.2* -- Consent of PricewaterhouseCoopers LLP.
24.1 -- Power of Attorney (included on signature page).
25.1* -- Statement of Eligibility of SunTrust Bank, as Trustee.
99.1* -- Form of Letter of Transmittal.
99.2* -- Form of Notice of Guaranteed Delivery.
</Table>
- ---------------
* Filed herewith.