- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14236
FELCOR LODGING TRUST INCORPORATED
(Exact name of registrant as specified in its charter)
<Table>
MARYLAND 75-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
</Table>
(972) 444-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X N
--- ---
The number of shares of Common Stock, par value $.01 per share, of
FelCor Lodging Trust Incorporated outstanding on August 9, 2002 was 53,043,778.
- --------------------------------------------------------------------------------
FELCOR LODGING TRUST INCORPORATED
INDEX
<Table>
<Caption>
Page
----
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................ 3
Consolidated Balance Sheets - June 30, 2002 (Unaudited)
and December 31, 2001................................................................... 3
Consolidated Statements of Operations - For the Three and Six Months
Ended June 30, 2002 and 2001 (unaudited)................................................ 4
Consolidated Statements of Comprehensive Income - For the Three and Six Months
Ended June 30, 2002 and 2001 (unaudited) ............................................... 5
Consolidated Statements of Cash Flows -- For the Six Months
Ended June 30, 2002 and 2001 (unaudited)................................................ 6
Notes to Consolidated Financial Statements................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General...................................................................................... 15
Financial Comparison......................................................................... 15
Results of Operations........................................................................ 15
Liquidity and Capital Resources.............................................................. 25
Inflation.................................................................................... 28
Seasonality.................................................................................. 28
Disclosure Regarding Forward Looking Statements.............................................. 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 28
PART II. - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders............................................. 29
Item 5. Other Information............................................................................... 29
Item 6. Exhibits and Reports on Form 8-K................................................................ 29
SIGNATURE................................................................................................... 31
</Table>
2
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $706,834
at June 30, 2002 and $630,962 at December 31, 2001 ............................... $ 3,592,897 $ 3,662,680
Investment in unconsolidated entities ............................................... 148,408 151,047
Hotels held for sale ................................................................ 33,722 38,937
Cash and cash equivalents ........................................................... 151,704 128,742
Accounts receivable ................................................................. 64,373 55,868
Deferred expenses, net of accumulated amortization of $13,330
at June 30, 2002 and $10,672 at December 31, 2001 ................................ 29,605 31,249
Other assets ........................................................................ 27,650 20,406
------------ ------------
Total assets ............................................................... $ 4,048,359 $ 4,088,929
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt, net of discount of $7,194 at June 30, 2002 and
$7,768 at December 31, 2001 ...................................................... $ 1,882,675 $ 1,938,408
Distributions payable ............................................................... 14,766 8,172
Accrued expenses and other liabilities .............................................. 178,893 173,496
Minority interest in FelCor LP, 9,003 and 9,005 units issued and
outstanding at June 30, 2002 and December 31, 2001, respectively ................. 232,518 236,100
Minority interest in other partnerships ............................................. 50,652 49,559
------------ ------------
Total liabilities .......................................................... 2,359,504 2,405,735
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Preferred Stock, 5,980 and 5,981 shares issued and
outstanding at June 30, 2002 and December 31, 2001, respectively .............. 149,512 149,515
Series B Redeemable Preferred Stock, 68 and 58 shares issued and
outstanding at June 30, 2002 and December 31, 2001, respectively .............. 169,395 143,750
Common stock, $.01 par value, 200,000 shares authorized, 69,422 and
69,418 shares issued, including shares in treasury, at June 30, 2002
and December 31, 2001, respectively .............................................. 694 694
Additional paid-in capital .......................................................... 2,057,517 2,059,448
Accumulated other comprehensive income (loss) ....................................... 2,464 (376)
Distributions in excess of earnings ................................................. (377,289) (355,391)
Common stock in treasury, at cost, 16,369 shares and 16,421 shares
at June 30, 2002 and December 31, 2001, respectively ............................. (313,438) (314,446)
------------ ------------
Total stockholders' equity ................................................. 1,688,855 1,683,194
------------ ------------
Total liabilities and stockholders' equity ................................. $ 4,048,359 $ 4,088,929
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
3
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
AND 2001 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues:
Hotel operating revenue:
Room .................................................. $ 277,361 $ 173,118 $ 534,591 $ 365,343
Food and beverage ..................................... 56,389 25,486 107,080 53,150
Other operating departments ........................... 17,548 11,891 33,767 24,790
Percentage lease revenue ................................ 63,606 115,137
Retail space rental and other revenue ................... 428 548 1,098 1,882
---------- ---------- ---------- ----------
Total revenues .......................................... 351,726 274,649 676,536 560,302
---------- ---------- ---------- ----------
Expenses:
Hotel operating expenses:
Room .................................................. 68,114 39,784 131,347 83,404
Food and beverage ..................................... 42,138 19,024 82,129 39,141
Other operating departments ........................... 7,916 5,195 15,232 10,922
Other property operating costs .......................... 90,548 52,508 179,708 111,009
Management and franchise fees ........................... 18,088 10,573 33,736 23,245
Taxes, insurance and lease expense ...................... 33,790 38,096 68,360 76,460
Corporate expenses ...................................... 3,970 3,231 7,716 6,372
Depreciation ............................................ 38,204 39,705 76,822 79,513
Lease termination costs ................................. 36,226
---------- ---------- ---------- ----------
Total operating expenses ................................ 302,768 208,116 595,050 466,292
---------- ---------- ---------- ----------
Operating income ........................................... 48,958 66,533 81,486 94,010
Interest expense, net:
Recurring financing ..................................... (41,555) (39,179) (82,751) (78,535)
Merger related financing ................................ (1,086) (1,086)
Swap termination expense ................................... (4,824) (4,824)
Loss on early extinguishment of debt ....................... (225) (225)
---------- ---------- ---------- ----------
Income (loss) before equity in income from
unconsolidated entities, minority interests and
gain on sale of assets .................................. 7,403 21,219 (1,265) 9,340
Equity in income from unconsolidated entities ........... 1,365 4,178 2,586 6,328
Minority interests ...................................... (1,827) (3,320) (526) (2,870)
Gain on sale of assets .................................. 6,061 482 6,061 2,955
---------- ---------- ---------- ----------
Net income ................................................. 13,002 22,559 6,856 15,753
Preferred dividends ..................................... (6,688) (6,150) (12,838) (12,300)
---------- ---------- ---------- ----------
Net income (loss) applicable to common stockholders ........ $ 6,314 $ 16,409 $ (5,982) $ 3,453
========== ========== ========== ==========
Per share data:
Basic:
Net income (loss) applicable to common stockholders ..... $ 0.12 $ 0.31 $ (0.11) $ 0.07
========== ========== ========== ==========
Weighted average common shares outstanding .............. 52,728 52,630 52,721 52,614
Diluted:
Net income (loss) applicable to common stockholders ..... $ 0.12 $ 0.31 $ (0.11) $ 0.07
========== ========== ========== ==========
Weighted average common shares outstanding .............. 53,093 53,046 52,721 53,055
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
4
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income .................................................. $ 13,002 $ 22,559 $ 6,856 $ 15,753
Cumulative transition adjustment from interest rate swaps ... 248
Unrealized holding losses from interest rate swaps .......... (879) (5,971)
Realized loss on terminated interest rate swap agreements ... 4,824 4,824
Foreign currency translation adjustment ..................... 2,259 2,840
-------- -------- -------- --------
Comprehensive income ................................... $ 15,261 $ 26,504 $ 9,696 $ 14,854
======== ======== ======== ========
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
5
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net income ..................................................................... $ 6,856 $ 15,753
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation ......................................................... 76,822 79,513
Gain on sale of assets ............................................... (6,061) (2,955)
Amortization of deferred financing fees .............................. 2,658 2,563
Accretion of debt, net of discount ................................... 205 (150)
Amortization of unearned compensation ................................ 1,035 884
Equity in income from unconsolidated entities ........................ (2,586) (6,328)
Loss on debt extinguishment .......................................... 225
Lease termination costs .............................................. 36,226
Minority interests ................................................... 526 2,870
Changes in assets and liabilities:
Accounts receivable .................................................. (7,753) (10,077)
Deferred expenses .................................................... (1,014) (11,045)
Other assets ......................................................... (8,366) (11,297)
Accrued expenses and other liabilities ............................... 7,402 (2,552)
---------- ----------
Net cash flow provided by operating activities ............. 69,724 93,630
---------- ----------
Cash flows (used in) provided by investing activities:
Restricted cash ................................................................ (323,555)
Improvements and additions to hotels ........................................... (17,924) (29,431)
Proceeds from sale of assets ................................................... 23,237 59,016
Operating cash received in acquisition of lessee ............................... 25,583
Cash distributions from unconsolidated entities ................................ 5,225 2,973
---------- ----------
Net cash flow (used in) provided by investing activities ... 10,538 (265,414)
---------- ----------
Cash flows (used in) provided by financing activities:
Proceeds from borrowings ....................................................... 849,748
Repayment of borrowings ........................................................ (56,718) (553,746)
Net proceeds from sale of preferred stock ...................................... 23,981
Purchase of treasury stock ..................................................... (113) (3,354)
Distributions paid to other partnership minority interests ..................... (448) (2,582)
Distributions paid to FelCor LP limited partners ............................... (2,751) (9,807)
Distributions paid to preferred stockholders ................................... (12,454) (12,300)
Distributions paid to common stockholders ...................................... (9,706) (58,015)
---------- ----------
Net cash flow (used in) provided by financing activities ... (58,209) 209,944
---------- ----------
Effect of exchange rate changes on cash .................................................. 909
Net change in cash and cash equivalents .................................................. 22,962 38,160
Cash and cash equivalents at beginning of periods ........................................ 128,742 26,060
---------- ----------
Cash and cash equivalents at end of periods .............................................. $ 151,704 $ 64,220
========== ==========
Supplemental cash flow information --
Interest paid .................................................................. $ 79,742 $ 84,115
========== ==========
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
6
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
FelCor Lodging Trust Incorporated ("FelCor"), a Maryland corporation,
is one of the nation's largest hotel real estate investment trusts, or REITs,
and is the sole general partner of, and the owner of a greater than 85%
partnership interest in, FelCor Lodging Limited Partnership ("FelCor LP").
FelCor, FelCor LP and their subsidiaries are referred to collectively, as the
"Company." The Company had ownership interests in 182 hotels at June 30, 2002,
with nearly 50,000 rooms and suites. All of the Company's operations are
conducted solely through FelCor LP or its subsidiaries. At June 30, 2002, the
Company owned a 100% interest in 149 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. Twelve of
the Company's hotels were designated as held for sale at June 30, 2002.
On January 1, 2001, the REIT Modernization Act ("RMA") went into
effect. Among other things, the RMA permits a REIT to form taxable subsidiaries
("TRS") that lease hotels from the REIT, provided that the hotels continue to be
managed by unrelated third parties. Effective January 1, 2001, the Company
completed transactions that resulted in its newly formed TRSs acquiring leases
for 96 hotels that were leased to either DJONT Operations, L.L.C. and its
consolidated subsidiaries (collectively "DJONT") or subsidiaries of Six
Continents Hotels. Effective July 1, 2001, the Company acquired the remaining 88
hotel leases held by Six Continents Hotels. By acquiring these leases through
its TRSs, the Company acquired the economic benefits and risks of the operation
of these hotels and began reporting hotel revenues and expenses rather than
percentage lease revenues.
The following table provides a schedule of the Company's hotels, by
brand, at June 30, 2002:
<Table>
BRAND
Hilton Hotels Corporation ("Hilton") brands:
Embassy Suites Hotels(R).................................................. 59
Doubletree(R) and Doubletree Guest Suites(R).............................. 12
Hampton Inn(R)............................................................ 7
Hilton Suites(R).......................................................... 1
Homewood Suites(R)........................................................ 1
Six Continents Hotels brands:
Holiday Inn(R)............................................................ 44
Crowne Plaza(R) and Crowne Plaza Suites(R)................................ 18
Holiday Inn Select(R)..................................................... 10
Holiday Inn Express(R).................................................... 5
Starwood Hotels & Resorts Worldwide Inc. ("Starwood") brands:
Sheraton(R) and Sheraton Suites(R)........................................ 10
Westin(R)................................................................. 1
Other brands................................................................... 14
---
Total hotels................................................................... 182
===
</Table>
7
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION -- (CONTINUED)
At June 30, 2002, the Company's hotels were located in the United
States (35 states) and Canada, with concentrations in Texas (41 hotels),
California (19 hotels), Florida (16 hotels) and Georgia (14 hotels).
Approximately 54% of the Company's hotel room revenues for the six months ended
June 30, 2002, were generated from hotels in these four states.
At June 30, 2002, of the Company's 182 hotels, (i) subsidiaries of Six
Continents Hotels managed 89, (ii) subsidiaries of Hilton managed 70, (iii)
subsidiaries of Starwood managed 11, (iv) subsidiaries of Interstate Hotels
Corporation ("IHC") managed eight and (v) three independent management companies
managed four. Two additional hotels were acquired subsequent to June 30, 2002
(see footnote 13).
Certain reclassifications have been made to prior period financial
information to conform to the current period's presentation with no effect to
previously reported net income or stockholders' equity.
The financial information for the three and six months ended June 30,
2002 and 2001, is unaudited but includes all adjustments (consisting only of
normal recurring accruals) which the Company considers necessary for a fair
presentation of the results for the periods. The financial information should be
read in conjunction with the consolidated financial statements for the year
ended December 31, 2001, included in the Company's Annual Report on Form 10-K
("Form 10-K"). Operating results for the three and six months ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2002.
2. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes additional criteria to
determine when a long-lived asset is held for sale and establishes a new
recoverability test for long-lived assets to be held for investment. It also
broadens the definition of "discontinued operations" to include the sale of
individual properties. The provisions of the new standard are generally to be
applied prospectively and assets designated as held for sale prior to January 1,
2002, are not subject to this standard. During the six months ended June 30,
2002, the Company was not required to record any impairment under the new
standard. In addition, the Company does not have any discontinued operations for
the six months ended June 30, 2002, as no additional hotels were designated as
held for sale during the period.
During the six months ended June 30, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"). SFAS 145, among other things, rescinds SFAS
4, which required that gains and losses from extinguishments of debt be
classified as an extraordinary item, net of related income tax effects. SFAS 145
is to be applied beginning in fiscal years beginning after May 15, 2002, and
encourages early application of SFAS 145 related to the rescission of SFAS 4.
The Company had $225,000 in losses from extinguishment of debt in the six months
ended June 30, 2001, which were reclassified to be included in income before
equity in income of unconsolidated entities, minority interests and gain on sale
of assets in the accompanying financial statements to conform to SFAS 145.
During the six months ended June 30, 2002, the Company adopted the
provisions of Statement of Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). The adoption of SFAS 142 did not have a
material effect on the Company's financial statements.
8
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
In July 2002, the FASB issued SFAS 146, "Accounting for Exit or
Disposal Activities." SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
(EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes
(1) costs related to terminating a contract that is not a capital lease and (2)
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS 146 will be
effective for exit or disposal activities initiated after December 31, 2002. The
Company is currently evaluating the impact this statement will have on its
financial position or results of operations.
3. ACQUISITION OF HOTEL LEASES
As a result of the passage of the RMA, effective January 1, 2001, the
Company acquired 100% of DJONT, which owned leases on 85 of our hotels, and
contributed it to a TRS. In consideration, FelCor LP issued 416,667 of its
units, valued at approximately $10 million, and the Company assumed DJONT's
accumulated stockholders' deficit of $25 million, which was expensed as lease
termination cost in 2001.
On January 1, 2001, the Company also acquired from Six Continents
Hotels the leases covering 11 hotels, terminated one additional lease in
connection with the sale of the related hotel and terminated the 12 related
management agreements in exchange for 413,585 shares of FelCor common stock
valued at approximately $10 million. Of this $10 million in consideration, $8
million was expensed in 2000, in connection with the designation of certain of
these hotels as held for sale. The remaining $2 million was expensed as lease
termination cost in 2001 as a result of the acquisition of the leases. Of the 11
hotels, two have been sold, eight have been contributed to a joint venture with
IHC, and one will be retained.
The Company purchased certain assets and assumed certain liabilities in
connection with the acquisition of the leases on these 96 hotels. The fair
values of the acquired assets and liabilities at January 1, 2001, and the
related lease termination costs for the six months ended June 30, 2001, are as
follows (in thousands):
<Table>
Cash and cash equivalents ................................................. $ 25,300
Accounts receivable ....................................................... 30,214
Other assets .............................................................. 17,394
------------
Total assets acquired ..................................................... 72,908
------------
Accounts payable .......................................................... 18,656
Due to the Company ........................................................ 30,687
Accrued expenses and other liabilities .................................... 40,072
------------
Total liabilities assumed ................................................. 89,415
------------
Liabilities assumed in excess of assets acquired .......................... 16,507
Value of common stock and FelCor LP units issued .......................... 19,719
------------
Lease termination costs .............................................. $ 36,226
============
</Table>
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company owned 50% interests in joint venture entities that owned 24
hotels at June 30, 2002 and 2001. The Company also owned a 50% interest in
entities that owned an undeveloped parcel of land, provided condominium
management services, developed and sold condominiums in Myrtle Beach, South
Carolina, and leased eight hotels. The Company accounts for its investments in
these unconsolidated entities under the equity method.
9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT IN UNCONSOLIDATED ENTITIES - (CONTINUED)
Summarized unaudited combined financial information for 100% of these
unconsolidated entities is as follows (in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
Balance sheet information:
Investment in hotels ................................................. $ 357,646 $ 365,802
Debt (a) ............................................................. $ 263,865 $ 266,238
Equity ............................................................... $ 117,039 $ 116,032
</Table>
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Statements of operations information:
Total revenues ................................... $ 22,798 $ 26,656 $ 41,663 $ 44,483
Net income ....................................... $ 3,767 $ 8,693 $ 5,485 $ 14,065
Net income attributable to the Company ........... $ 1,883 $ 4,346 $ 2,742 $ 7,032
Preferred return ................................. 370 367 732 367
Depreciation of cost in excess of book value ..... (888) (535) (888) (1,071)
-------- -------- -------- --------
Equity in income from unconsolidated entities .... $ 1,365 $ 4,178 $ 2,586 $ 6,328
======== ======== ======== ========
</Table>
(a) Debt at June 30, 2002, consists of $263.5 million of
non-recourse mortgage debt and $372,000 of full-recourse debt
guaranteed by the Company.
5. HOTELS HELD FOR SALE
In 2000, the Company identified 25 hotels that it considered
non-strategic and announced its intention to sell such hotels. In connection
with the decision to sell these hotels, in June 2000 the Company recorded an
expense of $63 million representing the difference between the net book value
and the then estimated fair market value of these hotels. In 2001, the Company
recognized an additional $7 million expense to reflect the deterioration of the
market value of the then remaining 13 hotels held for sale. At June 30, 2002,
the Company was actively marketing the then remaining 12 hotels held for sale.
At June 30, 2001, the Company had 16 hotels designated as held for sale. The
Company regularly reviews the carrying value of the remaining hotels held for
sale to ensure that they are recorded at the lower of depreciated book value or
expected net sales proceeds. No depreciation expense has been recorded on these
hotels since June 30, 2000.
For the three and six months ended June 30, 2002, the revenues, less
associated expenses, for hotels held for sale were approximately $2.2 million
and $3.3 million, respectively. For the three and six months ended June 30,
2001, the revenues less associated expenses, for hotels held for sale, were
approximately $1.8 million and $6.9 million.
The Company closed on the sale of its 183-room Doubletree Guest Suites
hotel in Boca Raton, Florida, on April 26, 2002, and received net sales proceeds
of $6.5 million. A net gain of approximately $773,000 was recorded on the sale.
This property previously had been identified as a non-strategic asset at June
30, 2000, and classified as held for sale.
10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT
Debt at June 30, 2002, and December 31, 2001, consists of the following
(in thousands):
<Table>
<Caption>
JUNE 30,
2002 JUNE DECEMBER 31,
COLLATERAL (a) INTEREST RATE MATURITY DATE 2002 2001
-------------- ------------- ------------- ---------- -----------
(UNAUDITED)
FLOATING RATE DEBT:
Line of credit None October 2004 $ 49,674
Publicly-traded term notes-swapped (b) None 5.59% October 2004 $ 174,697 174,633
Promissory note None 3.72 June 2016 650 650
---- ---------- -----------
Total floating rate debt 5.59 175,347 224,957
---- ---------- -----------
FIXED RATE DEBT:
Publicly-traded term notes None 7.63 October 2007 124,469 124,419
Publicly-traded term notes None 9.50 September 2008 595,860 595,525
Publicly-traded term notes None 8.50 June 2011 297,781 297,655
Mortgage debt 15 hotels 7.24 November 2007 136,151 137,541
Mortgage debt 7 hotels 7.54 April 2009 95,158 95,997
Mortgage debt 6 hotels 7.55 June 2009 71,585 72,209
Mortgage debt 7 hotels 8.73 May 2010 141,306 142,254
Mortgage debt 8 hotels 8.70 May 2010 181,689 182,802
Other 6 hotels 6.96 2002 - 2005 63,329 65,049
---- ---------- -----------
Total fixed rate debt 8.59 1,707,328 1,713,451
---- ---------- -----------
Total debt 8.31% $1,882,675 $ 1,938,408
==== ========== ===========
</Table>
(a) At June 30, 2002, the Company had unencumbered investments in
hotels with a net book value totaling $2.4 billion.
(b) At June 30, 2002, and December 31, 2001, the Company's $175
million in publicly-traded notes due October 2004 were matched
with interest rate swap agreements, which effectively
converted the fixed interest rate on the notes to a variable
interest rate tied to LIBOR. The interest rate swap agreements
also have a maturity of October 2004. The differences to be
paid or received by the Company under the terms of the
interest rate swap agreements are accrued as interest rates
change and recognized as an adjustment to interest expense.
These interest rate swaps have decreased interest expense by
$1.7 million during the six months ended June 30, 2002.
All of the Company's floating rate debt at June 30, 2002, was based
upon LIBOR. One month LIBOR at June 30, 2002, was 1.84%.
Interest expense is reported for the six months ended June 30, 2002 and
2001 net of interest income of $1.2 million and $2.2 million, respectively, and
capitalized interest of $108,000 and $229,000, respectively.
On June 17, 2002, the Company entered into an amendment of its $615
million unsecured line of credit. The amendment revised certain covenant levels
to provide greater financial and operating flexibility. The maturity date on the
credit facility remains October 31, 2004, and we may extend the facility for up
to two additional one-year terms, subject to certain conditions. The interest
rate remains on the same floating rate basis with a tiered spread based on our
debt leverage ratio. The lenders' commitments under the line of credit remain at
$615 million. The Company had no outstanding balance on its line of credit at
June 30, 2002.
In addition to financial covenants, the Company's line of credit
includes certain other affirmative and negative covenants, including limitations
on total indebtedness, total secured indebtedness, and restricted payments (such
as stock repurchases and cash distributions). At June 30, 2002, the Company was
in compliance with all of these covenants
11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT - (CONTINUED)
The Company publicly traded senior term notes require it to satisfy an
interest coverage test in order to incur additional indebtedness, except under
its line of credit; to pay dividends in excess of the minimum dividend required
to meet its REIT qualification test; or to repurchase stock. As of the date of
this filing, the Company has satisfied this minimum interest coverage
requirement.
The Company's other borrowings contain affirmative and negative
covenants that are generally equal to or less restrictive than those contained
in its 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 unsecured indebtedness. Most of the mortgage debt is non-recourse to the
Company and contains provisions allowing for the substitution of collateral upon
satisfaction of certain conditions. Most of the mortgage debt is prepayable,
subject to various prepayment penalties, yield maintenance or defeasance
obligations.
7. DERIVATIVES
In the normal course of business, the Company is exposed to the effect
of interest rate changes. The Company limits these risks by following
established risk management policies and procedures including the use of
derivatives. It is the objective of the Company to use interest rate hedges to
manage its fixed and floating interest rate position and not to be engaged in
speculation on interest rates. We manage interest rate risk based on the varying
circumstances of anticipated borrowings, and existing floating and fixed rate
debt. We will generally seek to pursue interest rate risk mitigation strategies
that result in the least amount of reported earnings volatility under generally
accepted accounting principles, while still meeting strategic economic
objectives and maintaining adequate liquidity and flexibility. Instruments that
meet these hedging criteria are formally designated as hedges at the inception
of the derivative contract.
To manage the relative mix of its debt between fixed and variable rate
instruments, at June 30, 2002, the Company had interest rate swap agreements
with three financial institutions with a notional value of $175 million. These
interest rate swap agreements modify a portion of the interest characteristics
of the Company's outstanding fixed rate debt, without an exchange of the
underlying principal amount, and effectively convert fixed rate debt to a
variable rate.
The differences to be paid or received by the Company under the terms
of the interest rate swap agreements are accrued as interest rates change and
are recognized as an adjustment to interest expense by the Company and will have
a corresponding effect on its future cash flows.
To determine the fair values of its derivative instruments, the Company
engages a third party that uses a variety of methods and assumptions based on
market conditions and risks existing at each balance sheet date. As deemed
necessary, the Company will use other methods and assumptions to validate the
fair market values. All methods of assessing fair value result in a general
approximation of value, and such value may never actually be realized.
The interest rate swap agreements held at June 30, 2002, are designated
as fair value hedges, are marked to market through the income statement, but are
offset by the change in fair value of the Company's swapped outstanding fixed
rate debt. The estimated unrealized gain on these interest rate swap agreements
was approximately $1.5 million at June 30, 2002, and represents the amount the
Company would receive to terminate the agreements based on current market rates.
12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PREFERRED STOCK
On April 4, 2002, FelCor issued 1,025,800 depositary shares,
representing 10,258 shares of its 9% Series B Cumulative Redeemable Preferred
Stock ("Series B preferred stock") at $24.37 per depositary share to yield 9.4%.
The Series B preferred stock and the corresponding depositary shares may be
called by FelCor at $25 per depositary share on or after May 7, 2003, have no
stated maturity, sinking fund or mandatory redemption, and are not convertible
into any other securities of FelCor. The net proceeds of $24.0 million were used
for working capital, and allowed the Company to accelerate discretionary capital
expenditures.
9. DEFERRED RENT
The Company recognized rent deferred under Staff Accounting Bulletin
No. 101 ("SAB 101") of $5.3 million for the quarter ended June 30, 2001, on the
88 hotels leased by Six Continents Hotels. This deferred rent was recognized
upon the acquisition of the leases.
10. INCOME TAXES
The Company generally leases its hotels to wholly-owned TRSs that are
subject to federal and state income taxes. The Company accounts for income taxes
in accordance with the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes ("SFAS 109")." Under SFAS 109, the Company
accounts for income taxes using the asset and liability method, under which
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. At June 30, 2002, the Company's TRSs had a deferred tax asset of
approximately $18.8 million, prior to any valuation allowance, relating to
accumulated losses of the TRSs. Management has provided a 100% valuation
allowance against this asset due to the uncertainty of realization and,
accordingly, no provision or benefit for income taxes is reflected in the
accompanying Consolidated Statements of Operations.
11. GAIN ON DISPOSITION OF ASSETS
During the three months ended June 30, 2002, the Company sold its
Doubletree Guest Suites hotel in Boca Raton, Florida, for net proceeds of $6.5
million and recorded a net gain of $0.8 million. Additionally, the Company sold
retail space associated with the Allerton Hotel located in Chicago, Illinois,
for net proceeds of $16.7 million and recorded a net gain of approximately $5.1
million. The Company also recognized a $0.2 million gain related to the
condemnation of land adjacent to one of its hotels.
For the six months ended June 30, 2001, the Company received $3.9
million for the condemnation of three parcels of land and recorded a gain of
$3.0 million.
13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended June 30, 2002 and 2001
(unaudited, in thousands, except per share data):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Net income .............................................. $ 13,002 $ 22,559 $ 6,856 $ 15,753
Preferred dividends ................................... (6,688) (6,150) (12,838) (12,300)
---------- ---------- ---------- ----------
Net income (loss) applicable to common stockholders ..... $ 6,314 $ 16,409 $ (5,982) $ 3,453
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares .............................. 52,728 52,630 52,721 52,614
Effect of dilutive securities:
Stock options ........................................... 40 65 90
Restricted shares ....................................... 325 351 351
---------- ---------- ---------- ----------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions ...... 53,093 53,046 52,721 53,055
---------- ---------- ---------- ----------
Earnings (loss) per share data:
Basic
Net income (loss) ....................................... $ 0.12 $ 0.31 $ (0.11) $ 0.07
========== ========== ========== ==========
Diluted
Net income (loss) ....................................... $ 0.12 $ 0.31 $ (0.11) $ 0.07
========== ========== ========== ==========
</Table>
The Series A preferred shares and other dilutive securities are not
included in the calculation of diluted earnings per share for the six months
ended June 30, 2002, because they are anti-dilutive as the result of losses in
the period. The Series A preferred shares and the majority of stock options
granted are anti-dilutive for the remaining periods presented and, as such, are
not included in the calculation of diluted earnings per share.
13. SUBSEQUENT EVENTS
On July 12, 2002, the Company acquired the 208-suite SouthPark Suite
Hotel in Charlotte, North Carolina for $14.5 million. This hotel will be
converted to a Doubletree Guest Suites during the fall of 2002. The Company
entered into a 15-year management agreement with Hilton for the hotel concurrent
with the acquisition closing. The Company utilized excess cash on hand to
acquire this hotel.
On July 19, 2002, the Company acquired the 385-room Wyndham(R) resort
and the Arcadia Shores Golf Club in Myrtle Beach, South Carolina. This hotel
will be converted to a Hilton hotel in 2003. This hotel, adjacent land and a
leasehold interest in the golf course were purchased for $35.3 million. The
Company entered into a 15-year management agreement with Hilton for the hotel
concurrent with the acquisition closing. The Company utilized excess cash on
hand to acquire this hotel.
The Company closed on the sale of its Holiday Inn Express hotel in
Colby, Kansas, on August 8, 2002, and received net proceeds of $1.7 million.
This property previously had been identified as a non-strategic asset and
classified as held for sale.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
For background information relating to the Company and the definitions
of certain capitalized terms used herein, reference is made to Notes 1 and 2 of
Notes to Consolidated Financial Statements of FelCor Lodging Trust Incorporated
appearing elsewhere herein.
The Company's results for the three and six months ended June 30, 2002,
reflect Revenue Per Available Room ("RevPAR") below the same period in the prior
year, but a consistent, gradual increase in hotel occupancy during 2002. RevPAR
for the portfolio was below that of the prior year by 11.1% for the three months
ended June 30, 2002, and 14.6% for the six months ended June 30, 2002.
FINANCIAL COMPARISON
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
-------- -------- -------- -------- -------- --------
(IN MILLIONS, (IN MILLIONS,
EXCEPT REVPAR) EXCEPT REVPAR)
RevPAR ......................................... $ 64.57 $ 72.65 (11.1)% $ 62.67 $ 73.39 (14.6)%
Funds From Operations ("FFO")(1) ............... $ 45.7 $ 65.3 (30.0)% $ 75.1 $ 136.8 (45.2)%
Earnings Before Interest, Taxes, Depreciation
and Amortization ("EBITDA")(1) ............ $ 94.6 $ 111.4 (15.1)% $ 171.8 $ 228.8 (24.9)%
Net income ..................................... $ 13.0 $ 22.6 (42.5)% $ 6.9 $ 15.8 (56.3)%
</Table>
(1) For a discussion of the computation of FFO and EBITDA, see "Results of
Operations -- Funds From Operations and EBITDA."
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 2002 and 2001
On July 1, 2001, the Company acquired operating leases covering 88 of
its hotels and contributed them to its TRSs. As the leases were acquired, the
Company began receiving and recording hotel revenues and expenses, rather than
percentage lease revenue for these hotels. Consequently, a comparison of
historical results for the three months ended June 30, 2002, to the three months
ended June 30, 2001, are not directly comparable.
Total revenue increased $77.1 million for the three months ended June
30, 2002, over the same period in 2001. The increase is principally associated
with reporting hotel operating revenues for 88 of the hotels during 2002,
contrasted with percentage lease revenue reported by the Company for these
hotels during the same period in 2001. These 88 hotels contributed approximately
$163.1 million in hotel operating revenue during the three months ended June 30,
2002, compared to $63.6 million in percentage rent revenue for the same hotels,
during the same period in 2001. For the remaining 85 consolidated hotels owned
by the Company, total revenues decreased approximately $20.2 million in the
quarter. The principal component of this decrease is a decrease in room revenue
for these hotels of $17 million. The RevPAR for these 85 hotels was 9.9% below
that of the same period in 2001. The decrease in RevPAR for these hotels was
comprised of a 2.3% decrease in hotel occupancy and a 7.8% decrease in average
daily rate ("ADR"). The remaining change in revenue of $2.2 million primarily
relates to decreases in revenue from the disposition of assets held for sale.
Total operating expenses increased $94.7 million for the three months
ended June 30, 2002, over the same three month period in 2001. This increase
primarily resulted from the inclusion of hotel operating expenses, management
fees and other property related costs for the 88 hotels that were not included
in the same period of 2001, prior to the Company's acquisition of the leases.
15
Taxes, insurance and lease expense decreased $4.3 million, compared to
the second quarter of 2001, principally as the result of decreases in lease
expense of $3.9 million and in property taxes of $2.7 million, partially offset
by increased insurance costs of $1.6 million. The decrease in lease expense is
related to participating leases that are generally based on revenue. Property
taxes decreased primarily as a result of resolutions in the current quarter of
prior year tax disputes.
Interest expense, net of interest income, on recurring financing
increased $2.4 million for the three months ended June 30, 2002, over the same
period in 2001. The increase during the second quarter is primarily related to
excess cash carried during 2002 and the related increase in average debt
outstanding of $85.2 million compared to the same period of 2001.
Equity in the income of unconsolidated entities decreased by $2.8
million, compared to the same quarterly period in 2001. The decrease in 2002
principally resulted from a 13.6% drop in RevPAR for the unconsolidated hotels.
Minority interest decreased $1.5 million for the three months ended
June 30, 2002, over the same period in 2001. Minority interest represents the
proportionate share of the net income of FelCor LP not owned by FelCor and the
proportionate share of the income or loss of other consolidated subsidiaries not
owned by FelCor.
Included in net income for the three months ended June 30, 2002, is a
gain of $5.1 million on the sale of retail space and $0.8 million on the sale of
a hotel Included in net income for the three months ended June 30, 2001, is a
gain of $0.5 million related to condemnation proceeds received.
The Company's net income decreased by $9.6 million for the three months
ended June 30, 2002, compared to the same period in 2001. The major item
affecting the change in net income was the 11.1% decline in the Company's hotel
RevPAR in the second quarter of 2002, compared to the same period in the prior
year. Other items affecting the change in net income were approximately $6
million of non-recurring expenses during the second quarter of 2001 related to
merger financing and termination of interest rate swaps and $5.9 million in 2002
of gains on sale, related to the sale of retail space at the Allerton hotel in
Chicago, Illinois, and the sale of a non-strategic hotel in Boca Raton, Florida.
Comparison of the Six Months Ended June 30, 2002 and 2001
On July 1, 2001, the Company acquired operating leases covering 88 of
its hotels and contributed them to its TRSs. As the leases were acquired, the
Company began receiving and recording hotel revenues and expenses, rather than
percentage lease revenue for these hotels. Consequently, the historical results
for the six months ended June 30, 2002, and the six months ended June 30, 2001,
are not directly comparable.
Total revenue for the six months ended June 30, 2002, increased $116.2
million over the same period in 2001. The increase is principally associated
with reporting hotel operating revenues for 88 of the hotels during 2002,
contrasted with percentage lease revenue reported by the Company for these
hotels during the same period in 2001. These 88 hotels contributed approximately
$305.3 million in hotel operating revenue in the first six months of 2002,
compared to $115.1 million in percentage rent revenue for the same hotels,
during the same period in 2001. For the remaining 85 consolidated hotels owned
by the Company, total revenues decreased approximately $61 million for the six
months ended June 30, 2002. The principal component of this decrease is a
decrease in room revenue for these hotels of $49 million. The RevPAR for these
85 hotels was 13.9% below that of the same period in 2001. The decrease in
RevPAR for these hotels was comprised of a 5.9% decrease in hotel occupancy and
a 8.5% decrease in ADR. The remaining change in revenue of $13 million primarily
relates to decreases in revenue from the disposition of assets held for sale.
16
Total operating expenses increased $128.8 million for the six months
ended June 30, 2002, over the same three month period in 2001. This increase
primarily resulted from the inclusion of hotel operating expenses, management
fees and other property related costs for the 88 hotels that were not included
in the same period of 2001, prior to the Company's acquisition of the leases.
Also included in total operating expenses for the first six months of 2001 were
lease termination costs of $36.2 million.
Interest expense, net of interest income, increased $3.1 million for
the six months ended June 30, 2002, over the same period in 2001. The increase
for the period is primarily related to the Company's excess cash carried during
2002 and an increase in average debt of $83.4 million over the same period of
2001.
Equity in the income of unconsolidated entities decreased by $3.7
million, compared to the same six month period in 2001. The decrease in 2002
principally resulted from a 15.1% drop in RevPAR from the unconsolidated hotels.
Taxes, insurance and lease expense decreased $8.1 million, principally
as the result of decreases in lease expense of $9.2 million and in property
taxes of $3.3 million, partially offset by increased insurance costs of $3.3
million. The decrease in lease expense is related to participating leases that
are based principally on revenues. Property taxes decreased principally from
resolutions in the current quarter of prior year tax disputes.
Minority interest decreased $2.3 million for the six months ended June
30, 2002, over the same period in 2001. Minority interest represents the
proportionate share of the net income or loss of FelCor LP not owned by FelCor
and the proportionate share of the income or loss of other consolidated
subsidiaries not owned by FelCor. This change principally reflects the decrease
in net income.
Included in net income for the six months ended June 30, 2002, is a
gain of $5.1 million on the sale of retail space and $0.8 million on the sale of
a hotel. Included in net income for the six months ended June 30, 2001, is a
gain of $3.0 million related to condemnation proceeds received.
The Company's net income was reduced $8.9 million for the six months
ended June 30, 2002, compared to the same period in 2001. The major item
affecting this change in income was the 14.6% decline in the Company's hotel
RevPAR in the six months ended June 30, 2002 compared to the same period in the
prior year.
Comparison of the Six Months Ended June 30, 2002 with Pro Forma 2001
On July 1, 2001, we acquired the operating leases covering 88 of our
hotels and contributed them to our TRSs. As the leases were acquired, we began
receiving and recording hotel revenues and expenses, rather than percentage
lease revenue. Consequently, a comparison of historical results for the six
months ended June 30, 2002, to the six months ended June 30, 2001, 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 six months ended June 30, 2001 assumes that
our acquisition of 88 hotel leases held by Six Continents Hotels had occurred on
January 1, 2001.
17
FELCOR LODGING TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
------------------------------
HISTORICAL PRO FORMA
2002 2001
------------ ------------
Total revenues ............................................................ $ 676,536 $ 802,304
Operating expenses:
Lease termination costs ................................................ 36,226
Other operating expenses ............................................... 595,050 667,576
------------ ------------
Operating income .......................................................... 81,486 98,502
Interest expense, net:
Recurring financing .................................................... (82,751) (78,535)
Merger related financing ............................................... (1,086)
Swap termination expense .................................................. (4,824)
Loss on early extinguishment of debt ...................................... (225)
------------ ------------
Income (loss) before equity in income from unconsolidated entities,
minority interests and gain on sale of assets ....................... (1,265) 13,832
Equity in income from unconsolidated entities .......................... 2,586 6,328
Minority interest ...................................................... (526) (3,524)
Gain on sale of assets ................................................. 6,061 2,955
------------ ------------
Net income ................................................................ 6,856 19,591
Preferred dividends .................................................... (12,838) (12,300)
------------ ------------
Net income (loss) applicable to common stockholders ....................... $ (5,982) $ 7,291
============ ============
Basic and diluted per share data:
Net income (loss) applicable to common stockholders .................... $ (0.11) $ 0.14
============ ============
Weighted average common shares outstanding ................................ 52,721 53,055
</Table>
18
FELCOR LODGING TRUST INCORPORATED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
FELCOR
HISTORICAL PRO FORMA
2001 ADJUSTMENTS 2001
------------ ------------ ------------
Total revenues .................................................. $ 560,302 $ 242,002(a) $ 802,304
Operating expenses:
Lease termination costs ...................................... 36,226 36,226
Other operating expenses ..................................... 430,066 237,510(b) 667,576
------------ ------------ ------------
Operating income ................................................ 94,010 4,492 98,502
Interest expense, net:
Recurring financing .......................................... (78,535) (78,535)
Merger related financing ..................................... (1,086) (1,086)
Swap termination expense ........................................ (4,824) (4,824)
Loss on early extinguishment of debt ............................ (225) (225)
------------ ------------ ------------
Income before equity in income from unconsolidated entities,
minority interests and gain on sale of assets .............. 9,340 4,492 13,832
Equity in income from unconsolidated entities ................ 6,328 6,328
Minority interests ........................................... (2,870) (654)(c) (3,524)
Gain on sale of assets ....................................... 2,955 2,955
------------ ------------ ------------
Net income ...................................................... 15,753 3,838 19,591
Preferred dividends .......................................... (12,300) (12,300)
------------ ------------ ------------
Net income applicable to common stockholders .................... $ 3,453 $ 3,838 $ 7,291
============ ============ ============
</Table>
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 date, nor do they purport to represent
our results of operations for future periods.
The pro forma numbers presented represent our historical revenues and
expenses, modified as described in the pro forma adjustments below.
Pro forma adjustments:
(a) Total revenue adjustments consist of the increase in our historical
revenue from the elimination of historical percentage lease revenue and
the addition of historical hotel operating revenues.
(b) Operating expense adjustments consist of: (i) the increase in our
historical operating expense from the addition of historical hotel
operating expenses and the elimination of percentage lease expense for
the 88 hotel leases acquired from Six Continents Hotels on July 1,
2001, (ii) the recording of management fees at their new contractual
rates, and (iii) the elimination of historical franchise fees, which
are included in the new management fees for these hotels.
(c) Represents FelCor LP's minority interest holders' share of revenue and
expense adjustments.
Revenues decreased $125.8 million in 2002 compared to pro forma 2001,
primarily as a result of the continuing economic downturn and the 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 for the six months ended June 30, 2002, compared
to the same pro forma period in 2001. During the six months ended June 30, 2002,
our hotels' RevPAR decreased 14.6%, compared to the same period in the prior
year, which was comprised of a decrease in hotel occupancy of 5.8 percentage
points to 63.1% and a decline in ADR of 6.8% to $99.28.
19
Other operating expenses decreased $72.5 million in 2002 compared to
pro forma 2001. However, other operating expense as a percentage of total
revenue, increased from 83% to 88%. The principal reason for the increase in
other operating expenses as a percentage of total revenue, was a 140 basis point
drop in hotel operating margins. This margin compression primarily relates to
the reduction in revenue and the inability to reduce labor costs, repair and
maintenance costs and marketing costs proportionately. We are actively working
with our managers to implement cost cutting programs at the hotels to maximize
hotel operating profits. These measures include reducing labor costs,
streamlining staffing, and consolidating operations by closing unused floors in
hotels when possible.
Interest expense from recurring financing, net of interest income,
increased $3.1 million. The increase for the period is primarily related to the
Company's excess cash carried during 2002 and an increase in average debt of
$83.4 million over the same period of 2001.
Equity in income from unconsolidated entities decreased $3.7 million,
principally as the result of the decrease in RevPAR previously discussed.
Minority interest decreased $3.0 million for the six months ended June
30, 2002, over the same pro forma period in 2001. Minority interest represents
the proportionate share of the net income or loss of FelCor LP not owned by
FelCor and the proportionate share of the income or loss of other consolidated
subsidiaries not owned by FelCor. This change principally reflects the decrease
in net income.
Included in net income for the six months ended June 30, 2002, was a
gain of $5.1 million on the sale of retail space and $0.8 million on the sale of
a hotel. Included in pro forma net income for the six months ended June 30,
2001, was a gain of $3.0 million related to condemnation proceeds received.
Funds From Operations and EBITDA
We consider Funds From Operations ("FFO") and Earnings Before Interest,
Taxes, Depreciation, and Amortization ("EBITDA") to be key measures of a REIT's
performance and should be considered along with, but not as an alternative to,
net income and cash flow as a measure of 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 extraordinary items and gains or losses from sales of properties, plus
real estate related depreciation and amortization, after comparable adjustments
for the applicable portion of these items related to unconsolidated entities and
joint ventures. We believe that FFO and EBITDA are helpful to investors as a
measure of the performance of an equity REIT because, along with cash flow from
operating activities, financing activities and investing activities, they
provide investors with an indication of the ability of the REIT to incur and
service debt, to make capital expenditures, to pay dividends and to fund other
cash needs. We compute FFO in accordance with standards established by NAREIT,
except that we add back lease termination costs, merger financing costs, swap
termination costs, loss from early extinguishment of debt and deferred rent to
derive FFO. This may not be comparable to FFO reported by other REITs that do
not define the term in accordance with the current NAREIT definition, that
interpret the current NAREIT definition differently than we do or that do not
adjust FFO for lease termination costs, merger financing costs, swap termination
costs, loss from early extinguishment of debt and deferred rent. 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.
20
The following table details our computation of Funds From Operations
(unaudited, in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
FUNDS FROM OPERATIONS (FFO):
Net income ................................................... $ 13,002 $ 22,559 $ 6,856 $ 15,753
Deferred rent ........................................... (5,254)
Gain on sale of assets .................................. (5,861) (5,861)
Lease termination costs ................................. 36,226
Merger related interest, net ............................ 1,086 1,086
Loss on early extinguishment of debt .................... 225 225
Swap termination expense ................................ 4,824 4,824
Series B preferred dividends ............................ (3,773) (3,234) (7,007) (6,468)
Depreciation ............................................ 38,204 39,705 76,822 79,513
Depreciation from unconsolidated entities ............... 3,078 2,641 5,256 5,022
Minority interest in Operating Partnership .............. 1,072 2,794 (1,015) 588
---------- ---------- ---------- ----------
FFO .......................................................... $ 45,722 $ 65,346 $ 75,051 $ 136,769
========== ========== ========== ==========
Weighted average common shares and units outstanding (a) ..... 66,733 66,750 66,724 66,759
========== ========== ========== ==========
</Table>
- ----------
(a) Weighted average common shares and units outstanding are
computed including dilutive options, unvested stock grants,
and assuming conversion of Series A preferred stock to common
stock.
The following table details our computation of EBITDA (unaudited, in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
EBITDA:
Funds from Operations ...................................... $ 45,722 $ 65,346 $ 75,051 $ 136,769
Interest expense ...................................... 42,184 39,803 83,959 79,896
Interest expense of unconsolidated subsidiaries ....... 2,373 2,631 4,732 4,742
Amortization expense .................................. 526 408 1,035 884
Series B preferred dividends .......................... 3,773 3,234 7,007 6,468
---------- ---------- ---------- ----------
EBITDA ..................................................... $ 94,578 $ 111,422 $ 171,784 $ 228,759
========== ========== ========== ==========
</Table>
21
Hotel Portfolio Composition
The following tables set forth as of June 30, 2002, our hotel portfolio
distribution by brand, by our top ten Metropolitan Statistical Areas ("MSAs"),
by selected states, by type of location, and by market segment. For comparative
purposes, also set forth below is the percentage of EBITDA contributed by each
grouping for the year ended December 31, 2001.
<Table>
<Caption>
Brand Hotels Rooms % of Total Rooms % of 2001 EBITDA
- ---------------------- ------ ------ ---------------- ----------------
Embassy Suites(R) 59 14,842 31% 44%
Holiday Inn(R)-branded 59 16,914 35 26
Crowne Plaza(R) 18 5,963 12 10
Sheraton(R)-branded 10 3,269 7 8
Doubletree(R)-branded 12 2,467 5 5
Other 24 4,848 10 7
</Table>
<Table>
<Caption>
Top 10 MSAs Hotels Rooms % of Total Rooms % of 2001 EBITDA
- ---------------------- ------ ------ ---------------- ----------------
Dallas 18 5,479 11% 7%
Atlanta 12 3,514 7 8
San Francisco 6 2,440 5 6
Houston 9 2,262 5 4
Orlando 6 2,220 5 4
New Orleans 3 917 2 4
Phoenix 5 1,245 3 3
Philadelphia 3 1,174 3 3
San Jose 2 572 1 3
Chicago 4 1,239 3 3
</Table>
<Table>
<Caption>
Top Four States Hotels Rooms % of Total Rooms % of 2001 EBITDA
- ---------------------- ------ ------ ---------------- ----------------
Texas 41 11,138 23% 17%
California 19 6,026 12 18
Florida 17 5,529 11 12
Georgia 14 3,868 8 9
</Table>
<Table>
<Caption>
Location Hotels Rooms % of Total Rooms % of 2001 EBITDA
- ---------------------- ------ ------ ---------------- ----------------
Suburban 80 20,394 42% 41%
Urban 43 13,138 27 30
Airport 32 9,488 20 21
Highway 20 3,537 7 3
Resort 7 1,746 4 5
</Table>
<Table>
<Caption>
Segment Hotels Rooms % of Total Rooms % of 2001 EBITDA
- ---------------------- ------ ------ ---------------- ----------------
Upscale all-suite 76 18,149 38% 51%
Upscale 27 9,286 19 18
Full-service 61 18,236 38 29
Limited-service 18 2,633 5 2
</Table>
22
Hotel Operating Statistics
The following tables set forth historical occupied rooms ("Occupancy"),
ADR and RevPAR at June 30, 2002, and 2001, and the percentage changes therein
between the periods presented for the hotels in which the Company had an
ownership interest at June 30, 2002:
OPERATING STATISTICS BY BRAND
(FOR THE THREE AND SIX MONTHS ENDED JUNE 30)
<Table>
<Caption>
OCCUPANCY (%)
-------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------
% %
2002 2001 VARIANCE 2002 2001 VARIANCE
---- ---- -------- ---- ---- --------
Embassy Suites hotels 70.1 70.9 (1.2) 68.3 71.2 (4.1)
Holiday Inn-branded hotels 65.7 71.2 (7.8) 62.2 69.1 (10.0)
Crowne Plaza hotels 63.2 65.9 (4.2) 60.0 65.3 (8.1)
Doubletree-branded hotels 70.6 72.3 (2.4) 65.8 72.2 (8.8)
Sheraton-branded hotels 61.5 69.2 (11.1) 59.0 68.8 (14.3)
Other hotels 55.6 61.7 (10.0) 55.6 63.6 (12.6)
Total hotels 65.7 69.4 (5.4) 63.1 68.9 (8.3)
</Table>
<Table>
<Caption>
ADR ($)
-------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------
% %
2002 2001 VARIANCE 2002 2001 VARIANCE
---- ---- -------- ---- ---- --------
Embassy Suites hotels 119.52 130.83 (8.6) 122.12 134.36 (9.1)
Holiday Inn-branded hotels 82.22 86.00 (4.4) 81.56 85.69 (4.8)
Crowne Plaza hotels 97.92 106.98 (8.5) 96.09 106.41 (9.7)
Doubletree-branded hotels 102.63 107.00 (4.1) 104.31 111.10 (6.1)
Sheraton-branded hotels 103.61 111.32 (6.9) 104.22 114.74 (9.2)
Other hotels 76.82 77.83 (1.3) 80.28 81.88 (2.0)
Total hotels 98.33 104.64 (6.0) 99.28 106.57 (6.8)
</Table>
<Table>
<Caption>
REVPAR ($)
-------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------
% %
2002 2001 VARIANCE 2002 2001 VARIANCE
---- ---- -------- ---- ---- --------
Embassy Suites hotels 83.73 92.77 (9.7) 83.40 95.66 (12.8)
Holiday Inn-branded hotels 54.00 61.24 (11.8) 50.77 59.23 (14.3)
Crowne Plaza hotels 61.87 70.54 (12.3) 57.66 69.50 (17.0)
Doubletree-branded hotels 72.41 77.34 (6.4) 68.63 80.20 (14.4)
Sheraton-branded hotels 63.75 77.02 (17.2) 61.49 78.97 (22.1)
Other hotels 42.68 48.04 (11.2) 44.64 52.08 (14.3)
Total hotels 64.57 72.65 (11.1) 62.67 73.39 (14.6)
</Table>
23
OPERATING STATISTICS FOR OUR TOP 10 MSAS
(FOR THE THREE AND SIX MONTHS ENDED JUNE 30)
<Table>
<Caption>
OCCUPANCY (%)
------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ---------------------------------
% %
2002 2001 VARIANCE 2002 2001 VARIANCE
---- ---- -------- ---- ---- --------
Dallas 50.9 58.2 (12.6) 51.2 62.7 (18.3)
Atlanta 67.4 71.9 (6.3) 68.2 73.3 (7.0)
San Francisco 70.5 77.1 (8.6) 64.2 74.9 (14.3)
Houston 66.1 77.5 (14.7) 67.6 76.8 (11.9)
Orlando 71.1 76.7 (7.2) 70.3 76.1 (7.6)
New Orleans 73.4 76.1 (3.5) 73.5 77.3 (4.9)
Phoenix 62.5 63.4 (1.5) 66.0 70.1 (5.8)
Philadelphia 71.8 71.5 0.4 62.8 64.3 (2.3)
San Jose 64.8 69.8 (7.2) 63.7 74.2 (14.1)
Chicago 69.7 71.1 (1.9) 61.5 67.6 (9.1)
</Table>
<Table>
<Caption>
ADR ($)
------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ---------------------------------
% %
2002 2001 VARIANCE 2002 2001 VARIANCE
---- ---- -------- ---- ---- --------
Dallas 86.93 88.08 (1.3) 89.31 91.86 (2.8)
Atlanta 90.02 97.83 (8.0) 84.25 100.21 (15.9)
San Francisco 123.09 154.78 (20.5) 120.46 153.65 (21.6)
Houston 75.43 79.05 (4.6) 75.40 78.70 (4.2)
Orlando 79.08 86.76 (8.9) 84.25 93.17 (9.6)
New Orleans 132.22 142.25 (7.1) 148.52 153.45 (3.2)
Phoenix 99.22 103.46 (4.1) 115.09 127.11 (9.5)
Philadelphia 127.84 126.61 1.0 120.47 119.86 0.5
San Jose 125.78 158.61 (20.7) 128.68 166.03 (22.5)
Chicago 125.85 141.17 (10.9) 120.06 136.08 (11.8)
</Table>
<Table>
<Caption>
REVPAR ($)
------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ---------------------------------
% %
2002 2001 VARIANCE 2002 2001 VARIANCE
---- ---- -------- ---- ---- --------
Dallas 44.20 51.25 (13.7) 45.76 57.57 (20.5)
Atlanta 60.67 70.37 (13.8) 63.00 73.43 (14.2)
San Francisco 86.76 119.41 (27.3) 77.30 115.12 (32.9)
Houston 49.86 61.24 (18.6) 51.00 60.45 (15.6)
Orlando 56.25 66.53 (15.5) 59.26 70.91 (16.4)
New Orleans 97.05 108.20 (10.3) 109.21 118.61 (7.9)
Phoenix 61.98 65.62 (5.5) 75.98 89.06 (14.7)
Philadelphia 91.73 90.51 1.4 75.71 77.08 (1.8)
San Jose 81.56 110.78 (26.4) 81.99 123.16 (33.4)
Chicago 87.76 100.39 (12.6) 73.83 92.02 (19.8)
</Table>
24
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to stockholders and repayments of indebtedness, is from the
results of operations of our hotels. For the six months ended June 30, 2002, net
cash flow provided by operating activities, consisting primarily of hotel
operations, was $69.7 million and FFO was $75.1 million. We currently expect
that our operating cash flow will be sufficient to fund our continuing
operations, including our required capital expenditures, debt service
obligations and distributions to shareholders required to maintain our REIT
status. However, due to the sharp reduction in travel following the terrorist
attacks of September 11, 2001, and the resultant drop in RevPAR and profits from
our hotel operations, we plan to continue to limit distributions to holders of
our common stock as may be necessary. Accordingly, distributions to holders of
capital stock may be significantly reduced or possibly eliminated in future
periods.
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 continued economic slowdown and the drop in occupancy
and ADR following the terrorist attacks of September 11, 2001, resulted both in
declines in RevPAR and an erosion in operating margins during the year ended
December 31, 2001, compared to 2000, that have continued through the second
quarter of 2002 compared to the same period in 2001. 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.
As a result of the current RevPAR environment, we amended our unsecured
line of credit on June 17, 2002. The amendment allows for the relaxation of
certain financial covenants through the maturity date, with a step-up in
financial certain covenants. 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 were $615 million at June 30, 2002. No amount was outstanding
under the facility at June 30, 2002.
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. At June 30 2002, we were in compliance with all of the line of
credit covenants.
Our publicly traded senior term notes require us to satisfy an interest
coverage test in order to incur additional indebtedness, except under our line
of credit; to pay dividends in excess of the minimum dividend required to meet
our REIT qualification test; or to repurchase stock. As of the date of this
filing, we have satisfied this minimum interest coverage requirement.
25
Unless our business continues to gradually improve, we may be unable to
satisfy all of the covenant requirements. In such an event, we may need to
obtain further amendments from our lenders under the line of credit in order to
borrow under the facility. We are not certain whether, to what extent, or upon
what terms the lenders may be willing to further amend the covenants. Further
amendments to our line of credit, if any, may result in additional restrictions
on us and may adversely affect our ability to run our business and financial
affairs.
Failure to satisfy one or more 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 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 the satisfaction of certain conditions.
Most of the mortgage debt is prepayable; subject, however, to various prepayment
penalties, yield maintenance, or defeasance obligations.
For the third quarter of 2002, we currently anticipate our portfolio
RevPAR will be 1% to 5% above the comparable period of the prior year. FFO is
expected to be within the range of $33 million to $40 million, and EBITDA is
expected to be within the range of $81 million to $88 million for the same
period.
We estimate our full year 2002 hotel portfolio RevPAR will be between
3.5% and 5.5% below 2001. Our FFO for the full year 2002 is currently
anticipated to be within the range of $133 million to $150 million and EBITDA to
be within the range of $81 to $88 million. We currently anticipate 2002 capital
expenditures will be from $55 to $65 million. For the six months ended June 30,
2002, capital expenditures totaled $20 million.
In the event that RevPAR declines, compared to the prior year, are
greater than anticipated in the preparation of this guidance, or operating
margins are lower than anticipated, we may not meet our forecast for the
remainder of the year. RevPAR results for July 2002 were 7% below the same
period in 2001.
Our decision to pay quarterly dividends will be determined each quarter
based upon the operating results of that quarter, economic conditions, and other
factors. For both the three months ended March 31, 2002, and the three months
ended June 30, 2002, we paid a dividend of $0.15 per share on our Common Stock,
$0.4875 per share on our $1.95 Series A Cumulative Convertible Preferred Stock
and $0.5625 per depositary share evidencing our 9% Series B Cumulative
Redeemable Preferred Stock.
On June 30, 2002, we did not have any amount outstanding on our line of
credit. We also maintain flexibility in working with our lenders, as a result of
our $152 million of cash and cash equivalents on hand, $2.4 billion of
unencumbered assets, and a breakeven portfolio hotel occupancy, after debt
service and preferred equity distributions, of approximately 50%. The $615
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, 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.
26
At June 30, 2002, we had $152 million of cash and cash equivalents.
Certain significant credit and debt statistics at June 30, 2002, are as follows:
o Interest coverage ratio of 1.9x for the six month period ended June
30, 2002
o Borrowing capacity of $615 million under our line of credit
o Consolidated debt equal to 38.3% of our investment in hotels, at cost
o Fixed interest rate debt equal to 91% of our total debt
o Weighted average maturity of debt of approximately 6.5 years and a
weighted average interest cost of 8.3%
o Mortgage debt to total assets of 17%
o Scheduled debt repayments of $6 million during the remainder of 2002
o Scheduled debt repayments of $35 million in 2003
o Scheduled debt repayments of $189 million in 2004
We spent approximately $19.8 million on upgrading and renovating our
consolidated hotels and approximately $5.6 million on upgrading and renovating
the hotels owned by our unconsolidated entities during the six months ended June
30, 2002. 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 capital expenditures of
between $55 and $65 million, depending upon the pace of the anticipated economic
recovery.
Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2002 approximately 91% 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 June 30, 2002, the
table presents scheduled maturities and weighted average interest rates, by
maturity dates. For interest rate swaps, the table presents the notional amount
and weighted average interest rate, by contractual maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve as
of June 30, 2002. 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 June 30, 2002, at then current market interest rates.
EXPECTED MATURITY DATE
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE
LIABILITIES
Debt:
Fixed rate $ 6,289 $ 34,904 $ 189,228 $ 42,636 $ 14,216 $ 1,601,946 $ 1,889,219 $ 1,713,780
Average interest rate 7.88% 7.43% 7.42% 7.48% 8.04% 8.66% 8.48%
Floating rate $ 650 $ 650 650
Average interest rate (a) 7.74% 7.74%
Discount accretion $ (7,194)
Total debt 6,289 34,904 189,228 42,636 14,216 1,602,596 $ 1,882,675
Average interest rate 7.88% 7.43% 7.42% 7.48% 8.04% 8.66% 8.48%
Interest rate swaps:
Fixed to floating 175,000 $ 175,000 $ 1,472
Average pay rate 5.04% 5.59%
Average receive rate 7.38% 7.38%
</Table>
(a) The average floating rate of interest represents the projected
forward rate at June 30, 2002.
27
Swap agreements, 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 equity holders.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Quarterly Report on Form 10-Q include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's current
expectations are disclosed herein and in the Company's other filings under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, (collectively, "Cautionary Disclosures"). The forward looking
statements included herein, and all subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf, are
expressly qualified in their entirety by the Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to FelCor
is incorporated herein by reference to the discussion under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" contained elsewhere in this
Quarterly Report on Form 10-Q for the six months ended June 30, 2002.
28
PART II. -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
FelCor held its 2002 Annual Meeting of Stockholders on May 14, 2002
(the "Annual Meeting"). At the Annual Meeting, the stockholders of FelCor
elected Thomas J. Corcoran, Jr., Donald J. McNamara, and Richard C. North to
serve as Class II Directors, until the Annual Meeting of Stockholders to be held
in 2005 and elected Robert A. Mathewson to serve as a Class III director until
the Annual Meeting of Stockholders to be held in 2003.
The total number of shares entitled to vote at the 2002 Annual Meeting
was 53,154,141 shares of Common Stock. A total of 42,818,412 shares of Common
Stock were represented in person or by proxy at the Annual Meeting. The
following table sets forth, with respect to each of the directors elected, the
number of votes cast for, and the number of votes withheld, with respect to his
election:
<Table>
<Caption>
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
Thomas J. Corcoran, Jr. 45,660,216 381,451
Donald J. McNamara 45,662,016 379,651
Richard C. North 42,473,958 3,567,709
Robert A. Mathewson 45,790,360 251,307
</Table>
In addition, at the 2002 Annual Meeting, the stockholders of FelCor
ratified and adopted the Company's 2001 Restricted Stock and Stock Option Plan
("the Plan"). There were 42,444,595 votes cast for the Plan, 3,342,383 votes
cast against, and 254,689 shares abstained from voting. There were no broker
non-votes.
ITEM 5. OTHER INFORMATION.
For information relating to certain other transactions by the Company
through June 30, 2002, see Note 1 of Notes to Consolidated Financial Statements
of FelCor Lodging Trust Incorporated contained in Item 1 of Part I of this
Quarterly Report on Form 10-Q. Such information is incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: None
(b) Reports on Form 8-K:
A current report on Form 8-K dated June 17, 2002 was filed by the
Company on July 1, 2002. This filing, under Item 5, disclosed the execution of
the Company's Second Amendment to the Seventh Amended and Restated Credit
Agreement on June 17, 2002. The amendment was filed as an exhibit to the 8-K.
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2002
FELCOR LODGING TRUST INCORPORATED
By: Richard J. O'Brien
-----------------------------
Richard J. O'Brien
Executive Vice President and
Chief Financial Officer
By: Lester C. Johnson
-----------------------------
Lester C. Johnson
Senior Vice President and
Chief Accounting Officer
30