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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
MARYLAND 75-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 E. JOHN CARPENTER FRWY., SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<Table>
<Caption>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON STOCK NEW YORK STOCK EXCHANGE, INC.
$1.95 SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
DEPOSITARY SHARES REPRESENTING 9% SERIES B CUMULATIVE
REDEEMABLE PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
</Table>
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant, as of June 28, 2002, was approximately $867.4
million.
As of March 17, 2003, the registrant had issued and outstanding 58,849,159
shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement pertaining to the 2003 Annual
Meeting of Stockholders (the "Proxy Statement"), filed or to be filed not later
than 120 days after the end of the fiscal year pursuant to Regulation 14A, is
incorporated herein by reference into Part III.
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FELCOR LODGING TRUST INCORPORATED
INDEX
<Table>
<Caption>
FORM 10-K
REPORT
ITEM NO. PAGE
- -------- ----
PART I
1. Business............................................................................................1
2. Properties.........................................................................................16
3. Legal Proceedings..................................................................................27
4. Submission of Matters to a Vote of Security Holders................................................27
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters..............................28
6. Selected Financial Data............................................................................31
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............32
7A. Quantitative and Qualitative Disclosures About Market Risk.........................................51
8. Financial Statements and Supplementary Data........................................................51
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...............51
PART III
10. Directors and Executive Officers of the Registrant.................................................52
11. Executive Compensation.............................................................................52
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters........................................................................52
13. Certain Relationships and Related Transactions.....................................................52
14. Controls and Procedures............................................................................52
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................53
</Table>
This Annual Report on Form 10-K contains registered trademarks owned or
licensed by companies other than us, including but not limited to Bristol
House(R), Conrad(R), Courtyard by Marriott(R), Crowne Plaza(R), Crown Plaza
Suites(R), Disney(R), Doubletree(R), Doubletree Guest Suites(R), Embassy Suites
Hotels(R), Fairfield Inn(R), Hampton Inn(R), Harvey Hotel(R), Harvey Suites(R),
Hilton(R), Hilton Suites(R), Holiday Inn(R), Holiday Inn & Suites(R), Holiday
Inn Express(R), Holiday Inn Express & Suites(R), Holiday Inn Select(R), Homewood
Suites(R) by Hilton, Inter-Continental(R), Sheraton(R), Sheraton Suites(R),
Staybridge Suites(R), Walt Disney World(R), Westin(R) and Wyndham(R).
PART I
ITEM 1. BUSINESS
FelCor Lodging Trust Incorporated, or FelCor, a Maryland corporation,
is the nation's second largest hotel real estate investment trust, or REIT. As
the sole general partner of, and the owner of a greater than 95% partnership
interest in, FelCor Lodging Limited Partnership, or FelCor LP, we had ownership
interests in the real estate of 183 hotels at December 31, 2002, with nearly
50,000 rooms and suites. All of our operations are conducted solely through
FelCor LP and its subsidiaries. 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.
We seek to increase operating cash flow through aggressive asset
management and the competitive positioning of our hotels, to maintain a sound
and flexible capital structure, and to reposition our portfolio through the sale
of non-strategic hotels and reinvestment in newer, higher quality hotels in
major urban and resort markets with greater growth potential. The hotels in
which we will reinvest sale proceeds are expected to be ones that are affiliated
with, or will benefit from affiliation with, one of the premium brands available
to us through our strategic brand owner and manager relationships with Hilton
Hotels Corporation, or Hilton, Six Continents Hotels and Starwood Hotels &
Resorts Worldwide Inc., or Starwood.
At December 31, 2002, we had an aggregate of 62,056,414 shares of
FelCor common stock, and units of FelCor LP limited partner interest
outstanding.
BACKGROUND
As a result of the passage of the REIT Modernization Act, effective
January 1, 2001, we are allowed to own the lessees of our hotels through taxable
REIT subsidiaries, or TRSs. In 2001, we acquired our hotel leases from DJONT
Operations L.L.C., or DJONT, and Six Continents Hotels.
Upon acquisition of our hotel leases, we began recording hotel revenues
and expenses, rather than just rental revenue, and became exposed to all of the
risks and rewards of hotel operations. Under the leases, the rent payable to us
would vary only as a result of changes in hotel revenues. By acquiring the
leases, our cash flow and net income also vary as a result of changes in the
operating margins of the hotels. Through the ownership of our operating lessees,
we now consolidate the operating revenues and expenses of 169 of our hotels. We
have 50% unconsolidated interests in the operating revenues and expenses of the
remaining 14 hotels, which are accounted for using the equity method.
Our business is conducted in one reportable segment, which is
hospitality. We derived 97% of our revenues from hotels located within the
United States and the balance from our Canadian hotels.
Additional information on our business can be found on our website at
www.felcor.com and in the Notes to Consolidated Financial Statements located
elsewhere in this Annual Report on Form 10-K. Our annual, quarterly and current
reports filed with the SEC under the Securities Act of 1934, as amended, are
made available on our website, free of charge, under the "SEC Filings" tab on
our "Investor Relations" page, as soon as practicable following their filing.
DEVELOPMENTS DURING 2002
During 2002, we sold various non-strategic assets, realizing net cash
proceeds of approximately $29 million. These assets included the retail space at
our Allerton Crowne Plaza hotel in Chicago, Illinois, the 183-room Doubletree
Guest Suites hotel in Boca Raton, Florida, and the Holiday Inn hotel in Colby,
Kansas. In addition, we sold four Holiday Inn-branded hotels and a Hampton Inn
hotel to a new joint venture, in which we retain a 50% equity interest.
1
In July 2002, we acquired the 208-suite SouthPark Suite Hotel in
Charlotte, North Carolina for $14.5 million, and the 385-room Wyndham Myrtle
Beach Resort, and a leasehold interest in the associated Arcadian Shores Golf
Club, in Myrtle Beach, South Carolina, for $35.3 million. We have converted the
SouthPark Suite Hotel to a Doubletree Guest Suites hotel managed by Hilton. The
Wyndham Myrtle Beach Resort is currently under renovation, and we expect to
convert it to a Hilton hotel in April of 2003.
In April 2002, we issued approximately $25 million of our Series B
preferred stock. We utilized the proceeds for working capital and discretionary
capital expenditures.
In 2002, we entered into two amendments to our unsecured line of
credit. In June 2002, we amended our line of credit to relax certain covenant
levels to provide us with greater financial flexibility. In December 2002, we
further amended our line of credit, to relax covenant levels, and to reduce the
line to $300 million from $615 million. The pricing and maturity of our line
remained unchanged but with added pricing tiers to reflect the higher permitted
leverage.
Through a 50/50 joint venture agreement with Hilton, we started the
development of a 251-unit luxury oceanfront residential condominium project in
Myrtle Beach, South Carolina. We expect this project to be completed in 2004.
For 2002, we paid common dividends of $0.60 per share, preferred
dividends of $1.95 per share on our Series A preferred stock and preferred
dividends of $2.25 per depository share on our Series B preferred stock.
RECENT DEVELOPMENTS
In February 2003, we announced our plan to sell 33 non-strategic hotels
over the next 36 months, six of which had been previously designated as held for
sale. These non-strategic hotels include smaller hotels in secondary or tertiary
markets and include some Texas hotels, and specifically, hotels in Dallas, Texas
(an area in which we desire to reduce our concentration of hotels). It is our
intention to reinvest most of the proceeds from these sales in newer, larger and
higher quality hotels, primarily in urban and resort locations with higher
growth rates and barriers to competition. For those hotels currently managed by
Six Continents Hotels, we are liable for liquidated damages under the terms of
our management agreement, unless we reinvest the net proceeds to purchase one or
more hotels licensed and managed by Six Continents Hotels within one year of the
sale. We recorded $157.5 million in impairment losses in 2002, principally
related to the shorter holding periods associated with our decision to sell
these non-strategic hotels.
The 33 hotels identified as non-strategic represented 14% of our hotel
rooms, but less than 7% of our 2002 consolidated hotel EBITDA. (For a discussion
of the computation of EBITDA, see the Funds from Operations and EBITDA section
in Part II of this Annual Report on Form 10-K, under Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.) These
non-strategic hotels have an average of 196 rooms, while the average number of
rooms for the remainder of our portfolio is 294.
THE INDUSTRY
The continued stagnation of the U.S. and global economies, the negative
wealth effect from the sharp decline in stock values, the erosion of consumer
confidence, the difficulties associated with air travel and the prospect of war
in Iraq, combined to adversely affect lodging demand. The unprecedented decline
in lodging demand is evidenced by the decline in industry revenue per available
room, or RevPAR, for 2001 and 2002, the first two-year consecutive decline since
industry RevPAR has been tracked. After 18 months of consecutive industry RevPAR
declines, the industry recorded increased RevPAR for the last four months of
2002. The RevPAR increases for the last four months of 2002 were driven by
occupancy increases over the same period in the prior year. In addition to weak
demand, ADR has declined because of competitive pressures and discounting of
room rates through the Internet.
2
Business travel is a key profit driver in the lodging industry. In a
UBS Warburg survey conducted in October 2002, corporate travel managers reported
that they anticipate 2003 hotel spending and negotiated rates will be slightly
lower than in 2002 and approximately 80% of their spending is projected to be in
downtown/urban markets. These corporate travel managers indicated that they plan
to direct less business to luxury hotels, and more to midscale and upscale
hotels.
One of the most positive fundamentals for the lodging industry is that
supply growth has been sharply curtailed. According to PricewaterhouseCoopers'
Hospitality Directions - U.S. Edition December 2002 Forecast Update, room supply
rose only 1.9% and 1.8% in 2001 and 2002, respectively, and is projected to
increase only 1.1% in each of 2003 and 2004. This level of growth is the lowest
since 1993, and is well below the historical 15-year average of 2.7% per annum.
We do not anticipate a significant recovery in lodging industry RevPAR
during 2003. Although most economists are forecasting GDP growth in 2003, growth
in lodging demand has historically "lagged" the general economy by six to 12
months. Increasing business travel is typically foreshadowed by growth in both
corporate profits and employment. Companies tend to wait for growth in profits
prior to hiring, and hire prior to releasing funds for travel. The recovery to
date has been termed the "jobless recovery". As such, we do not anticipate that
corporations will increase their travel budgets until there is more clarity with
regard to the economy and corporate profits. Additionally, lodging demand will
be adversely affected during 2003 by the continued fear of an event of
terrorism, the commencement of war with Iraq and the increased inconvenience
encountered during air travel due to heightened security.
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 own
properties in the Upper Upscale (including Doubletree Guest Suites, Doubletree,
Embassy Suites Hotels, Sheraton and Westin hotels), Upscale (including Crowne
Plaza and Homewood Suites), and Midscale With Food & Beverage (including Holiday
Inn and Holiday Inn Select hotels) categories, from which we derived
approximately 98% of our EBITDA in 2002. More than 50% of our EBITDA in 2002 was
derived from upper upscale all-suite hotels.
Smith Travel Research also categorizes hotels based upon their relative
market positions, as measured by average daily rate, or ADR, as Luxury, Upscale,
Midprice, Economy and Budget. The following table contains information with
respect to average occupancy (determined by dividing occupied rooms by available
rooms), ADR and RevPAR for our hotels, as well as all Upscale U.S. hotels, all
Midprice U.S. hotels and all U.S. hotels, as reported by Smith Travel Research,
for the periods indicated.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
NUMBER OF FELCOR HOTELS ............. 183 183 186 188 193
OCCUPANCY:
FelCor hotels (1) ................. 62.1% 63.9% 70.4% 68.2% 68.3%
All Upscale U.S. hotels (2) ....... 61.7 61.8 65.1 64.9 65.9
All Midscale U.S. hotels (3) ...... 57.2 58.4 61.7 61.1 62.0
All U.S. hotels ................... 59.2 60.1 63.7 63.1 63.8
ADR:
FelCor hotels (1) ................. $ 96.84 $ 102.18 $ 104.42 $ 100.72 $ 96.62
All Upscale U.S. hotels (2) ....... 91.05 92.84 94.07 87.45 85.33
All Midscale U.S. hotels (3) ...... 68.40 69.60 69.22 64.89 62.15
All U.S. hotels ................... 83.15 84.85 86.04 81.29 78.15
REVPAR:
FelCor hotels (1) ................. $ 60.16 $ 65.34 $ 73.73 $ 68.93 $ 66.02
All Upscale U.S. hotels (2) ....... 56.22 57.38 69.24 56.76 56.23
All Midscale U.S. hotels (3) ...... 39.13 40.65 42.71 39.65 38.53
All U.S. hotels ................... 49.24 50.99 54.81 51.29 49.86
</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 "midscale level," defined as hotels
with ADRs in the 40th to 70th percentiles in their respective markets.
3
BUSINESS STRATEGY
In the current operating environment, in which the lodging industry has
experienced declines in RevPAR for two consecutive years, we intend to continue
focusing on preserving capital, maximizing operating cash flow by actively
overseeing the operation of our hotels by our managers, maintaining financial
flexibility 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 current challenging economic environment, we have committed
ourselves to conserving capital, maximizing operating cash flow from our hotels
and maintaining financial flexibility to take advantage of opportunities that
may arise in the future. We expect our board of directors to suspend our common
dividends until our hotels experience an increase in RevPAR of 2% to 4%;
decisions on future distributions on common and preferred stock will be made
based on hotel operating results and minimum distributions required to maintain
REIT status. We intend to limit distributions generally to not more than
available cash flow, after debt service and maintenance capital expenditures,
and to restrict discretionary capital expenditures. We have scheduled debt
maturities of $35 million in 2003 and $189 million in 2004. In February 2003, we
announced our decision to dispose of 33 non-strategic hotels over the next 36
months. These non-strategic hotels include smaller hotels in secondary or
tertiary markets and certain hotels in Texas, and specifically in Dallas, areas
where we want to reduce our concentration of hotels. We will seek to sell $50 to
$75 million of these non-strategic hotels that are unencumbered by debt and
management agreement reinvestment requirements during 2003, and to use the
proceeds from these sales to pay down debt.
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.
o Hilton has a hotel system of approximately 2,000 hotels with
more than 330,000 guest rooms worldwide, and is the largest
operator of full-service, all-suite hotels in the United
States. Hilton owns Hilton Hotels, Conrad, Embassy Suites
Hotels, Doubletree and Doubletree Guest Suites brands among
others. Subsidiaries of Hilton managed 73 of our hotels at
December 31, 2002. Hilton is a 50% partner in joint ventures
with us in the ownership of 12 hotels and the development of a
residential luxury condominium, and is the holder of a 10%
equity interest in certain of our consolidated subsidiaries
owning six hotels.
o Six Continents Hotels is the world's largest hotel company.
Six Continents Hotels owns, operates or franchises more than
3,300 hotels with approximately 515,000 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 managed 82 of our hotels
at December 31, 2002, and also own approximately 17% of our
outstanding common stock. On October 1, 2002, Six Continents
plc announced a proposal to separate its hotel and soft drink
businesses from its retail business, with the new hotel to be
called InterContinental Hotels Group plc. This separation is
currently expected to be effective on or about April 15, 2003.
o Starwood is one of the world's largest hotel operating
companies. Directly and through subsidiaries, Starwood owns,
leases, manages or franchises more than 740 properties with
approximately 224,000 rooms in more than 80 countries.
Subsidiaries of Starwood managed 11 of our hotels at December
31, 2002. Starwood is a 40% joint venture partner with us in
the ownership of two hotels and a 50% joint venture partner
with us in the ownership of one hotel.
4
Hotel Renovation, Redevelopment and Rebranding
We expect to continue to differentiate ourselves from many of our
competitors by:
o our success in upgrading, renovating and/or redeveloping our
hotels to enhance their competitive position, and, in certain
instances, rebranding them to improve their revenue generating
capacity; and
o our ongoing program for the maintenance of our upgraded hotel
assets, which generally includes:
-- contribution of approximately 4% of total annual room
and suite revenue to a capital reserve for routine
capital replacements and improvements; and
-- adherence to a rigorous maintenance and repair
program, resulting in the additional expenditure of
approximately 4 to 5% of annual hotel revenues on
maintenance of the hotels.
We have demonstrated our ability to successfully execute renovations.
During 2002, we substantially completed a $13 million renovation on our San
Diego, California Holiday Inn, we upgraded and converted the recently acquired
SouthPark Suite Hotel in Charlotte, North Carolina to a Doubletree Guest Suites
hotel and started a $10 million renovation project at the Wyndham Myrtle Beach
Resort Hotel, which will allow us to convert this hotel to a Hilton hotel in
April 2003. We believe that our historical capital expenditures should limit the
need for future major renovation expenditures. During 2002, we made capital
expenditures aggregating approximately $63 million and we currently anticipate
2003 capital expenditures of between $60 and $70 million.
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 service and limited service hotels in its immediate
vicinity and secondarily with other hotel properties in its geographic market.
We believe that brand recognition, location, the quality of the hotel and
services provided, and price are the principal competitive factors affecting our
hotels.
ENVIRONMENTAL MATTERS
We customarily obtain a Phase I environmental survey from an
independent environmental consultant before acquiring a hotel. The principal
purpose of a Phase I survey is to identify indications of potential
environmental contamination for which a property owner may have liability and,
secondarily, to assess, to a limited extent, the potential for environmental
regulatory compliance liabilities. The Phase I surveys of our hotels were
designed to meet the requirements of the then current industry standards
governing Phase I surveys, and consistent with those requirements, none of the
surveys involved testing of groundwater, soil or air. Accordingly, they do not
represent evaluations of conditions at the studied sites that would be revealed
only through such testing. In addition, their assessment of environmental
regulatory compliance issues was general in scope and was not a detailed
determination of the hotel's complete environmental compliance status.
Similarly, the surveys did not involve comprehensive analysis of potential
offsite liability. The Phase I survey reports did not reveal any environmental
liability that we believe would have a material adverse effect on our business,
assets or results of operations, nor are we aware of any such liability.
Nevertheless, it is possible that these reports do not reveal or accurately
assess all environmental liabilities and that there are material environmental
liabilities of which we are unaware.
We believe that our hotels are in compliance, in all material respects,
with all federal, state, local and foreign laws and regulations regarding
hazardous substances and other environmental matters, the violation of which
would have a material adverse effect on us. We have not been notified by any
governmental authority or private party of any material noncompliance, liability
or claim relating to hazardous or toxic substances or
5
other environmental matters in connection with any of our current or former
properties. However, obligations for compliance with environmental laws that
arise or are discovered in the future may adversely affect our financial
condition.
TAX STATUS
We elected to be taxed as a REIT under the federal income tax laws,
commencing with our initial taxable year ended December 31, 1994. As a REIT, we
generally are not subject to federal income taxation at the corporate level on
our taxable income that is distributed to our stockholders. We may, however, be
subject to certain state and local taxes on our income and property. A REIT is
subject to a number of organizational and operational requirements, including a
requirement that it currently distribute annually at least 90% of its taxable
income. In connection with our election to be taxed as a REIT, our charter
imposes restrictions on the ownership and transfer of shares of our common
stock. FelCor LP expects to make distributions on its units sufficient to enable
us to meet our distribution obligations as a REIT. As a result of the passage of
the REIT Modernization Act, in 2001 we acquired or terminated all of our hotel
leases and contributed them to TRSs. These TRSs are subject to both federal and
state income taxes.
EMPLOYEES
Mr. Thomas J. Corcoran, Jr., our President and Chief Executive Officer,
entered into an employment agreement with us in 1994 that continues in effect
until December 31, 2003, and automatically renews for successive one-year terms
unless terminated by either party. Our other executive officers have change in
control contracts that renew annually. We had 65 full-time employees at December
31, 2002.
All persons employed in the day-to-day operation of our hotels are
employees of the management companies engaged by us, and are not our employees.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements and analyses contained in this Annual Report on Form
10-K, in our 2002 Annual Report to Shareholders, or that may in the future be
made by, or be attributable to, us, may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology. All of such
forward-looking statements are based upon present expectations and assumptions
that may or may not actually occur. The following factors constitute cautionary
statements identifying important factors, including material risks and
uncertainties, with respect to such forward-looking statements that could cause
actual results to differ materially from those reflected in such forward-looking
statements or in our historical results. Each of the following factors, among
others, could adversely affect our ability to meet the current expectations of
management.
TERRORIST ACTIVITIES AND THE POTENTIAL OF A MILITARY CONFLICT IN IRAQ 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 experienced substantial declines in
occupancy and ADR due to a decline in both business and leisure travel. In 2002,
the economic slowdown, the increasing likelihood of war with Iraq and continued
threats of terrorism continued to restrict travel and lodging demand. The
commencement of war in Iraq, and the actual or threatened bankruptcy of several
major airlines could result in further decreases in travel. We are unable to
predict with certainty when or if travel and lodging demand will be fully
restored to historically normal levels. Military actions against terrorists, new
terrorist attacks (actual or threatened), the military conflict in Iraq, and
other political or economic 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.
6
OUR FINANCIAL LEVERAGE IS HIGH DUE TO DEPRESSED OPERATING CASH FLOWS
At December 31, 2002, our consolidated debt of $1.9 billion equaled 65%
of our total market capitalization and 41% of our investment in hotel assets, at
cost. Our consolidated debt to EBITDA ratio for the year ended December 31,
2002, was 6.1 times. The decline in our revenues and cash flow from operations
during 2001 and 2002, have adversely affected our public debt ratings and may
limit our access to additional debt capital. Historically, we have incurred debt
for acquisitions and to fund our renovation, redevelopment and rebranding
program and a share repurchase program.
At December 31, 2002, we had:
o approximately $1.9 billion in consolidated debt, of which
approximately $683 million was secured by mortgages or capital
leases; and
o a ratio of EBITDA to cash interest paid, including interest
expense from unconsolidated entities, for the year then ended
of 1.9x.
The current economic slowdown, which began in early 2001 and which was
exacerbated by the terrorist attacks of September 11, 2001, has resulted in
declines in RevPAR during both 2001 and 2002, compared to the prior years. If
the economic slowdown and the reduced RevPAR experienced in 2001 and 2002
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.
As a consequence of the economic slowdown in our business, and in the
travel and lodging industries generally, Standard & Poor's lowered its ratings
on our $1.2 billion in senior unsecured debt from BB- to B+, in February 2003.
Although Moody's affirmed its current rating on our senior unsecured debt in
February 2003 (Ba3), we remain on negative outlook. Should Moody's downgrade its
ratings to B1, the interest rate on $900 million of our $1.2 billion senior
unsecured debt would increase by 50 basis points, which would increase our
interest expense by approximately $4.5 million on an annual basis.
Our leverage could have important consequences. For example, it could:
o limit our ability to obtain additional financing for working
capital, renovation, redevelopment and rebranding plans,
acquisitions, debt service requirements and other purposes;
o require us to agree to additional restrictions and limitations
on our business operations and capital structure to obtain
additional or continued financing;
o increase our vulnerability to adverse economic and industry
conditions, as well as to fluctuations in interest rates;
o require us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, thereby reducing
funds available for operations, future business opportunities,
payment of dividends or other purposes;
o limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we compete; and
o place us at a competitive disadvantage, compared to our
competitors that have less debt.
7
WE HAVE RESTRICTIVE DEBT COVENANTS THAT COULD ADVERSELY AFFECT OUR ABILITY TO
RUN OUR BUSINESS
The indentures governing our existing senior unsecured notes and the
agreements governing our line of credit contain various restrictive covenants
including, among others, provisions that can restrict our ability to:
o incur indebtedness;
o make common and preferred distributions;
o make investments;
o make investments in capital expenditures and acquiring hotels
in excess of certain amounts;
o engage in transactions with affiliates;
o incur liens;
o merge or consolidate with another person;
o dispose of all or substantially all of our assets; and
o permit 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.
In addition, some of these agreements require us to maintain certain
specified financial ratios. Our ability to comply with such ratios may be
adversely affected by events beyond our control.
In 2002, we entered into two amendments to our line of credit. In June
2002, we amended our line of credit to relax covenant levels to provide us with
greater financial flexibility. In December 2002, we further amended our line of
credit to relax covenant levels and reduce the line to $300 million from $615
million. The maturity of the line of credit remains at October 31, 2004, but we
have the right to extend the maturity date for two consecutive one-year periods,
subject to certain conditions. We recorded a $3.2 million expense to write off
unamortized deferred financing costs associated with the reduction in our line
of credit. Although we were in compliance with our existing covenants prior to
the amendments, it was necessary to amend the line of credit in anticipation of
a continued negative RevPAR environment. The amended line allows for the
relaxation of certain financial covenants through the maturity date, with a
step-up in covenants on June 30, 2004, including the unsecured interest
coverage, fixed charge coverage, secured leverage, 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 an added tier to reflect higher permitted
leverage. There was no amount outstanding under the facility at December 31,
2002.
Unless our business and cash flow stabilizes, we may not be able to
satisfy the relaxed financial covenant requirements. In such an event, we may
need to obtain further amendments from our lenders on the line of credit to
continue being able to borrow under it. 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 that, together with any limitation on our ability
to borrow under the line, may adversely affect our ability to run our business
and manage our financial affairs.
The breach of any of these covenants and limitations under our line of
credit 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
unsecured recourse indebtedness. We may not be able to refinance or repay our
debt in full under those circumstances.
8
CONFLICTS OF INTEREST COULD ADVERSELY AFFECT OUR BUSINESS
Certain FelCor directors. Six Continents Hotels currently manages 82 of
our hotels. Richard C. North, who joined FelCor's board during 1998, is the
Chief Executive Officer of Six Continents PLC Hotels Division, which, through
its affiliates, owns approximately 17% of our outstanding common stock.
Issues may arise under the 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
Hotels, 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 brands under which our hotels will
be operated, Mr. North, by virtue of his relationship with Six Continents
Hotels, may have interests that conflict with our interests.
We anticipate that any director who has a conflict of interest with
respect to an issue presented to the FelCor board will abstain from voting upon
that issue, although he or she will have no legal obligation to do so. We have
no provisions in our bylaws or charter that require an interested director to
abstain from voting upon an issue. We do not expect to add provisions in our
charter and bylaws to this effect. Although each director has a fiduciary duty
of loyalty to us, there is a risk that, should an interested director vote upon
an issue in which he or one of his affiliates has an interest, his vote may
reflect a bias that could be contrary to our best interests. In addition, even
if an interested director abstains from voting, the director's participation in
the meeting and discussion of an issue in which he or companies with which he is
associated have an interest could influence the votes of other directors
regarding the issue.
For information regarding the management agreements entered into by us
with Six Continents Hotels and others, reference is made to the description of
these agreements under the caption "Management Agreements" in Item 2 of this
Annual Report on Form 10-K.
Adverse tax consequences to affiliates on a sale of some hotels. Mr.
Corcoran and Mr. Robert A. Mathewson, a director, may incur additional tax
liability if we sell our investments in six hotels that we acquired in July 1994
from partnerships in which they were investors. 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 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 completed improvements may not
achieve the results anticipated when we made the decision to invest in the
improvements.
WE WILL ENCOUNTER INDUSTRY RELATED RISKS THAT MAY ADVERSELY AFFECT OUR BUSINESS
The current 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 have experienced declines in
RevPAR, beginning in March 2001 and continuing through August 2002. A sharper
than anticipated decline in business travel was the primary cause of the
decline, which was reflected in decreased occupancies, which led to declines in
room rates as hotels competed more aggressively for guests, both of which have
had a significant adverse effect on our RevPAR and operating performance. On a
national basis, the hotel industry experienced a RevPAR decline of 7.0% for the
year ended December 31, 2001, and 2.5% for the year ended December 31, 2002. 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.
9
Investing in hotel assets involves special risks. We have invested in
hotel-related assets, and our hotels are subject to all of the risks common to
the hotel industry. These risks could adversely affect hotel occupancy and the
rates that can be charged for hotel rooms, and generally include:
o competition from other hotels;
o construction of more hotel rooms in a particular area than
needed to meet demand;
o increases in energy costs and other travel expenses that
reduce business and leisure travel;
o adverse effects of declines in general and local economic
activity;
o fluctuations in our revenue caused by the seasonal nature of
the hotel industry;
o adverse effects of a downturn in the hotel industry; and
o risks generally associated with the ownership of hotels and
real estate, as discussed below.
We 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.
We face reduced coverages and increased costs of insurance. Following
the events of September 11, 2001, certain types of insurance coverage, such as
for acts of terrorism, are only available at high cost. In an effort to keep our
cost of insurance within reasonable limits, we have only purchased terrorism
insurance for those hotels that are secured by mortgage debt, as required by our
lenders. We have established a self-insured retention of $250,000 per occurrence
for general liability insurance with regard to 68 of our hotels; the remainder
of our hotels participate in general liability programs of our managers, with no
deductible. Our property program has a $100,000 all risk deductible, a
deductible of 2% of insured value for named windstorm coverage and a deductible
of 5% of insured value for California earthquake coverage. Should such uninsured
or not fully insured losses be substantial, they could have a material adverse
impact on our operating results and cash flows.
We have geographic concentrations that may create risks from regional
economic and weather conditions. Approximately 54% of our hotel rooms and 56% of
our hotel EBITDA for the year ended December 31, 2002, were generated from
hotels located in four states: California, Florida, Georgia and Texas.
Additionally, we have concentrations in three major metropolitan areas, Atlanta,
San Francisco Bay Area and Dallas, which represented approximately 20% of our
hotel EBITDA for the year ended December 31, 2002. Therefore, adverse economic
or weather conditions in these states or metropolitan areas will have a greater
effect on us than similar conditions in other states.
We have designated 33 hotels as non-strategic and intend to sell them
within the next 36 months. We may be unable to sell the 33 hotels at acceptable
prices, or at all, within the proposed time frame; and we may be unable to
acquire suitable replacement properties at acceptable prices, or at all, which
could trigger substantial penalties payable to Six Continents Hotels under our
management agreements. Furthermore, if we sell these hotels and fail to reinvest
the net proceeds in assets with returns equal to, or better than, the hotels
sold, our results of operations will be adversely affected.
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 such 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
10
system. Compliance with these standards could require us to incur significant
expenses or capital expenditures, which could adversely affect our results of
operations and ability to make distributions to our stockholders and payments on
our 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 brand owner.
If such an agreement terminates due to our failure to make required
improvements, we may be liable to the brand manager or franchisor for a
termination payment. These termination payments vary by agreement and hotel. The
loss of a substantial number of brand 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 brand manager or 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
to be made to the hotels for which we would be responsible. The agreements
providing franchise licenses with respect to 15 of our hotels expire within the
next five years.
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' EBITDA were generated by hotels
operated under each of the indicated brands during the year ended December 31,
2002:
o Embassy Suites Hotels 42%
o Holiday Inn-branded hotels 26%
o Crowne Plaza 11%
o Sheraton 8%
o Doubletree-branded hotels 6%
Should any of these brands suffer a significant decline in popularity
with the traveling public, it could adversely affect our revenues and
profitability.
We are subject to the risks of hotel operations. Through our ownership
of our lessees, we are subject to the risk of fluctuating hotel operating
expenses at our hotels, including but not limited to:
o wage and benefit costs;
o repair and maintenance expenses;
o the costs of gas and electricity;
o the costs of insurance, including health, general liability
and workers compensation; and
o other operating expenses.
These operating expenses are more difficult to predict and control than
revenue, resulting in an increased risk of volatility in our results of
operations.
The lodging business is seasonal in nature. Generally, hotel revenues
for our hotel portfolio 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.
11
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 our 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, the
salary and benefits provided to hotel employees, the conduct of food and
beverage operations and similar matters.
OUR ABILITY TO GROW OR SUSTAIN OUR BUSINESS MAY BE LIMITED BY OUR ABILITY TO
ATTRACT DEBT OR EQUITY FINANCING AND WE MAY HAVE DIFFICULTY ACCESSING CAPITAL ON
ATTRACTIVE TERMS
We may not be able to fund future growth and operations solely from
cash provided from operating activities because of recent declines in cash flows
and our requirement to 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 possibility of war in
Iraq, the terrorist attacks on September 11, 2001, the ongoing war against
terrorism by the United States and the bankruptcy of several major companies,
such as Enron Corp. These events, or an escalation in the anti-terrorism war,
new terrorist attacks, the war in Iraq or additional bankruptcies in the future,
could adversely affect the availability and cost of capital for our business. We
cannot assure you that we will be successful in attracting sufficient debt or
equity financing to fund future growth and operations at an acceptable cost, or
at all.
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 29 hotels, in which we have an aggregate
investment of approximately $142 million. The operations of 15 of these hotels
are included in our consolidated results of operations due to our ownership of
the lessee of the hotels. None of our directors or officers holds any interest
in any of these ventures. The ventures and hotels were subject to non-recourse
mortgage loans aggregating approximately $268 million at December 31, 2002.
Additionally, one joint venture had a $97.6 million advance type construction
loan for a residential condominium development that has been guaranteed equally
on a several basis by us and our joint venture partner. At December 31, 2002,
there was $11.4 million outstanding on this loan, of which we have guaranteed
our pro rata share of $5.7 million at December 31, 2002. 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 elect to make additional
capital contributions. In many of the foregoing events, we may be faced with the
choice of losing our investment in the venture or investing more capital in it
with no guaranty of receiving a return on that investment.
WE ARE SUBJECT TO POTENTIAL TAX RISKS
The federal income tax laws governing REITs are complex. We have
operated and intend to continue to operate in a manner that is intended to
enable us to qualify as a REIT under the federal income tax laws. The REIT
qualification requirements are extremely complicated, and interpretations of the
federal income tax laws
12
governing qualification as a REIT are limited. Accordingly, we cannot be certain
that we have been, or will continue to be, successful in operating so as to
qualify as a REIT. At any time, new laws, interpretations or court decisions may
change the federal tax laws relating to, or the federal income tax consequences
of, qualification as a REIT.
Failure to make required distributions would subject us to tax. Each
year, a REIT must pay out to its stockholders at least 90% of its taxable
income, other than any net capital gain. To the extent that we satisfy the
applicable distribution requirement, but distribute less than 100% of our
taxable income, we will be subject to federal corporate income tax on our
undistributed taxable income. In addition, we will be subject to a 4%
nondeductible tax if the actual amount we pay out to our stockholders in a
calendar year is less than a minimum amount specified under federal tax laws.
Our only source of funds to make such distributions comes from distributions to
us from FelCor LP. Accordingly, we may be required to borrow money or sell
assets to make distributions sufficient to pay out enough of our taxable income
to satisfy the applicable distribution requirement and to avoid corporate income
tax and the 4% tax in a particular year.
Failure to qualify as a REIT would subject us to federal income tax. If
we fail to qualify as a REIT in any taxable year, we would be subject to federal
income tax on our taxable income. We might need to borrow money or sell hotels
in order to pay any such tax. If we cease to be a REIT, we no longer would be
required to distribute most of our taxable income to our stockholders. Unless
our failure to qualify as a REIT were excused under federal income tax laws, we
could not re-elect REIT status until the fifth calendar year following the year
in which we failed to qualify.
Failure to have distributed earnings and profits of Bristol Hotel
Company in 1998 could cause us to fail to qualify as a REIT. At the end of any
taxable year, a REIT may not have any accumulated earnings and profits,
described generally for federal income tax purposes as cumulative undistributed
net income, from a non-REIT corporation. In connection with the merger of
Bristol Hotel Company, or Bristol, with and into us in 1998, Arthur Andersen LLP
prepared and provided to us its computation of Bristol's accumulated earnings
and profits through the date of the merger, and we made a corresponding special
distribution to our stockholders. However, the determination of accumulated
earnings and profits for federal income tax purposes is extremely complex and
the computations by any professional service firm are not binding upon the
Internal Revenue Service. Should the Internal Revenue Service successfully
assert that Bristol's accumulated earnings and profits were greater than the
amount so distributed by us, we may fail to qualify as a REIT. Alternatively,
the Internal Revenue Service may permit FelCor to avoid losing its REIT status
by paying a deficiency dividend to eliminate any remaining accumulated earnings
and profits of Bristol. There can be no assurance, however, that we would be
able to make any such required distribution or that the Internal Revenue Service
would not assert loss of REIT status as the penalty for failing to distribute
any accumulated earnings and profits of Bristol in 1998.
A sale of assets acquired from Bristol within ten years after the
merger may result in corporate income tax. If we sell any asset acquired from
Bristol within ten years after our merger with Bristol, and we recognize a
taxable gain on the sale, we will be taxed at the highest corporate rate on an
amount equal to the lesser of:
o the amount of gain that we recognize at the time of the sale;
or
o the amount of gain that we would have recognized if we had
sold the asset at the time of the Bristol merger for its then
fair market value.
The sales of Bristol hotels that have been made to date have not
resulted in any material amount of tax liability. If we are successful in
selling the hotels that we have designated as non-strategic, the majority of
which are Bristol hotels, we could incur corporate income tax with respect to
the related built in gain, the amount of which cannot yet be determined.
13
DEPARTURE OF KEY PERSONNEL, INCLUDING MR. CORCORAN, COULD ADVERSELY AFFECT OUR
FUTURE OPERATING RESULTS
WE WILL ENCOUNTER RISKS THAT MAY ADVERSELY AFFECT REAL ESTATE OWNERSHIP
General Risks. Our investments in hotels are subject to the numerous
risks generally associated with owning real estate, including among others:
o adverse changes in general or local economic or real estate
market conditions;
o changes in zoning laws;
o changes in traffic patterns and neighborhood characteristics;
o increases in assessed valuation and real estate tax rates;
o increases in the cost of property insurance;
o governmental regulations and fiscal policies;
o the potential for uninsured or underinsured property losses;
o the impact of environmental laws and regulations; and
o other circumstances beyond our control.
Moreover, real estate investments are relatively illiquid, and we may
not be able to vary our portfolio in response to changes in economic and other
conditions.
Compliance with environmental laws may adversely affect our financial
condition. Owners of real estate are subject to numerous federal, state, local
and foreign environmental laws and regulations. Under these laws and
regulations, a current or former owner of real estate may be liable for the
costs of remediating hazardous substances found on its property, whether or not
it was responsible for their presence. In addition, if an owner of real property
arranges for the disposal of hazardous substances at another site, it may also
be liable for the costs of remediating the disposal site, even if it did not own
or operate the disposal site. Such liability may be imposed without regard to
fault or the legality of a party's conduct and may, in certain circumstances, be
joint and several. A property owner may also be liable to third parties for
personal injuries or property damage sustained as a result of its release of
hazardous or toxic substances, including asbestos-containing materials, into the
environment. Environmental laws and regulations may require us to incur
substantial expenses and limit the use of our properties. We could have
substantial liability for a failure to comply with applicable environmental laws
and regulations, which may be enforced by the government or, in certain
instances, by private parties. The existence of hazardous substances on a
property can also adversely affect the value of, and the owner's ability to use,
sell or borrow against, the property.
We cannot provide assurances that future or amended laws or
regulations, or more stringent interpretations or enforcement of existing
environmental requirements, will not impose any material environmental
liability, or that the environmental condition or liability relating to the
hotels will not be affected by new information or changed circumstances, by the
condition of properties in the vicinity of such hotels, such as the presence of
leaking underground storage tanks, or by the actions of unrelated third parties.
Compliance with the Americans with Disabilities Act may adversely
affect our financial condition. Under the Americans with Disabilities Act of
1990, all public accommodations, including hotels, are required to meet certain
federal requirements for access and use by disabled persons. Various state and
local jurisdictions have also adopted requirements relating to the accessibility
of buildings to disabled persons. We believe that our hotels substantially
comply with the requirements of the Americans with Disabilities Act and other
applicable laws. However, a determination that the hotels are not in compliance
with such laws 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 and other similar laws, it could adversely affect our
ability to make distributions to our stockholders and to pay our obligations.
14
OUR CHARTER CONTAINS LIMITATIONS ON OWNERSHIP AND TRANSFER OF SHARES OF OUR
STOCK THAT COULD ADVERSELY AFFECT ATTEMPTED TRANSFERS OF OUR COMMON STOCK
To maintain our status as a REIT, no more than 50% in value of our
outstanding stock may be owned, actually or constructively, under the applicable
tax rules, by five or fewer persons during the last half of any taxable year.
Our charter prohibits, subject to some exceptions, any person from owning more
than 9.9%, as determined in accordance with the Internal Revenue Code and the
Exchange Act, of the number of outstanding shares of any class of our stock. Our
charter also prohibits any transfer of our stock that would result in a
violation of the 9.9% ownership limit, reduce the number of stockholders below
100 or otherwise result in our failure to qualify as a REIT. Any attempted
transfer of shares in violation of the charter prohibitions will be void, and
the intended transferee will not acquire any right in those shares. We have the
right to take any lawful action that we believe necessary or advisable to ensure
compliance with these ownership and transfer restrictions and to preserve our
status as a REIT, including refusing to recognize any transfer of stock in
violation of our charter.
SOME PROVISIONS IN OUR CHARTER AND BYLAWS AND MARYLAND LAW MAKE A TAKEOVER OF US
MORE DIFFICULT
Ownership Limit. The ownership and transfer restrictions of our charter
may have the effect of discouraging or preventing a third party from attempting
to gain control of us without the approval of our board of directors.
Accordingly, it is less likely that a change in control, even if beneficial to
stockholders, could be effected without the approval of our board.
Staggered Board. Our board of directors is divided into three classes.
Directors in each class are elected for terms of three years. As a result, the
ability of stockholders to effect a change in control of us through the election
of new directors is limited by the inability of stockholders to elect a majority
of our board at any particular meeting.
Authority to Issue Additional Shares. Under our charter, our board of
directors may issue preferred stock without stockholder action. The preferred
stock may be issued, in one or more series, with the preferences and other terms
designated by our board that may delay or prevent a change in control of us,
even if the change is in the best interests of stockholders. We currently have
outstanding 5,980,475 shares of our Series A preferred stock and 67,758 shares,
represented by 6,775,800 depositary shares, of our Series B preferred stock. The
preferred stock reduces the amount of dividends available, and has dividend,
liquidation and other rights superior, to the holders of our common stock.
Maryland Takeover Statutes. As a Maryland corporation, we are subject
to various provisions under the Maryland General Corporation Law, including the
Maryland business combination statute, that may have the effect of delaying or
preventing a transaction or a change in control that might involve a premium
price for the stock or otherwise be in the best interests of stockholders. Under
the Maryland business combination statute, some "business combinations,"
including some issuances of equity securities, between a Maryland corporation
and an "interested stockholder," which is any person who beneficially owns 10%
or more of the voting power of the corporation's shares, or an affiliate of that
stockholder, are prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. Any of these
business combinations must be approved by a stockholder vote meeting two
separate super majority requirements unless, among other conditions, the
corporation's common stockholders receive a minimum price, as defined in the
statute, for their shares and the consideration is received in cash or in the
same form as previously paid by the interested stockholder for its common
shares. Our charter currently provides that the Maryland control share statute
will not apply to any of our existing or future stock. That statute may deny
voting rights to shares involved in an acquisition of one-tenth or more of the
voting stock of a Maryland corporation. To the extent these or other laws are
applicable to us, they may have the effect of delaying or preventing a change in
control of us even though beneficial to our stockholders.
15
ITEM 2. PROPERTIES
We are the only lodging REIT that owns a diversified portfolio of
nationally branded, upscale and full-service hotels managed by its strategic
brand managers, which are Hilton, Six Continents Hotels, and Starwood. We are
competitively positioned, with a strong management team, strategic brand manager
alliances, diversified upscale and full-service hotels, and value creation
expertise.
We consider our hotels, generally, to be high quality lodging
properties with respect to desirability of location, size, facilities, physical
condition, quality and variety of services offered in the markets in which they
are located. Our hotels are designed to appeal to a broad range of hotel
customers, including frequent business travelers, groups and conventions, as
well as leisure travelers. The hotels generally feature comfortable, modern
guest rooms, extensive meeting and convention facilities and full-service
restaurant and catering facilities. Our hotels are located in 35 states and
Canada, and are situated primarily in major markets near airport, suburban or
downtown areas. The following tables illustrate the distribution of our 169
consolidated hotels.
<Table>
<Caption>
TOP TEN MARKETS HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA
- --------------- ------ ----- ---------------- ----------------
Atlanta 10 3,061 7% 8%
Dallas 17 5,273 11 7
San Francisco Bay area 9 3,255 7 5
New Orleans 2 746 2 4
Orlando 6 2,220 5 4
Philadelphia 3 1,174 3 4
Houston 5 1,696 4 3
Phoenix 4 1,027 2 3
Minneapolis 4 955 2 3
Chicago 4 1,239 3 3
TOP FOUR STATES HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA
- --------------- ------ ----- ---------------- ----------------
California 19 6,026 13% 19%
Texas 36 10,366 22 16
Florida 16 5,346 12 12
Georgia 12 3,415 7 9
LOCATION HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA
- -------- ------ ----- ---------------- ----------------
Suburban 79 19,615 42% 43%
Urban 31 10,483 23 27
Airport 33 9,711 21 21
Highway 14 2,954 6 3
Resort 12 3,678 8 6
CATEGORIES AS DEFINED BY
SMITH TRAVEL RESEARCH HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA
- --------------------- ------ ----- ---------------- ----------------
Upper upscale 85 21,596 47% 59%
Midscale full service 55 17,050 36 28
Upscale 20 6,457 14 11
Limited service 9 1,338 3 2
</Table>
Our hotels have an average of approximately 275 rooms, with eight of
them having more than 500 rooms. Although obsolescence arising from age and
condition of facilities can adversely affect our hotels, we have invested in
excess of $600 million, in the aggregate, during the past five years to upgrade,
renovate and/or
16
redevelop our hotels to enhance their competitive position. We are committed to
maintaining the high standards of our hotels and spend at least 4% of hotel
revenues annually for maintenance and repair programs, in addition to necessary
capital.
HOTEL BRANDS
A key part of our business strategy is to have our hotels managed by
one of our strategic brand managers. Our hotels are operated under some of the
nation's most recognized and respected hotel brands. We maintain strategic
relationships with our brand owners, who also manage substantially all of our
hotels. We are the owner of the largest number of Embassy Suites Hotels, Crowne
Plaza, Holiday Inn and independently owned Doubletree-branded hotels. The
following table illustrates the distribution of our hotels among these premier
brands.
BRAND DISTRIBUTION
<Table>
<Caption>
BRAND HOTELS ROOMS % OF TOTAL ROOMS % OF 2002 EBITDA
- ----- ------ ----- ---------------- ----------------
Embassy Suites 59 14,842 32% 42%
Holiday Inn-branded 53 16,019 34 26
Crowne Plaza 18 5,963 13 11
Sheraton-branded 10 3,269 7 8
Doubletree-branded 13 2,675 6 6
Other 16 3,673 8 7
</Table>
17
HOTEL OPERATING STATISTICS
The following tables set forth historical occupied rooms, or Occupancy,
ADR and RevPAR at December 31, 2002 and 2001, and the percentage changes therein
between the periods presented for our 169 consolidated hotels:
OPERATING STATISTICS BY BRAND
<Table>
<Caption>
OCCUPANCY (%)
--------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Embassy Suites hotels 67.5 67.0 0.8
Doubletree-branded hotels 65.7 65.8 (0.1)
Holiday Inn-branded hotels 61.7 64.8 (4.9)
Crowne Plaza hotels 58.7 60.1 (2.3)
Sheraton-branded hotels 58.0 62.2 (6.8)
Other hotels 58.9 58.4 1.0
Total hotels 62.4 64.2 (2.8)
</Table>
<Table>
<Caption>
ADR ($)
--------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Embassy Suites hotels 118.58 127.90 (7.3)
Doubletree-branded hotels 99.20 105.16 (5.7)
Holiday Inn-branded hotels 80.33 83.74 (4.1)
Crowne Plaza hotels 94.05 101.62 (7.5)
Sheraton-branded hotels 100.84 109.14 (7.6)
Other hotels 95.96 100.14 (4.2)
Total hotels 97.90 103.56 (5.5)
</Table>
<Table>
<Caption>
REVPAR ($)
--------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 % VARIANCE
---- ---- ----------
Embassy Suites hotels 80.08 85.66 (6.5)
Doubletree-branded hotels 65.22 69.22 (5.8)
Holiday Inn-branded hotels 49.54 54.27 (8.7)
Crowne Plaza hotels 55.24 61.12 (9.6)
Sheraton-branded hotels 58.48 67.92 (13.9)
Other hotels 56.57 58.45 (3.2)
Total hotels 61.14 66.51 (8.1)
</Table>
18
OPERATING STATISTICS FOR OUR TOP TEN MARKETS
<Table>
<Caption>
OCCUPANCY (%)
--------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Atlanta 68.0 68.0 -
Dallas 48.0 55.3 (13.2)
San Francisco Bay area 66.7 69.0 (3.4)
New Orleans 65.7 69.7 (5.7)
Orlando 66.4 67.5 (1.6)
Philadelphia 62.3 62.6 (0.4)
Houston 63.2 72.7 (13.1)
Phoenix 66.5 61.6 8.0
Minneapolis 67.2 65.8 2.1
Chicago 63.1 64.4 (2.0)
</Table>
<Table>
<Caption>
ADR ($)
--------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Atlanta 90.02 96.29 (6.5)
Dallas 88.23 89.38 (1.3)
San Francisco Bay area 117.11 144.47 (18.9)
New Orleans 136.26 141.21 (3.5)
Orlando 79.26 86.70 (8.6)
Philadelphia 117.54 115.16 2.1
Houston 74.84 78.72 (4.9)
Phoenix 110.63 124.06 (10.8)
Minneapolis 124.54 128.91 (3.4)
Chicago 120.95 133.77 (9.6)
</Table>
<Table>
<Caption>
REVPAR ($)
--------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Atlanta 61.22 65.44 (6.5)
Dallas 42.34 49.43 (14.3)
San Francisco Bay area 78.09 99.75 (21.7)
New Orleans 89.50 98.40 (9.1)
Orlando 52.66 58.54 (10.1)
Philadelphia 73.23 72.05 1.6
Houston 47.30 57.27 (17.4)
Phoenix 73.56 76.36 (3.7)
Minneapolis 83.68 84.83 (1.4)
Chicago 76.37 86.15 (11.4)
</Table>
19
Embassy Suites Hotels
Embassy Suites Hotels are upscale, full-service, all-suite hotels
designed to attract frequent business travelers, leisure travelers and weekend
guests. Embassy Suites Hotels typically offer numerous services and amenities,
such as:
o two-room suites, containing two telephones, a
mini-refrigerator, coffeemaker, microwave oven, wet bar, and
two color televisions;
o complimentary, cooked-to-order breakfast;
o complimentary cocktails during two hours every evening,
subject to local laws and regulations, in an atrium
environment; and
o business centers equipped with fax and copy machines.
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, coffeemaker
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 focus on the business traveler. Each room
offers a residential decor with a well-lit work area, including a dataport and
voicemail, and in-room coffeemakers. 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 a full-service restaurant and lounge.
The Holiday Inn, Holiday Inn Select and Crowne Plaza brands are part of
the family of brands owned, operated and franchised by Six Continents Hotels.
Six Continents Hotels owns, operates or franchises more than 3,300 hotels with
approximately 515,000 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 193
Crowne Plaza hotels in 49 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 more than 750
properties in over 80 countries.
20
Other Hotels
As of December 31, 2002, 19 of our hotels were operated under other
brands, as follows:
o Hampton Inn (5 hotels);
o Holiday Inn Express (3 hotels);
o Harvey Hotel (4 hotels);
o Hilton Suites (1 hotel);
o Homewood Suites (1 hotel);
o Westin (1 hotel);
o Wyndham(1) (1 hotel); and
o Independent (3 hotels).
- ------------------
(1) This hotel is scheduled to convert to a Hilton in April 2003.
21
HOTEL PORTFOLIO
The following table sets forth certain descriptive information regarding our
hotels at December 31, 2002:
<Table>
<Caption>
Hotel State Rooms % Owned (1) Brand
----- ----- ----- ----------- -----
Consolidated operations:
Birmingham(2) AL 242 Embassy Suites
Montgomery (East I-85)(2) AL 213 Holiday Inn
Texarkana (I-30) AR 210 Holiday Inn
Flagstaff AZ 119 Embassy Suites
Phoenix (Airport - 44th St.) AZ 229 Embassy Suites
Phoenix (Camelback) AZ 232 Embassy Suites
Phoenix (Crescent)(2) AZ 342 Sheraton
Tempe (ASU)(2) AZ 224 Embassy Suites
Anaheim (Disney Area)(2) CA 222 Embassy Suites
Burlingame (SF-Airport South) CA 340 Embassy Suites
Covina (I-10)(2) CA 259 50% Embassy Suites
Dana Point - Doheny Beach CA 195 Doubletree Guest Suites
El Segundo (LAX-Airport South) CA 349 97% Embassy Suites
Irvine (Orange County Airport) CA 335 Crowne Plaza
Milpitas (Silicon Valley)(2) CA 266 Embassy Suites
Milpitas (San Jose-North) CA 305 Crowne Plaza
Napa Valley(2) CA 205 Embassy Suites
Oxnard (Mandalay Beach Resort) CA 248 Embassy Suites
Palm Desert(2) CA 198 Embassy Suites
Pleasanton (San Ramon Area) CA 244 Crowne Plaza
Santa Barbara (Goleta)(2) CA 160 Holiday Inn
San Diego (On the Bay) CA 600 Holiday Inn
San Francisco (Financial District-Chinatown) CA 565 Holiday Inn
San Francisco (Fisherman's Wharf) CA 585 Holiday Inn
San Francisco (Airport Burlingame)(2) CA 312 Embassy Suites
San Francisco (Union Square) CA 403 Crowne Plaza
San Rafael (Marin County)(2) CA 235 50% Embassy Suites
Aurora (Denver-Southeast) CO 248 90% Doubletree
Avon (Beaver Creek Lodge) CO 72 Independent
Hartford (Downtown) CT 350 Crowne Plaza
Stamford CT 383 Holiday Inn Select
Wilmington DE 244 90% Doubletree
Boca Raton FL 263 Embassy Suites
Cocoa Beach (Oceanfront Resort) FL 500 Holiday Inn
Deerfield Beach (Resort)(2) FL 244 Embassy Suites
Ft. Lauderdale (17th Street)(2) FL 358 Embassy Suites
Ft. Lauderdale (Cypress Creek)(2) FL 253 Sheraton Suites
Jacksonville (Bay Meadows) FL 277 Embassy Suites
Kissimmee (Nikki Bird Resort) FL 530 Holiday Inn
Miami (Airport LeJeune Center) FL 304 Crowne Plaza
Miami (Airport)(2) FL 316 Embassy Suites
Lake Buena Vista (Walt Disney World Resort) FL 229 Doubletree Guest Suites
Orlando (Airport) FL 288 Holiday Inn Select
Orlando (International Drive Resort) FL 652 Holiday Inn
Orlando (North) FL 277 Embassy Suites
Orlando (International Drive/Convention Center)(2) FL 244 Embassy Suites
Tampa (Busch Gardens) FL 408 Holiday Inn
Tampa FL 203 Doubletree Guest Suites
Atlanta (Airport) GA 378 Crowne Plaza
</Table>
22
<Table>
<Caption>
Hotel State Rooms % Owned (1) Brand
----- ----- ----- ----------- -----
Atlanta (Airport) GA 233 Embassy Suites
Atlanta (Airport-Gateway) GA 395 Sheraton
Atlanta (Airport-North)(2) GA 493 Holiday Inn
Atlanta (Buckhead)(2) GA 317 Embassy Suites
Atlanta (Galleria)(2) GA 278 Sheraton Suites
Atlanta (South I-75 & US 41)(2) GA 180 Holiday Inn
Atlanta (Perimeter Center)(2) GA 241 50% Embassy Suites
Atlanta (Perimeter-Dunwoody)(2) GA 250 Holiday Inn Select
Atlanta (Powers Ferry)(2) GA 296 Crowne Plaza
Brunswick GA 130 Embassy Suites
Columbus (North I-185 at Peachtree Mall) GA 224 Holiday Inn
Chicago (Allerton) IL 443 Crowne Plaza
Chicago (Lombard-Oak Brook)(2) IL 262 50% Embassy Suites
Chicago (O'Hare Airport)(2) IL 297 Sheraton Suites
Deerfield (Northbrook)(2) IL 237 Embassy Suites
Moline (Quad Cities) IL 138 Hampton Inn
Moline (Airport) IL 216 Holiday Inn
Moline (Airport Area) IL 110 Holiday Inn Express
Indianapolis (North)(2) IN 221 50% Embassy Suites
Davenport (Quad Cities) IA 132 Hampton Inn
Davenport IA 279 Holiday Inn
Overland Park(2) KS 199 50% Embassy Suites
Lexington KY 174 Hilton Suites
Lexington(2) KY 155 Sheraton Suites
Baton Rouge(2) LA 223 Embassy Suites
New Orleans(2) LA 372 Embassy Suites
New Orleans (French Quarter)(2) LA 374 Holiday Inn
Boston (Government Center) MA 303 Holiday Inn Select
Boston (Marlborough)(2) MA 229 Embassy Suites
Baltimore (BWI Airport) MD 251 90% Embassy Suites
Troy MI 251 90% Embassy Suites
Bloomington MN 219 Embassy Suites
Minneapolis (Airport)(2) MN 310 Embassy Suites
Minneapolis (Downtown) MN 216 Embassy Suites
St. Paul (Downtown) MN 210 Embassy Suites
Kansas City (Plaza)(2) MO 266 50% Embassy Suites
Kansas City (Northeast) MO 167 Holiday Inn
St. Louis (Downtown) MO 297 Embassy Suites
St. Louis (Westport)(2) MO 316 Holiday Inn
Jackson (Downtown)(2) MS 354 Crowne Plaza
Jackson (North)(2) MS 222 Holiday Inn & Suites
Olive Branch (Whispering Woods Hotel and MS 181 Independent
Conference Center)
Charlotte(2) NC 274 50% Embassy Suites
Charlotte (SouthPark) NC 208 Doubletree Guest Suites
Raleigh (Crabtree)(2) NC 225 50% Embassy Suites
Raleigh NC 203 Doubletree Guest Suites
Omaha (Central) NE 187 Doubletree Guest Suites
Omaha (Central) NE 131 Hampton Inn
Omaha (Central-I-80) NE 383 Holiday Inn
Omaha (Old Mill) NE 223 Crowne Plaza
Omaha (Southwest) NE 131 Hampton Inn
Omaha (Southwest) NE 78 Holiday Inn Express & Suites
Omaha NE 108 Homewood Suites
Parsippany(2) NJ 274 50% Embassy Suites
</Table>
23
<Table>
<Caption>
Hotel State Rooms % Owned (1) Brand
----- ----- ----- ----------- -----
Piscataway(2) NJ 224 Embassy Suites
Secaucus (Meadowlands) NJ 304 Crowne Plaza
Secaucus (Meadowlands) NJ 261 50% Embassy Suites
Albuquerque (Mountainview) NM 360 Holiday Inn
Syracuse NY 215 Embassy Suites
Cleveland (Downtown) OH 268 Embassy Suites
Columbus OH 194 Doubletree Guest Suites
Dayton(2) OH 137 Doubletree Guest Suites
Tulsa (I-44) OK 244 Embassy Suites
Philadelphia (Center City) PA 445 Crowne Plaza
Philadelphia (Historic District)(2) PA 364 Holiday Inn
Philadelphia (Society Hill)(2) PA 365 Sheraton
Pittsburgh (At University Center)(2) PA 251 Holiday Inn Select
Charleston (Mills House) SC 214 Holiday Inn
Greenville (Roper Mountain Road) SC 208 Crowne Plaza
Myrtle Beach (Kingston Plantation) SC 255 Embassy Suites
Myrtle Beach(3) SC 385 Wyndham
Knoxville (Central at Papermill Road) TN 240 Holiday Inn
Nashville (Airport/Opryland Area) TN 296 Embassy Suites
Nashville TN 138 Doubletree Guest Suites
Nashville (Opryland/Airport) TN 382 Holiday Inn Select
Addison (North Dallas) TX 429 Crowne Plaza
Amarillo (I-40) TX 248 Holiday Inn
Austin (North) (2) TX 260 50% Embassy Suites
Austin TX 189 90% Doubletree Guest Suites
Austin (Town Lake) TX 320 Holiday Inn
Beaumont (Midtown I-10) TX 190 Holiday Inn
Corpus Christi(2) TX 150 Embassy Suites
Dallas (Alpha Road)(4) TX 114 Independent
Dallas (Campbell Centre) TX 300 90% Doubletree
Dallas (DFW Airport-North - Irving) TX 506 Harvey Hotel
Dallas (DFW Airport-North - Irving)(2) TX 164 Harvey Suites
Dallas (DFW Airport-South - Irving) TX 305 Embassy Suites
Dallas (Downtown-West End) TX 311 Hampton Inn
Dallas (Love Field)(2) TX 248 Embassy Suites
Dallas (Market Center)(2) TX 354 Crowne Plaza
Dallas (Market Center)(2) TX 244 Embassy Suites
Dallas (Park Central) TX 295 Crowne Plaza Suites
Dallas (Park Central) TX 279 Embassy Suites
Dallas (Park Central)(2) TX 313 Harvey Hotel
Dallas (Park Central) TX 438 60% Sheraton
Dallas (Park Central) TX 536 60% Westin
Houston (I-10 West) TX 349 Holiday Inn Select
Houston (Intercontinental Airport)(2) TX 415 Holiday Inn
Houston (Medical Center)(2) TX 293 Crowne Plaza
Houston (Medical Center)(2) TX 284 Holiday Inn & Suites
Houston (Greenway Plaza)(2) TX 355 Holiday Inn Select
Midland (Country Villa) TX 250 Holiday Inn
Odessa TX 186 Holiday Inn Express & Suites
Odessa (Centre) TX 245 Holiday Inn & Suites
Plano(2) TX 279 Harvey Hotel
Plano TX 160 Holiday Inn
San Antonio (Airport)(2) TX 261 50% Embassy Suites
San Antonio (Downtown) TX 315 Holiday Inn
San Antonio (International Airport) TX 397 Holiday Inn Select
</Table>
24
<Table>
<Caption>
Hotel State Rooms % Owned (1) Brand
----- ----- ----- ----------- -----
San Antonio (Northwest I-10)(2) TX 216 50% Embassy Suites
Waco (I-35) TX 170 Holiday Inn
Salt Lake City (Airport) UT 191 Holiday Inn
Burlington(2) VT 309 Sheraton
Vienna (Tysons Corner)(2) VA 437 50% Sheraton Premiere
Canadian Hotels:
Cambridge Ontario 143 Holiday Inn
Kitchener (Waterloo) Ontario 182 Holiday Inn
Peterborough (Waterfront) Ontario 153 Holiday Inn
Sarnia Ontario 151 Holiday Inn
Toronto (Airport) Ontario 445 Holiday Inn Select
Toronto (Yorkdale) Ontario 370 Holiday Inn
Unconsolidated operations:
Scottsdale (Downtown)(2) AZ 218 50% Fairfield Inn
Atlanta (Downtown)(2) GA 211 50% Courtyard by Marriott
Atlanta (Downtown)(2) GA 242 50% Fairfield Inn
Great Bend(2) KS 174 50% Holiday Inn
Hays(2) KS 117 50% Hampton Inn
Hays(2) KS 191 50% Holiday Inn
Salina(2) KS 195 50% Holiday Inn
Salina (I-70) (2) KS 93 50% Holiday Inn Express & Suites
New Orleans (Chateau LeMoyne)(2) LA 171 50% Holiday Inn
Dallas (Regal Row)(2) TX 204 50% Fairfield Inn
Houston (I-10 East)(2) TX 160 50% Fairfield Inn
Houston (I-10 East)(2) TX 90 50% Hampton Inn
Houston (Near the Galleria)(2) TX 209 50% Courtyard by Marriott
Houston (Near the Galleria)(2) TX 107 50% Fairfield Inn
</Table>
- ------------------------------------------------------
(1) We own 100% of the real estate interests unless otherwise noted.
(2) Encumbered by mortgage debt.
(3) Conversion to a Hilton hotel is expected in April 2003.
(4) Converted to a Staybridge Suites hotel in March 2003.
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 95 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 total
revenue 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:
25
o Doubletree -- between 2% and 3% of the hotel's total revenue
per month;
o Sheraton -- 2% of the hotel's total revenue per month; and
o Embassy Suites Hotels -- 2% of the hotel's total revenue per
month.
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 five-year term on mutually
acceptable terms and conditions, provided the hotel meets certain performance
standards. The TRSs may elect not to continue to operate the hotels under the
brand beyond the expiration of the initial term, however such election will give
Six Continents Hotels the right to force us to sell such hotel to it at an
appraised value. The management agreements with the other managers generally
have initial terms of between 10 and 20 years, and the agreements are generally
renewable beyond the initial term for a period or periods of between five and 10
years only upon the mutual written agreement of the parties. Management
agreements covering 64 of our hotels expire, subject to any renewal rights,
within the next five years.
The management agreements are generally terminable upon the occurrence
of standard events of default or if the hotel subject to the agreement fails to
meet certain financial expectations. Upon termination by either party for any
reason the TRSs generally will pay all amounts due and owing under the
management agreement through the effective date of such termination. Under the
Six Continents Hotels management agreements, if we sell any individual hotel, we
may be required to pay Six Continents Hotels a monthly replacement management
fee equal to the existing fee structure for up to one year. In addition, if a
TRS breaches the agreement, resulting in a default and termination thereof, or
otherwise causes or suffers a termination for any reason other than an event of
default by Six Continents Hotels, the TRS may be liable for liquidated damages
under the terms of the management agreement. However, if the termination results
from the sale of a hotel, no such liquidated damages will be owed if the net
proceeds of the sold hotel are reinvested to purchase one or more hotels
licensed and managed 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 an unaffiliated third
party without the prior written consent of the other party to the agreement,
which consent shall not be unreasonably withheld. A change in control of either
party will generally require the other's consent, which may not be unreasonably
withheld.
FRANCHISE AGREEMENTS
With the exception of our 95 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 67 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 establish various management,
operational, record-keeping, accounting, reporting and marketing standards and
26
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.
Our typical Embassy Suites Hotels franchise license agreement provides
for a term of 20 years, but we have a right to terminate the license for any
particular hotel on the 10th or 15th anniversary of the agreement upon payment
by us of an amount equal to the fees paid to the franchisor with respect to that
hotel during the two preceding years. The agreements provide us with no renewal
or extension rights. The agreements are not assignable by us and a change in
control of the franchisee will constitute a default on our part. In the event we
breach one of these agreements, in addition to losing the right to use the
Embassy Suites Hotels name for the operation of the applicable hotel, we may be
liable, under certain circumstances, for liquidated damages equal to the fees
paid to the franchisor with respect to that hotel during the three preceding
years. Franchise license agreements covering nine of our Embassy Suites Hotels
expire within the next five years.
ITEM 3. LEGAL PROCEEDINGS
There is no litigation pending or known to be threatened against us or
affecting any of our hotels, other than claims arising in the ordinary course of
business or which are not considered to be material. Furthermore, most of these
claims are substantially covered by insurance. We do not believe that any claims
known to us, individually or in the aggregate, will have a material adverse
effect on us, without regard to any potential recoveries from insurers or other
third parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is traded on the New York Stock Exchange under the
symbol "FCH." The following table sets forth for the indicated periods the high
and low sale prices for our common stock, as traded on that exchange.
<Table>
<Caption>
HIGH LOW
---- ---
2001
First quarter............................... $24.94 $22.14
Second quarter.............................. 24.75 20.90
Third quarter............................... 24.23 11.90
Fourth quarter.............................. 17.20 12.80
2002
First quarter............................... 22.00 16.20
Second quarter.............................. 21.73 17.25
Third quarter............................... 18.74 12.46
Fourth quarter.............................. 13.15 10.12
</Table>
STOCKHOLDER INFORMATION
At March 17, 2003, we had approximately 465 holders of record of our
common stock and approximately 55 holders of record of our Series A preferred
stock (which is convertible into common stock). It is estimated that there were
approximately 16,200 beneficial owners, in the aggregate, of our common stock
and Series A preferred stock at that date.
IN ORDER TO COMPLY WITH CERTAIN REQUIREMENTS RELATED TO OUR
QUALIFICATION AS A REIT, OUR CHARTER LIMITS, SUBJECT TO CERTAIN EXCEPTIONS, THE
NUMBER OF SHARES OF COMMON STOCK THAT MAY BE OWNED BY ANY SINGLE PERSON OR
AFFILIATED GROUP TO 9.9% OF THE OUTSTANDING COMMON STOCK.
DISTRIBUTION INFORMATION
We have, historically, had a policy of paying regular quarterly
distributions on our common stock, and cash distributions have been paid on our
common stock with respect to each quarter since our inception. However, on
February 4, 2003, we announced that, as the result of the uncertain political
environment and soft business climate, together with the risk of further margin
deterioration should we continue to experience declines in our portfolio's
average daily rate, we do not expect our board of directors to declare future
common dividends until there is a 2 to 4% increase in hotel RevPAR. We currently
expect to determine the amount of each future quarterly common and preferred
dividend, if any, based upon the operating results of that quarter, economic
conditions and other operating trends. Future distributions, if any, paid by us
will be at the discretion of our board of directors and will depend on our
actual cash flow, financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Internal Revenue Code
and such other factors as our board of directors deems relevant.
28
The following table sets forth information regarding the declaration and
payment of distributions by FelCor on its common stock during 2001 and 2002.
<Table>
<Caption>
DISTRIBUTION DISTRIBUTION PER SHARE
RECORD PAYMENT DISTRIBUTION
DATE DATE AMOUNT
------------ ------------ ------------
2001
First quarter.................................................. 4/13/01 4/30/01 $0.55
Second quarter................................................. 7/13/01 7/31/01 0.55
Third quarter.................................................. 10/15/01 10/31/01 0.55
Fourth quarter................................................. 12/31/01 1/31/02 0.05
2002
First quarter.................................................. 4/12/02 4/30/02 0.15
Second quarter................................................. 7/15/02 7/31/02 0.15
Third quarter.................................................. 10/11/02 10/31/02 0.15
Fourth quarter................................................. 12/31/02 1/31/03 0.15
</Table>
The foregoing distributions represent approximately a 30% return of
capital in 2002 and a 45% return of capital in 2001. In order to maintain our
qualification as a REIT, we must make annual distributions to our stockholders
of at least 90% of our taxable income (which does not include net capital
gains). For the years ended December 31, 2002 and December 31, 2001, we had
annual distributions totaling $0.60 and $1.70 per common share, respectively, of
which only $0.23 and $0.41 per share, respectively, were required to satisfy the
90% REIT distribution tests in the respective years. Under certain circumstances
we may be required to make distributions in excess of cash available for
distribution in order to meet these REIT distribution requirements. In that
event, we presently would expect to borrow funds, or to sell assets for cash, to
the extent necessary to obtain cash sufficient to make the distributions
required to retain our qualification as a REIT for federal income tax purposes.
ISSUANCES OF UNREGISTERED SECURITIES
A subsidiary of Six Continents Hotels had previously contributed an
aggregate 5,713,185 shares of FelCor common stock to FelCor LP, in exchange for
a like number of units of limited partner interest therein. Effective October 1,
2002, FelCor, FelCor LP and a subsidiary of Six Continents Hotels entered into
an exchange agreement pursuant to which FelCor issued to the subsidiary
5,713,185 shares of its common stock in exchange for the units in FelCor LP
previously issued to the subsidiary.
During the year ended December 31, 2002, in addition to the
aforementioned stock, we issued an aggregate of 2,492 shares of our common stock
to holders of FelCor LP units upon redemption of a like number of units.
For each of the foregoing issuances of shares of common stock by us, we
relied upon the exemption from registration provided by Section 4(2) of the
Securities Act as each was a transaction not involving a public offering.
29
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth the number of securities to be issued
upon exercise of outstanding options, warrants and rights; weighted average
exercise price of outstanding options, warrants and rights; and the number of
securities remaining available for future issuance.
EQUITY COMPENSATION PLAN INFORMATION
<Table>
<Caption>
NUMBER OF SECURITIES TO WEIGHTED AVERAGE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF NUMBER OF SECURITIES
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REMAINING AVAILABLE
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FOR FUTURE ISSUANCE
------------ ----------------------- ------------------ --------------------
Equity compensation plans approved
by security holders:
Stock Options 1,977,474 $22.85
Restricted Stock 633,281
----------
Total 2,610,755 1,133,179
==========
</Table>
30
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data for us for the
years ended December 31, 2002, 2001, 2000, 1999, and 1998 that has been derived
from our audited financial statements and the notes thereto. This data should be
read in conjunction with Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Item 15(a), the Consolidated
Financial Statements and Notes thereto, appearing elsewhere in this Annual
Report on Form 10-K.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2002(1) 2001(2) 2000(3) 1999 1998(4)
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Total revenues ............................. $ 1,317,959 $ 1,200,971 $ 539,964 $ 493,087 $ 332,600
Net income (loss) .......................... $ (178,581) $ (39,276) $ 61,699 $ 131,080 $ 114,839
Net income (loss) applicable to
common stockholders ..................... $ (204,873) $ (63,876) $ 37,017 $ 106,345 $ 93,416
DILUTED EARNINGS PER SHARE:
Net income (loss) applicable to
common stockholders ..................... $ (3.78) $ (1.21) $ 0.67 $ 1.57 $ 1.86
OTHER DATA:
Cash distributions per common
share(5) ................................. $ 0.60 $ 1.70 $ 2.20 $ 2.20 $ 2.545
Funds From Operations (6) .................. $ 102,372 $ 183,657 $ 288,636 $ 286,895 $ 217,363
EBITDA(6) .................................. $ 306,553 $ 369,591 $ 470,861 $ 432,689 $ 306,361
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets ............................... $ 3,780,363 $ 4,079,485 $ 4,103,603 $ 4,255,751 $ 4,175,383
Total debt, net of discount ................ $ 1,877,134 $ 1,938,408 $ 1,838,241 $ 1,833,954 $ 1,594,734
</Table>
- ----------
(1) Includes hotel revenue and expenses with respect to 88 hotels that were
leased to Six Continents Hotels prior to July 1, 2001. Prior to acquisition of
these leases, our revenues with respect to these 88 hotels were comprised mainly
of percentage lease revenues. Accordingly, revenues, expenses and operating
results for the year ended December 31, 2002, are not directly comparable to the
same period in 2001. Additionally, for the year ended December 31, 2002, we
recognized impairment charges totaling $157.5 million. This impairment resulted
primarily from our decision to dispose of 33 non-strategic hotels over the next
36 months.
(2) Includes hotel revenues and expenses with respect to 96 hotels that were
leased to either DJONT or subsidiaries of Six Continents Hotels prior to January
1, 2001, and 88 hotels that were leased to Six Continents Hotels prior to July
1, 2001. Prior to the acquisition of the leases, our revenues were comprised
mainly of percentage lease revenues. Accordingly, revenues, expenses and
operating results for the year ended December 31, 2001, are not directly
comparable to the same period in 2000. Additionally, for the year ended December
31, 2001, we recorded approximately $78 million of expenses, including lease
termination costs of $36.6 million, merger termination costs of $19.9 million,
merger related financing costs of $5.5 million, swap termination costs of $7.0
million, loss on hotels held for sale of $7.0 million, the write-off of deferred
loan costs of $1.3 million, and abandoned project write-offs of $0.8 million.
(3) In the second quarter of 2000, we recorded a $63.0 million loss to reflect
the difference between our book value and the expected realizable value of 25
hotels in connection with our decision to sell these non-strategic hotel assets,
and an extraordinary charge of $3.9 million for the write-off of deferred loan
costs associated with debt retired in 2000, prior to its maturity.
(4) On July 28, 1998, we completed the merger of Bristol Hotel Company's real
estate holdings with and into FelCor. The merger resulted in the net acquisition
of 107 primarily full-service hotels in return for approximately 31 million
shares of newly issued common stock. We subsequently contributed all assets and
liabilities acquired in the merger to FelCor LP, in exchange for approximately
31 million of its common units.
(5) In 2002, we paid a common dividend of $0.15 per share each quarter, and in
the fourth quarter of 2001, we paid a common dividend of $0.05 per share. This
represents a reduction in common dividends compared to periods prior to the
fourth quarter of 2001, and was prompted by the decrease in revenues resulting
from the disruption in travel-related businesses and the general economic
downturn that began in 2001. In 1998, we declared a special distribution of
accumulated but undistributed earnings and profits as a result of Bristol Hotel
Company merging with and into FelCor, in addition to the aggregate quarterly
dividends of $2.20 per common share. The amount of the special distribution was
$0.345 per common share.
(6) A more detailed description and computation of FFO and EBITDA is contained
in the "Funds From Operations and EBITDA" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 below.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
For background information relating to us and the definitions of
certain capitalized terms used herein, reference is made to the Notes to
Consolidated Financial Statements of FelCor Lodging Trust Incorporated appearing
elsewhere in this Annual Report on Form 10-K.
The current economic downturn, which started in 2001, resulted in a
decline in lodging demand for 2001 that continued into 2002. This had an adverse
effect on our operating results for these years. For the year ended December 31,
2002, our hotels' revenue per available room, or RevPAR, decreased by 8.1%
compared to 2001. This decline resulted in lower revenues from our hotels and a
reduction in our operating income. Also affecting our results of operations for
2002, were impairment related charges of $157.5 million resulting primarily from
our decision to designate 33 hotels as non-strategic and to sell them over the
next 36 months.
We raised a net total of $24 million in new equity capital during 2002,
through the issuance of our Series B preferred stock, and had no borrowings
under our line of credit at December 31, 2002.
FINANCIAL COMPARISON
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
% CHANGE % CHANGE
2002 2001 2002-2001 2000 2001-2000
---------- ---------- --------- ---------- ---------
(IN MILLIONS, EXCEPT REVPAR)
Revenue Per Available Room
("RevPAR") .............................. $ 61.14 $ 66.51 (8.1)% $ 75.17 (11.5)%
Funds From Operations ("FFO") ............... $ 102.4 $ 183.7 (44.3) $ 288.6 (36.3)
Earnings Before Interest, Taxes,
Depreciation and Amortization
("EBITDA") ............................... $ 306.6 $ 369.6 (17.0) $ 470.9 (21.5)
Net income (loss) ........................... $ (178.6)(1) $ (39.3)(2) (354.5) $ 61.7(3) (163.7)
</Table>
(1) The net loss for the year ended December 31, 2002, includes $157.5
million in impairment related charges, principally associated with our
decision to sell 33 non-strategic hotels over the next 36 months.
(2) The net loss for the year ended December 31, 2001, includes $78.1
million of expenses, consisting of merger termination costs of $19.9
million, merger related financing costs of $5.5 million, lease
termination costs of $36.6 million, swap termination costs of $7.0
million, a loss on assets held for sale of $7.0 million, abandoned
project write-offs of $0.8 million and a loss of $1.3 million from the
write-off of deferred loan costs.
(3) 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 loss from the
write-off of deferred loan costs.
REVPAR DECLINE
We experienced declines in RevPAR from March 2001 through August 2002.
An overall decline in both business and leisure travel was reflected in
decreased occupancies, which led to declines in room rates as hotels competed
more aggressively for guests, both of which had a significant adverse effect on
our RevPAR and operating performance. Our hotel RevPAR declined 8.1% in 2002,
compared to 2001. On a national basis, the hotel industry experienced RevPAR
declines of 2.5% and 7.0% for 2002 and 2001, respectively.
Our hotel occupancies declined by only 2.8% in 2002, compared to 2001,
while our average daily rates ("ADR") declined 5.5% from those experienced in
2001.
32
In 2002, our hotels had a 220 basis point drop in pro forma hotel
operating margins from the prior year. The compression in margins was
principally related to improving occupancies of our hotels coupled with
decreasing ADR. Also affecting hotel margins were increases in employee related
costs, marketing, and repair and maintenance costs.
We continue to actively work with our brand managers to increase
revenues and control operating costs, while still maintaining the satisfaction
and security of our hotel guests.
SALE OF NON-STRATEGIC HOTELS
In February 2003, we announced our plan to sell 33 non-strategic hotels
over the next 36 months, six of which had been previously designated as held for
sale. These non-strategic hotels include smaller hotels in secondary or tertiary
markets and include some Texas hotels, and specifically, hotels in Dallas, Texas
(an area in which we desire to reduce our concentration of hotels). It is our
intention to reinvest most of the proceeds from these sales in newer, larger and
higher quality hotels, primarily in urban and resort locations with higher
growth rates and barriers to competition. For those hotels currently managed by
Six Continents Hotels, we are liable for liquidated damages under the terms of
our management agreement, unless we reinvest the net proceeds to purchase one or
more hotels licensed and managed by Six Continents Hotels within one year of the
sale. We will seek to sell $50 to $75 million of these non-strategic hotels that
are unencumbered by debt and management agreement reinvestment requirements
during 2003, and use the proceeds from these sales to pay down debt. We recorded
$157.5 million in impairment related losses in 2002, principally related to
shorter hold periods associated with our decision to sell these non-strategic
hotels.
The 33 hotels identified as non-strategic represent 14% of our hotel
rooms, but less than 7% of our 2002 consolidated hotel EBITDA. These
non-strategic hotels have an average of 196 rooms, while the average number of
rooms for the remainder of our portfolio is 294.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2002 and 2001
On July 1, 2001, we acquired operating leases covering 88 of our hotels
and contributed them to our taxable REIT subsidiaries, or TRSs. As the leases
were acquired, we began receiving and recording hotel revenues and expenses,
rather than percentage lease revenue, for these hotels. Consequently, the
historical results for the year ended December 31, 2002, and the year ended
December 31, 2001, are not directly comparable.
We recorded a net loss applicable to common shareholders of $204.9
million in 2002, compared to a net loss of $63.9 million in 2001. The principal
components of the 2002 loss were impairment related charges of $157.5 million,
principally related to shorter holding periods associated with our decision to
sell 33 non-strategic hotels; the decrease in hotel RevPAR of 8.1%; and
contraction of hotel operating margins, principally associated with the decline
in RevPAR.
Total revenue for the year ended December 31, 2002, increased $117.0
million over 2001. The increase is principally associated with reporting hotel
operating revenues for 88 of the hotels during the first six months of 2002, of
$305.3 million, contrasted with percentage lease revenue we reported for these
hotels during the same period in 2001, of $115.1 million. This increase was
partially offset by a $62.0 million reduction in hotel operating revenues and an
$11.2 million net reduction from disposition and acquisition of hotels during
the periods reported.
Total operating expenses increased $114.4 million for the year ended
December 31, 2002, over 2001. This increase primarily resulted from the
inclusion of $208.3 million in hotel operating expenses, management fees and
other property related costs for the 88 hotels during the first six months of
2002 that were not included in the same period of 2001, prior to our acquisition
of the leases. Offsetting this increase were $19.9 million of merger termination
costs associated with the termination of the MeriStar Hospitality merger and
$36.6 million of lease termination costs associated with the acquisition of
hotel leases that were recorded in 2001.
33
Taxes, insurance and lease expense decreased $8.6 million, principally
as the result of decreases in lease expense of $9.7 million, and property taxes
of $4.1 million, partially offset by increased insurance costs of $5.2 million.
The decrease in lease expense is related to participating leases that are based
principally on revenues. Property taxes decreased principally from the
resolutions of prior year property tax disputes.
Included in the year ended December 31, 2002, were $1.7 million of
abandoned project costs related to our pursuit of a large portfolio acquisition.
We were unable to reach mutually acceptable pricing and terms with the seller as
a result of the uncertain operating environment and softening capital markets.
The year ended December 31, 2001, included $0.8 million of abandoned project
costs.
Recurring interest expense, net of interest income, increased $6.0
million for the year ended December 31, 2002, over 2001. The increase is
primarily related to excess cash that we carried during 2002, an increase in
average debt outstanding of $45.3 million, over 2001, and higher average
interest rates in 2002 resulting from our senior unsecured notes issued during
2001. The year ended December 31, 2002, included a $3.2 million charge-off of
capitalized costs from reduced line commitments. The prior year included $5.5
million of merger related financing costs related to the $300 million in senior
debt that was repaid in October 2001, and a $1.3 million loss related to the
charge-off of capitalized costs from reduced line commitments. Also in 2001, 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 $7.0 million swap termination cost.
We recorded impairment related losses of $157.5 million during the
fourth quarter of 2002. Of these losses, $118.3 million primarily related to
shorter holding periods associated with our recent decision to sell 33 hotels
over the next 36 months. Six of these 33 hotels had been identified for sale in
prior periods and were included in the hotels for which an impairment loss of
$7.0 million was recorded in 2001. Of the remaining 2002 impairment charge:
$25.8 million related to two hotels held for investment that are not included in
the disposition plan and $13.4 million related to an other than temporary
decline in the value of certain equity method investments.
Equity in the income of unconsolidated entities decreased by $17.5
million, compared to 2001. The decrease in 2002 principally resulted from the
previously described $13.4 million impairment loss and an 8.6% drop in RevPAR
from our unconsolidated hotels.
Minority interest increased $5.3 million for the year ended December
31, 2002, over 2001. Minority interest represents the proportionate share of our
net income or loss held by minority owners of FelCor LP and the proportionate
share of the income or loss of other consolidated subsidiaries not owned by
FelCor. Of this change, $2.8 million resulted from the FelCor LP minority
interest holders share of our losses and $2.5 million from decreases in the
proportionate share of income of other consolidated entities not owned by us.
Partially offsetting the net loss for the year ended December 31, 2002,
was a gain of $5.1 million on the sale of retail space and $0.9 million on the
sale of a hotel. The net loss for the year ended December 31, 2001, was reduced
by a gain of $3.0 million related to condemnation proceeds received and a gain
of $0.4 million on the sale of land.
Comparison of the Year Ended December 31, 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 year
ended December 31, 2002, to the year ended December 31, 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 year ended December 31, 2001, assumes that
our acquisition of the 88 hotel leases had occurred on January 1, 2001.
34
CONDENSED CONSOLIDATED STATEMENTS OF OPERATING INCOME
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------
HISTORICAL PRO FORMA HISTORICAL
2002 2001 2001
---------- ---------- ----------
Total revenues $1,317,959 $1,442,974 $1,200,971
---------- ---------- ----------
Operating expenses:
Hotel operating expenses 1,191,832 1,260,326 1,021,785
Abandoned project costs 1,663 837 837
Lease termination costs 36,604 36,604
Merger termination costs 19,919 19,919
---------- ---------- ----------
Total operating expenses 1,193,495 1,317,686 1,079,145
---------- ---------- ----------
Operating income $ 124,464 $ 125,288 $ 121,826
========== ========== ==========
</Table>
The 2001 Pro Forma Condensed Consolidated Statement of Operating Income
is presented for illustrative purposes only and is not necessarily indicative of
what the actual results of operations would have been had the transaction
previously described 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) Hotel 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.
Revenues decreased $125.0 million in 2002, compared to pro forma 2001.
The decrease in revenue resulted principally from a decline in both business and
leisure travel for the year ended December 31, 2002 compared to 2001, which
reflected the weak economy and political uncertainties during the period. During
the year ended December 31, 2002, RevPAR for our hotels decreased 8.1%, compared
to the prior year pro forma; the decline in RevPAR was comprised of a decrease
in hotel occupancy of 1.8 percentage points (or 2.8%), to 62.4%, and a decline
in ADR of 5.5%, to $97.90.
Hotel operating expenses decreased $68.5 million in 2002, compared to
pro forma 2001. This decrease is primarily related to a decrease in the expenses
from hotel operations associated with the 8.1% decrease in RevPAR. However,
hotel operating expenses, as a percentage of total revenue, increased from 87%
to 90%. The principal reason for the increase in operating expenses, as a
percentage of total revenue, was a 220 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 our 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.
35
Included in the year ended December 31, 2002, were $1.7 million of
abandoned project costs related to our pursuit of a large portfolio acquisition.
We were unable to reach mutually acceptable pricing and terms with the seller as
a result of the uncertain operating environment and softening capital markets.
The year ended December 31, 2001, included $0.8 million of abandoned project
costs.
Included in the prior year were $36.6 million in lease termination
costs, associated with the acquisition of our hotel leases and $19.9 million of
costs associated with the termination of the proposed MeriStar Hospitality
merger.
Our operating income was $124.5 million in 2002, compared to pro forma
operating income of $125.3 million in 2001. The 2001 pro forma operating income
included $57.4 million in costs associated with abandoned project costs, lease
termination costs and merger termination costs. The principal reasons for this
decline in pro forma total revenues and pro forma hotel operating expenses were
an 8.1% decline in RevPAR and the contraction of hotel operating margins
principally associated with the decline in RevPAR.
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 2000.
For the year ended December 31, 2001, we recorded total revenues of
$1.2 billion, compared to $539.9 million for the year ended December 31, 2000.
The increase in total revenues of $661.0 million is principally associated with
reporting hotel operating revenues in 2001, rather than the percentage lease
revenue reported in the previous year. The 96 hotels acquired from DJONT
contributed approximately $787.9 million in hotel operating revenue in 2001,
compared to $277.3 million in percentage lease revenue for 2000. The 88 hotels
acquired July 1, 2001, from Six Continents Hotels contributed approximately
$115.1 million in percentage lease revenue and $295.0 million in hotel operating
revenue, following the acquisition of these leases, compared to $259.6 million
in percentage lease revenue for these same hotels in 2000.
Total operating expense increased $813.5 million for the year ended
December 31, 2001, over 2000, primarily as a result of the inclusion of hotel
operating expenses, management fees and other property related costs of $710.6
million, which were not included in 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 $48.2 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 $36.6 million of costs associated with the acquisition of DJONT and the
Six Continents Hotels leases, and $19.9 million of expenses associated with the
termination of the MeriStar merger. We also incurred $5.5 million in merger
related financing costs related to the $300 million in senior debt that was
repaid in October 2001, 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 $7.0 million swap termination cost. In June 2000, we
announced our intention to sell 25 non-strategic hotels and, in 2000, recorded
an expense of $63.0 million representing the difference between the net book
value of these hotels and their estimated net proceeds from sale. In 2001, an
additional $7.0 million loss provision was recorded related to the remaining 13
hotels held for sale.
36
Equity in income from unconsolidated entities decreased $7.5 million in
2001, compared to 2000. The principal reasons for the decrease in 2001 were a
gain of $3.7 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 the RevPAR of the hotels owned by them during 2001.
Minority interests decreased $15.5 million in 2001, compared to 2000.
This decrease in minority interest principally reflects FelCor LP's partners'
share of our net loss of $63.9 million in 2001.
We recorded a net loss applicable to common stockholders of $63.9
million in 2001, compared to a net income of $37.0 million in 2000. The
principal components of the loss in 2001 were the decrease in hotel RevPAR of
11.4%, contraction of hotel operating margins principally associated with the
decline in RevPAR, costs of terminating the MeriStar merger of $19.9 million,
merger financing costs of $5.5 million, lease termination costs of $36.6 million
associated with acquiring hotel leases, swap termination costs of $7.0 million
associated with repayment of variable rate debt, and a loss on assets held for
sale of $7.0 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 our hotels and contributed them to our TRSs. As the leases were
acquired, we began directly receiving and recording hotel revenues and expenses,
rather than percentage lease revenue. Consequently, a comparison of historical
results for the year ended December 31, 2001, to the year ended December 31,
2000, may not be as meaningful as a discussion of pro forma results.
Accordingly, we have included a discussion of the comparison of the pro forma
results of operations. The pro forma results of operations for the years ended
December 31, 2001, and 2000 assumes that the following occurred on January 1,
2000:
o Our acquisition of DJONT for 416,667 units of limited
partnership interest in FelCor LP, valued at approximately $10
million;
o Our acquisition of 12 hotel leases, together with their
associated management contracts, from Six Continents Hotels
for 413,585 shares of our common stock, valued at
approximately $10 million; and
o Our acquisition of the remaining 88 hotel leases held by Six
Continents Hotels.
37
CONDENSED CONSOLIDATED STATEMENTS OF OPERATING INCOME
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
PRO FORMA PRO FORMA HISTORICAL HISTORICAL
2001 2000 2001 2000
----------- ----------- ----------- ----------
Total revenues $ 1,442,974 $ 1,667,270 $ 1,200,971 $539,964
----------- ----------- ----------- --------
Operating expenses:
Hotel operating expenses 1,260,326 1,402,018 1,021,785 265,634
Lease termination costs 36,604 36,604
Merger termination costs 19,919 19,919
Abandoned project costs 837 837
----------- ----------- ----------- --------
Total operating expenses 1,317,686 1,402,018 1,079,145 265,634
----------- ----------- ----------- --------
Operating income $ 125,288 $ 265,252 $ 121,826 $274,330
=========== =========== =========== ========
</Table>
The 2002 and 2001 Condensed Consolidated Statements of Operating Income
are presented for illustrative purposes only and are not necessarily indicative
of what the actual results of operations would have been had the above
transactions occurred on the indicated date, nor do they purport to represent
our results of operations for future periods.
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 changes in our
historical revenue from the elimination of historical
percentage lease revenue and the addition of historical hotel
operating revenues.
(b) Hotel 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; (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.
Pro forma revenues decreased $224.3 million in 2001, primarily as a
result of the economic downturn and disruptions in business and leisure travel
following the terrorist attacks on September 11, 2001. As a result of these
events, both business and leisure travel declined significantly during the year
ended December 31, 2001, compared to 2000. During 2001, our hotels' RevPAR
decreased 11.4%, comprised of a decrease in occupancy of 6.6 percentage points
(or 9.4%), 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.
Pro forma hotel operating expenses decreased $141.7 million in 2001,
compared to 2000, but pro forma hotel operating expense as a percentage of total
revenue increased from 84% to 87%. 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 related to increased labor costs, the
cost of frequent guest programs and utility costs as a percentage of total
revenue. The increase in pro forma 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 hotels' operating profits. These measures include
reducing labor costs, streamlining staffing, and consolidating operations by
closing unused floors in hotels, when possible.
38
Our pro forma operating income was $125.3 million in 2001, compared to
pro forma operating income of $265.3 million in 2000. The principal reasons for
the drop in pro forma operating income were the decrease in pro forma hotel
RevPAR of 11.4%, contraction of pro forma operating margins principally
associated with the decline in RevPAR, costs of terminating the MeriStar merger
of $19.9 million and lease termination costs of $36.6 million associated with
acquiring the hotel leases.
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 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 certain significant non-recurring items, such as lease
termination costs, merger termination costs, merger financing costs, abandoned
project costs, impairment losses, charge-off of deferred financing costs and
interest rate swap termination expenses 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, or that interpret the current
NAREIT definition differently than we do.
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.
39
The following table details our computation of FFO and EBITDA (in
thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
FUNDS FROM OPERATIONS (FFO)(a)
Net income (loss) .............................................................. $ (178,581) $ (39,276) $ 61,699
Gain on sale of hotel assets ................................................... (5,861) (2,595)
Depreciation ................................................................... 152,817 157,692 160,745
Depreciation from unconsolidated entities ...................................... 11,616 10,881 10,167
Preferred dividends:
Series A preferred dividends ................................................ (11,662)
Series B preferred dividends ................................................ (14,630) (12,937) (12,937)
Minority interest in FelCor Lodging LP. ........................................ (13,717) (10,868) 4,692
Significant non-recurring items:
Impairment loss ............................................................. 157,505 7,000 63,000
Charge-off of deferred financing costs ...................................... 3,222 1,270 3,865
Abandoned project costs ..................................................... 1,663 837
Merger termination costs .................................................... 19,919
Merger related financing costs .............................................. 5,486
Lease termination costs ..................................................... 36,604
Swap termination costs ...................................................... 7,049
------------ ------------ ------------
FFO ............................................................................ $ 102,372 $ 183,657 288,636
============ ============ ============
Weighted average common shares and units outstanding(b) ........................ 62,061 66,675 67,239
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)(a)
FFO ............................................................................ $ 102,372 $ 183,657 $ 288,636
Interest expense ............................................................... 166,427 161,226 158,620
Interest expense from unconsolidated entities .................................. 9,374 9,678 9,188
Amortization expense ........................................................... 2,088 2,093 1,480
Preferred dividends:
Series A preferred dividends ................................................ 11,662
Series B preferred dividends ................................................ 14,630 12,937 12,937
------------ ------------ ------------
EBITDA ......................................................................... $ 306,553 $ 369,591 $ 470,861
============ ============ ============
</Table>
(a) FFO and EBITDA are adjusted to exclude significant
non-recurring items.
(b) Weighted average common stock and units outstanding are
computed including dilutive options, unvested stock grants,
and assuming conversion of Series A preferred stock to common
stock, when dilutive.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to stockholders and repayments of indebtedness, is from the
results of operations of our hotels. For the year ended December 31, 2002, net
cash flow provided by operating activities, consisting primarily of hotel
operations, was $106 million. We currently expect that our operating cash flow
for 2003 will be within the range of $70 to $90 million using current RevPAR
forecasts. Our debt maturities for 2003 are $35 million and we expect 2003
capital expenditures to be approximately $60 to $70 million. Cash necessary to
fund cash flow shortfalls and distributions, if any, will be funded from our
cash balances, which were approximately $150 million at the date of this filing,
proceeds from the sale of hotels or additional borrowings. However, due to the
sharp reduction in travel that began in 2001, and the resultant drop in RevPAR
and profits from our hotel operations, we expect our Board of Directors to defer
future common dividends until our hotels experience a 2% to 4% increase in
RevPAR, and to determine the amount of preferred dividends, if any, for each
quarterly period, based upon the
40
operating results of that quarter, economic conditions, other operating trends
and minimum REIT distribution requirements. Currently, we do not anticipate
paying any dividends on our common stock during 2003.
Recent events, including the threat of additional terrorist attacks,
the commencement of war in Iraq and the bankruptcy of several major
corporations, have had an adverse impact on the capital markets. These events,
new terrorist attacks, a prolonged war in Iraq 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, continue to be delayed significantly, that too could adversely
affect our operating cash flow and the availability and cost of capital for our
business. As a consequence of the economic slowdown in our business, and the
travel and lodging industries generally, Standard & Poor's lowered its ratings
on our $1.2 billion in senior unsecured debt from BB- to B+ with a stable
outlook, in February 2003. Although Moody's affirmed its current rating on our
senior debt in February 2003 (Ba3), we remain on negative outlook. Should
Moody's downgrade our current rating, the interest rate on $900 million of our
$1.2 billion in senior unsecured debt would increase by 50 basis points, which
would increase our interest expense by $4.5 million on an annual basis.
We are also 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 that can fluctuate disproportionately to revenues. These operating
expenses are difficult to predict and control, resulting in an increased risk of
volatility in our results of operations. The economic slowdown and the sharp
drop in Occupancy and ADR that began in 2001, have resulted both in declines in
RevPAR and an erosion in operating margins. 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, earnings and cash flow.
On April 4, 2002, we completed the private placement of approximately
$25 million of our Series B preferred stock. These shares of preferred stock
were issued at a discount to yield an effective rate of 9.4%. The proceeds were
used for working capital, and allowed us to accelerate certain capital
expenditures.
In August 2002, we contributed five 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 our joint venture partner holds the other 50% equity interest.
An affiliate of our joint venture partner manages these hotels. Pursuant to the
joint venture agreement, our joint venture partner contributed $1.4 million to
the new venture. The venture closed on a $10 million line of credit, of which
approximately $4.4 million was drawn at closing, with the cash proceeds going to
us. The remaining $5.5 million under the line of credit is being used for
capital improvements at the hotels. In addition to our 50% equity interest, we
retained a preferred right to receive approximately $6.3 million from the
venture.
In 2002, we entered into two amendments to our line of credit. In June
2002, we amended our line of credit to relax covenant levels to provide us with
greater financial flexibility. In December 2002, we further amended our line of
credit to relax covenant levels and to reduce capacity under the line to $300
million from $615 million. The maturity of the line of credit remains at October
31, 2004, but we have the right to extend the maturity date for two consecutive
one-year periods, subject to certain conditions. We recorded a $3.2 million
expense to write-off unamortized deferred financing costs associated with the
reduction in our line of credit. Although we were in compliance with our
existing covenants prior to the amendments, it was necessary to amend the line
of credit in anticipation of a continued negative RevPAR environment. The
amended line allows for the relaxation of certain financial covenants through
the maturity date, with a step-up in covenants on June 30, 2004, including the
unsecured interest coverage, fixed charge coverage, secured leverage, 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 an added tier to
reflect the higher permitted leverage. There was no amount outstanding under the
facility at December 31, 2002. As of the date of this filing, we had $149
million outstanding under our line of credit and cash and cash equivalents of
approximately $150 million. The primary reason for the outstanding balance on
our line of credit was our decision to carry excess cash because of the current
geopolitical and economic uncertainties and their potential impact on our
operating results.
41
In addition to 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 (such as distributions on common and preferred stock, share
repurchases and certain investments); limitations on our ability to merge or
consolidate with other persons to issue stock of our subsidiaries and to 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 and limitations on our ability to modify
certain instruments, to create liens, 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, at higher permitted leverage levels we
agreed to certain more stringent limitations on acquisitions, restricted
payments and discretionary capital expenditures. At December 31, 2002, we were
in compliance with all of these covenants.
Unless our business and cash flow stabilizes, we may not be able to
satisfy the relaxed financial covenant requirements. In such an event, we may
need to obtain further amendments from our lenders under the line of credit to
continue being able to borrow under it. We are not certain whether, to what
extent, or upon what terms the lenders may be willing to further relax the
covenants. Further amendments to our line of credit may result in additional
restrictions on us that, together with any limitation on our ability to borrow
under the line, may adversely affect our ability to run our business and manage
our financial affairs.
The breach of any of the covenants and limitations under our line of
credit could result in the acceleration of amounts outstanding. 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 unsecured recourse
indebtedness. We may not be able to refinance or repay our debt in full under
those circumstances.
Our other borrowings contain affirmative and negative covenants that
are generally equal to or less restrictive than the line of credit. Most of our
mortgage debt is non-recourse to us and contains provisions allowing for the
substitution of collateral upon satisfaction of certain conditions. Most of our
mortgage debt is prepayable, subject to various prepayment penalties, yield
maintenance or defeasance obligations. At December 31, 2002, we had unencumbered
investments in hotels with a net book value totaling $2.3 billion.
Our publicly traded senior unsecured notes require that we satisfy a
total leverage, a secured leverage and an interest coverage test in order to
incur additional indebtedness, except under our line of credit or to refinance
maturing debt with replacement debt, as defined under our indentures; to pay
dividends in excess of the minimum dividend required to meet the REIT
qualification test; to repurchase stock; or to merge. As of the date of this
filing, we have satisfied all such incurrence tests. We currently expect that we
will have the flexibility to meet these tests unless RevPAR declines continue or
become more severe. We have debt maturing of $35 million in 2003 and $189
million in 2004, including $175 million of our senior unsecured notes that
mature in October 2004. We anticipate meeting these obligations through a
combination of cash on hand, cash flow from operations, borrowing under our line
of credit, additional secured debt and sale of non-strategic hotel assets.
We currently anticipate that we will meet our financial covenant and
incurrence tests under the RevPAR guidance provided by us at our fourth quarter
earnings conference call on February 5, 2003. For the first quarter of 2003, we
currently anticipate that our portfolio RevPAR will be 3% to 5% below the
comparable period of the prior year. FFO is expected to be within the range of
$8 to $11 million for the first quarter of 2003, and EBITDA is expected to be
within the range of $59 million to $62 million for the same period. The RevPAR
decline in 2003, compared to the same periods in 2002, was approximately 3.6%
for January, 5.8% for February, and was 6.5% for the first 19 days of March. We
currently anticipate that full year 2003 hotel portfolio RevPAR will be
approximately the same as 2002, plus or minus 1%. FFO, for the year 2003, is
anticipated to be within the range of $74 to $87 million and EBITDA is expected
to be within the range of $277 to $289 million.
42
Certain significant credit and debt statistics at December 31, 2002,
and 2001, are as follows:
<Table>
<Caption>
2002 2001
---- ----
Consolidated debt to annual EBITDA 6.1x 5.2x
Total debt to annual EBITDA 6.6x 5.6x
Consolidated debt to investment in hotels, at cost 40.8% 42.8%
Consolidated debt to total market capitalization 64.6% 59.3%
Consolidated debt to assets 49.6% 47.4%
EBITDA to consolidated interest paid(a) 1.9x 2.4x
EBITDA to total interest expense(b) 1.7x 2.2x
Fixed charge coverage ratio(c) 1.5x 1.9x
</Table>
(a) EBITDA to consolidated interest paid represents consolidated
EBITDA divided by interest expense before capitalized interest
and amortization of debt costs.
(b) EBITDA to total interest expense represents consolidated
EBITDA divided by interest expense, including our pro rata
share of unconsolidated interest expense. Our interest
coverage incurrence test under our senior unsecured notes
allows the exclusion of certain unrestricted subsidiaries that
are included in the consolidated numbers used to compute this
ratio.
(c) Fixed charge coverage ratio represents consolidated EBITDA
divided by consolidated interest expense, our pro rata share
of unconsolidated interest expense and preferred dividends.
At December 31, 2002, we had:
o $66.5 million of cash and cash equivalents;
o No balance outstanding under our $300 million line of credit; o Fixed
interest rate debt equal to 89% of our total debt;
o Weighted average maturity of fixed interest rate debt of approximately
six years; and
o Secured debt to total assets of 18.1%
The following details our debt outstanding at December 31, 2002, and
2001 (in thousands):
<Table>
<Caption>
DECEMBER 31,
2002
COLLATERAL(a) INTEREST RATE MATURITY DATE 2002 2001
------------- ------------- ------------- ------------ -----------
FLOATING RATE DEBT:
Line of credit None 4.48% October 2004 $ 49,674
Publicly-traded term notes-swapped None 4.59(b) October 2004 $ 174,760 174,633
Publicly-traded term notes-swapped None 4.99(b) October 2007 25,000
Promissory note None 3.44 June 2016 650 650
---- ----------- ----------
Total floating rate debt(c) 4.73 200,410 224,957
---- ----------- ----------
FIXED RATE DEBT:
Publicly-traded term notes None 7.63 October 2007 99,518 124,419
Publicly-traded term notes None 9.50 September 2008 596,195 595,525
Publicly-traded term notes None 8.50 June 2011 297,907 297,655
Mortgage debt 15 hotels 7.24 November 2007 134,738 137,541
Mortgage debt 7 hotels 7.54 April 2009 94,288 95,997
Mortgage debt 6 hotels 7.55 June 2009 70,937 72,209
Mortgage debt 7 hotels 8.73 May 2010 140,315 142,254
Mortgage debt 8 hotels 8.70 May 2010 180,534 182,802
Mortgage debt 6 hotels 7.20 2003 - 2005 54,993 57,008
Other 1 hotel 9.10 2003 - 2010 7,299 8,041
---- ----------- ----------
Total fixed rate debt(c) 8.61 1,676,724 1,713,451
---- ----------- ----------
Total debt(c) 8.18% $ 1,877,134 $1,938,408
==== =========== ==========
</Table>
(a) At December 31, 2002, we had unencumbered investments in
hotels with a net book value totaling $2.3 billion.
43
(b) At December 31, 2002, our $175 million in publicly traded
notes due October 2004, and $25 million of our publicly traded
notes due October 2007, were matched with interest rate swap
agreements that effectively converted the fixed interest rate
on these notes to a floating interest rate tied to LIBOR. The
differences to be paid or received by us under the terms of
the interest rate swap agreements are accrued as interest
rates change and are recognized as an adjustment to interest
expense. The interest rate swaps decreased our interest
expense by $4 million during 2002.
(c) Calculated based on the weighted average of outstanding debt
at December 31, 2002.
All of our floating rate debt at December 31, 2002, was based upon
LIBOR. Six month LIBOR at December 31, 2002, was 1.38%.
At December 31, 2002, we had $175 million of publicly traded term notes
due October 2004, and $25 million of publicly traded term notes due October
2007, that were matched with interest rate swap agreements which effectively
convert the fixed interest rate on these notes to a variable interest rate.
These interest rate swap agreements have maturity dates coinciding with the
maturity dates of these publicly traded term notes. We entered into seven
separate interest rate swap agreements with three different financial
institutions. Under these agreements, we receive a fixed rate of 7.375% for the
agreements maturing in October 2004, and 7.625% for the agreement maturing in
October 2007. We pay the six-month LIBOR rate plus a spread ranging from 2.57%
to 3.57%. The weighted average spread over LIBOR at December 31, 2002, was
3.25%.
In January and February 2003, we executed two additional interest rate
swaps. These new fair value swaps are similar to those that existed at December
31, 2002; they modify a portion of the interest characteristics of our
outstanding fixed rate debt without an exchange of the underlying principal
amount and effectively convert fixed rate debt to a variable rate. As designated
fair value hedges, these swaps will be marked to market through the income
statement, but are offset by the change in fair value of our swapped outstanding
fixed rate debt. The notional amount of these new swaps is $50 million, on which
we receive a fixed rate of 7.625% and pay a rate of LIBOR plus an average spread
of 4.325%.
We spent approximately $63 million on upgrading and renovating our
hotels during the year ended December 31, 2002. Our unconsolidated entities
spent approximately $17.2 million on upgrading and renovating hotels, and
approximately $8.1 million on a residential condominium development project,
during the year ended December 31, 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 our 2003 capital expenditures to be between $60 and $70 million.
Contractual Obligations
We have obligations and commitments to make certain future payments
under debt agreements and various contracts. The following schedule details
these obligations at December 31, 2002 (in thousands):
<Table>
<Caption>
LESS THAN 1 1 - 3 4 - 5 AFTER
TOTAL YEAR YEARS YEARS 5 YEARS
---------- ------- -------- -------- ----------
Debt $1,883,754 $35,118 $231,834 $272,645 $1,344,157
Liquidated damages related to the sale of
hotels managed by Six Continents Hotels(a) 4,468 4,468
Operating leases 298,557 37,997 75,224 46,644 138,712
---------- ------- -------- -------- ----------
Total contractual obligations $2,186,779 $77,563 $307,058 $319,289 $1,482,869
========== ======= ======== ======== ==========
</Table>
(a) We currently expect that this obligation will be satisfied by
our investment in one or more hotels licensed and managed by
Six Continents Hotels.
44
We have guaranteed the payment of 50% of a loan related to the
construction of a residential condominium project in Myrtle Beach, South
Carolina, and a full recourse loan for one of our 50% owned unconsolidated hotel
ventures. The following schedule details these obligations and maturity dates at
December 31, 2002 (in thousands):
<Table>
<Caption>
TOTAL AMOUNTS
COMMITTED 2003 2004 2005
------------- ------ ----- -------
Loan guarantee $5,966 $ 143 $ 143 $ 5,680
</Table>
Investments in Unconsolidated Entities
At December 31, 2002, we had unconsolidated 50% investments in ventures
that own an aggregate of 29 hotels (referred to as hotel joint ventures), and we
had unconsolidated 50% investments in ventures that operate 14 of those 29
hotels (referred to as operating joint ventures). We own 100% of the lessees
operating the remaining 15 hotels owned by the hotel joint ventures. None of our
directors, officers or employees owns any interest in any of these hotel or
operating joint ventures. The hotel ventures had approximately $267 million of
non-recourse mortgage debt relating to 29 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 hotel joint venture had a
full recourse loan outstanding of $0.3 million at December 31, 2002, that we
guaranteed.
At December 31, 2002, we also had an unconsolidated 50% investment in a
venture that is developing a residential condominium project in Myrtle Beach,
South Carolina. This joint venture has a $97.6 million full recourse
construction loan. We and our joint venture partner, Hilton, have each
guaranteed 50% of the amount outstanding under this loan. At December 31, 2002,
an aggregate of $11.4 million had been drawn under this loan, of which we have
guaranteed our pro rata share of $5.7 million. Our pro rata share of the entire
amount available under the construction loan is $48.8 million. The anticipated
completion date of this development is late 2004.
Capital expenditures on the hotels owned by our hotel joint ventures
are generally paid from the capital reserve account, which is funded from the
income from operations of these ventures. However, if a venture has insufficient
cash to make necessary capital improvements, the venture may make a capital call
upon the venture members or partners to fund such necessary improvements. It is
possible that, in the event of a capital call, the other joint venture member or
partner may be unwilling or unable to make the 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,
including all of its assets and liabilities, 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.
45
Quantitative and Qualitative Disclosures About Market Risk
At December 31, 2002, approximately 89% 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 tables provide information about our financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations. For debt obligations, the tables present
scheduled maturities and weighted average interest rates, by maturity dates. For
interest rate swaps, the tables present the notional amount and weighted average
interest rate, by contractual maturity date. 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 the date presented, 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 received
or paid by us had the swaps been terminated at the date presented.
EXPECTED MATURITY DATE
AT DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
-------- --------- -------- -------- --------- ----------- ----------- -----------
LIABILITIES
Fixed rate:
Debt $ 35,118 $ 189,228 $ 42,606 $ 14,217 $ 258,428 $ 1,343,507 $ 1,883,104 $ 1,725,934
Interest rate swaps(a) (175,000) (25,000) (200,000)
Average interest rate 7.42% 7.91% 7.48% 8.04% 7.46% 8.89% 8.61%
Floating rate:
Debt 650 650 650
Interest rate swaps(a) 175,000 25,000 200,000 7,708
Average interest rate(b) 4.59% 4.95% 10.18% 4.63%
Total $ 35,118 $ 189,228 $ 42,606 $ 14,217 $ 258,428 $ 1,344,157 1,883,754
7.42% 4.84% 7.48% 8.04% 7.22% 8.89% 8.18%
Discount accretion (6,620)
Total debt $ 1,877,134
</Table>
(a) At December 31, 2002, our $175 million in publicly traded notes due
October 2004, and $25 million of our publicly traded notes due October
2007, were matched with interest rate swap agreements that effectively
converted the fixed interest rate on these notes to a variable interest
rate tied to LIBOR. The interest rate swap agreements also have
maturities that coincide with those notes. The differences to be paid
or received by us under the terms of the interest rate swap agreements
are accrued as interest rates change and are recognized as an
adjustment to interest expense. The interest rate swaps decreased our
interest expense by $4 million during 2002.
(b) The average floating rate of interest represents the implied forward
rates in the yield curve at December 31, 2002.
46
EXPECTED MATURITY DATE
AT DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
-------- --------- -------- -------- --------- ----------- ----------- -----------
LIABILITIES
Fixed rate:
Debt $ 12,922 $ 34,904 $ 189,229 $ 42,635 $ 14,216 $ 1,601,946 $ 1,895,852 $ 1,664,696
Interest rate swaps(a) (175,000) (175,000)
Average interest rate 7.88% 7.43% 7.91% 7.46% 8.04% 8.66% 8.59%
Floating rate:
Debt 49,674 650 50,324 50,324
Interest rate swaps 175,000 175,000
(1,466)
Average interest rate(a) 4.83% 8.26% 4.84%
Total $ 12,922 $ 34,904 $238,903 $ 42,635 $ 14,216 $ 1,602,596 1,946,176
7.88% 7.43% 5.01% 7.46% 8.04% 8.66% 8.15%
Discount accretion (7,768)
Total debt $ 1,938,408
</Table>
(a) The average floating rate of interest represents the implied forward
rates in the yield curve 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 equity holders.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). 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, the carrying value of investments in hotels, litigation,
and other contingencies. We base our estimates on historical
47
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the most
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o We are required by GAAP 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 certain events occur,
including one or more of the following: 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; events that could
cause changes or uncertainty in travel patterns; and a current
expectation that, more likely than not, a hotel will be sold
or otherwise disposed of significantly before the end of its
previously estimated useful life. In February 2003, we
announced our plan to sell 33 non-strategic hotels over the
next 36 months. The shorter probable holding periods related
to our decision to sell these hotels was the primary factor
that led to an impairment charge of $118.3 million on 20 of
these 33 hotels. Additional impairment charges of $25.8
million were recorded in the fourth quarter of 2002, resulting
from decreased estimates of future cash flows from two hotels
not included in our disposition plan. We revised our estimates
of future cash flows in the fourth quarter of 2002, when it
became apparent that the recovery of the travel industry would
take longer than we had originally expected. In the evaluation
of impairment of our hotel assets, and in establishing the
impairment charge, we made many assumptions and estimates on a
hotel by hotel basis, which included the following:
o Annual cash flow growth rates for revenues and
expenses;
o Holding periods;
o Expected remaining useful lives of assets;
o Estimates in fair values taking into consideration
future cash flows, capitalization rates, discount
rates and comparable selling prices; and
o Future capital expenditures.
Changes in these estimates, future adverse changes in market
conditions or poor operating results of underlying hotels
could result in losses or an inability to recover the carrying
value of the hotels that may not be reflected in the hotel's
current carrying value, thereby requiring additional
impairment charges in the future.
o We own a 50% interest in various real estate joint ventures
reported under the equity method of accounting. In accordance
with GAAP, we record an impairment of these equity method
investments when they experience an other than temporary
decline in value. During the fourth quarter of 2002, we
determined that certain of our equity method investments had
experienced an other than temporary decline in value, because
a recovery of their value in excess of previously recorded
book values was not expected to occur within the next year. As
such, we recorded a related impairment loss of $13.4 million.
Changes in our estimates or future adverse changes in the
market conditions of the hotels owned by equity method
investments could result in additional declines in value that
could be considered other than temporary.
o We make estimates with respect to contingent liabilities for
losses covered by insurance in accordance with FAS 5,
Accounting for Contingencies. We record liabilities for self
insured losses under our insurance programs when it becomes
probable that an asset has been impaired or a liability has
been incurred at the date of our financial statements and the
amount of the loss can be reasonably estimated. In 2002, we
became self-insured for the first
48
$250,000, per occurrence, of our general liability claims with
regard to 68 of our hotels. We review the adequacy of our
reserves for our self-insured claims on a regular basis. Our
reserves are intended to cover the estimated ultimate
uninsured liability for losses with respect to reported and
unreported claims incurred as of the end of each accounting
period. These reserves represent estimates at a given
accounting date, generally utilizing projections based on
claims, historical settlement of claims and estimates of
future costs to settle claims. Estimates are also required
since there may be reporting lags between the occurrence of
the insured event and the time it is actually reported.
Because establishment of insurance reserves is an inherently
uncertain process involving estimates, currently established
reserves may not be sufficient. If our insurance reserves of
$2.3 million, at December 31, 2002, for general liability
losses are insufficient, we will record an additional expense
in future periods. Property and catastrophic losses are
event-driven losses and, as such, until a loss occurs and the
amount of loss can be reasonably estimated, no liability is
recorded. We have recorded no contingent liabilities with
regard to property or catastrophic losses at December 31,
2002.
o Credit is extended to hotel guests, and terms of credit range
from one day for the clearing of credit card receivables to 30
days for corporate accounts. We make estimates with respect to
the collectability of our trade receivables and provide an
allowance for doubtful accounts for our estimate of probable
losses. Our estimate of losses is based on several factors,
including historical losses, the aging of the outstanding
receivables, and the financial condition of the customers. If
a customer becomes insolvent or files for bankruptcy, we
charge-off the entire amount due from that customer. At both
December 31, 2002 and 2001, we had an allowance for doubtful
accounts of $1.4 million and had recorded bad debt expense of
$1.5 million and $1.8 million for the years ended December 31,
2002 and 2001, respectively. No bad debt expense was recorded
during the year ended December 31, 2000, as this period was
prior to our purchase of the hotel leases. Significant
judgments and estimates must be made and used in connection
with establishing allowances in any accounting period.
Material differences may result in the amount and timing of
our allowances for any period if adverse economic conditions
cause widespread financial difficulties among our customers,
in general. Specifically, additional bankruptcies of other
companies in the travel industry, such as airlines, may result
in additional charges to bad debt expense.
o SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" establishes accounting and reporting standards for
derivative instruments. In accordance with this pronouncement,
all of our interest rate swap agreements outstanding at
December 31, 2002, were designated as fair value hedges
because they are hedging our exposure to the changes in the
fair value of our fixed rate debt. Our swaps meet the criteria
necessary to assume no ineffectiveness of the hedge. These
instruments are marked to our estimate of their fair market
value through the income statement, but are offset by the
change in the estimated fair value of our swapped fixed rate
debt. We estimate the fair value of our interest rate swaps
and fixed rate debt through the use of a third party
valuation. We may use other methods and assumptions to
validate the fair market value. At December 31, 2002, our
estimate of the fair market value of the interest rate swaps
was approximately $7.7 million and represents the amount that
we estimate we would currently receive upon termination of
these instruments, based on current market rates and
reasonable assumptions about relevant future market
conditions.
o Our TRSs have cumulative future tax deductions totaling $103.4
million. The gross deferred income tax asset associated with
these future tax deductions was $39.3 million. We have
recorded a valuation allowance equal to 100% of our $39.3
million deferred tax asset related to our TRSs, because of the
uncertainty of realizing the benefit of the deferred tax
asset. SFAS 109, "Accounting for Income Taxes," establishes
financial accounting and reporting standards for the effect of
income taxes. The objectives of accounting for income taxes
are to recognize the amount of taxes payable or refundable for
the current year and deferred tax
49
liabilities and assets for the future tax consequences of
events that have been recognized in an entity's financial
statements or tax returns. In accordance with SFAS 109 we have
considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a
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 operating income in the period such
determination was made.
RECENT ACCOUNTING ANNOUNCEMENTS
During the year ended December 31, 2002, we elected early adoption of
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections." 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. We have
reclassified all losses from extinguishment of debt reported in prior periods 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.
The Financial Accounting Standards Board ("FASB") has issued SFAS No.
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") of the FASB, 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 included (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. We do not currently
expect SFAS 146 to have a material impact on our results of operations and
financial position.
The FASB has issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions," which is effective for certain transactions arising on or after
October 1, 2002. SFAS 147 will have no impact on us.
The FASB has issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to a fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
have adopted the disclosure requirements of SFAS 148. The Company currently
accounts for stock-based employee compensation in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
In accordance with one of the alternative methods of transition for a voluntary
change to a fair value based method of accounting for stock-based employee
compensation mandated by SFAS 148, we intend to adopt the "prospective method"
as of January 1, 2003. Under this method, compensation expense will be
recognized for any new awards issued after December 31, 2002. We do not
currently expect the adoption of SFAS 148 to have a material impact on our
financial position or results of operations.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission
of FASB Interpretation No. 34," ("FIN 45") was issued in November 2002. FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. The initial recognition and initial
measurement
50
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. We have
made the disclosures required by FIN 45.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51" ("FIN 46"), was issued in January
2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
FIN 46 requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among the parties involved. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.
We have no unconsolidated variable interest entities that would be
consolidated under the requirements of FIN 46.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward looking statements include, without limitation, any statement that
may predict, forecast, indicate or imply future results, performance or
achievements. Forward-looking statements involve risks and uncertainties that
may cause actual results to differ materially from the results contained in the
forward-looking statements. The risks, uncertainties and assumptions that may
affect our actual results, which are discussed more fully under "Cautionary
Factors That May Affect Future Results" in Item 1 hereof and in our previous
filings under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (collectively, "Cautionary Disclosures"),
include: general economic conditions, including the timing and magnitude of any
recovery from the current soft economy; future acts of terrorism and the
commencement of war in Iraq; the availability of capital; and numerous other
factors which may affect results, performance and achievements. The forward
looking statements included herein, and all subsequent written and oral forward
looking statements attributable to us or persons acting on our behalf, are
expressly qualified in their entirety by the Cautionary Disclosures. We
undertake no obligation to update any forward-looking statements to reflect
future events or circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to us are
incorporated herein by reference to the discussion under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" contained elsewhere in this Annual
Report on Form 10-K for the year ended December 31, 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herein beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
51
PART III. -- OTHER INFORMATION
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item is contained in our definitive
Proxy Statement for our 2003 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item is contained in our definitive
Proxy Statement for our 2003 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information called for by this Item is contained in our definitive
Proxy Statement for our 2003 Annual Meeting of Stockholders, or in Item 5 of
this Annual Report on Form 10-K for the year ended December 31, 2002, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is contained in our definitive
Proxy Statement for our 2003 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our senior
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely accumulating and
communicating to them material information relating to FelCor and its
consolidated subsidiaries that are required to be included in our periodic SEC
filings.
(b) Changes in internal controls.
Not applicable.
52
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included herein at pages F-1 through F-34.
2. Financial Statement Schedules
The following financial statement schedule is included herein at page
F-35 though F-39.
Schedule III - Real Estate and Accumulated Depreciation for
FelCor Lodging Trust Incorporated
All other schedules for which provision is made in Regulation S-X are
either not required to be included herein under the related instructions or are
inapplicable or the related information is included in the footnotes to the
applicable financial statement and, therefore, have been omitted.
3. Exhibits
The following exhibits are filed as part of this Annual Report on Form
10-K:
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 - Articles of Amendment and Restatement dated June 22, 1995,
amending and restating the Charter of FelCor Lodging Trust
Incorporated ("FelCor"), as amended or supplemented by
Articles of Merger dated June 23, 1995, Articles Supplementary
dated April 30, 1996, Articles of Amendment dated August 8,
1996, Articles of Amendment dated June 16, 1997, Articles of
Amendment dated October 30, 1997, Articles Supplementary dated
May 6, 1998, Articles of Merger and Articles of Amendment
dated July 27, 1998, and Certificate of Correction dated March
11, 1999 (filed as Exhibit 3.1 to FelCor's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (the
"1998 10-K") and incorporated herein by reference).
3.1.1 - Certificate of Correction to the Articles of Merger between
FelCor and Bristol Hotel Company, dated August 31, 1999 (filed
as Exhibit 3.1.1 to FelCor's Form 10-Q for the quarter ended
September 30, 1999 (the "September 1999 10-Q") and
incorporated herein by reference).
3.1.2 - Articles Supplementary dated April 1, 2002 (filed as Exhibit
3.1.2 to FelCor's Form 8-K dated April 1, 2002, and filed on
April 4, 2002, and incorporated herein by reference).
3.2 - Bylaws of FelCor, as amended (filed as Exhibit 3.2 to
FelCor's Registration Statement on Form S-11 (file no.
333-98332) and incorporated herein by reference).
4.1 - Form of Share Certificate for Common Stock (filed as Exhibit
4.1 to FelCor's Form 10-Q for the quarter ended June 30, 1996,
and incorporated herein by reference).
4.2 - Form of Share Certificate for $1.95 Series A Cumulative
Convertible Preferred Stock (filed as Exhibit 4.4 to FelCor's
Form 8-K dated May 1, 1996, and incorporated herein by
reference).
</Table>
53
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
4.3 - Form of Share Certificate for 9% Series B Cumulative
Redeemable Preferred Stock (filed as Exhibit 4.5 to FelCor's
Form 8-K dated May 29, 1998, and incorporated herein by
reference).
4.4 - Deposit Agreement dated April 30, 1998, between FelCor and
SunTrust Bank, Atlanta, as preferred share depositary (filed
as Exhibit 4.6 to FelCor's Form 8-K dated May 29, 1998, and
incorporated herein by reference).
4.4.1 - Supplement and Amendment to Deposit Agreement dated April 4,
2002, among FelCor, SunTrust Bank and the holders (filed as
Exhibit 4.4.1 to FelCor's Form 8-K dated April 1, 2002, and
filed on April 4, 2002, and incorporated herein by reference).
4.5 - Form of Depositary Receipt evidencing the Depositary Shares
(filed as Exhibit 4.7 to FelCor's Form 8-K dated May 29, 1998,
and incorporated herein by reference).
4.6 - Indenture dated as of April 22, 1996 by and between FelCor
and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as
Exhibit 4.2 to FelCor's Form 8-K dated May 1, 1996 and
incorporated herein by reference).
4.7 - Indenture dated as of October 1, 1997 by and among FelCor
Lodging Limited Partnership, formerly FelCor Suites Limited
Partnership ("FelCor LP"), FelCor, the Subsidiary Guarantors
named therein and SunTrust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4.1 to the Registration Statement on Form
S-4 (file no. 333-39595) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.7.1 - First Amendment to Indenture dated as of February 5, 1998 by
and among FelCor, FelCor LP, the Subsidiary Guarantors named
therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed
as Exhibit 4.2 to the Registration Statement on Form S-4 (file
no. 333-39595) of FelCor LP and the other co-registrants named
therein and incorporated herein by reference).
4.7.2 - Second Amendment to Indenture and First Supplemental
Indenture dated as of December 30, 1998, by and among FelCor,
FelCor LP, the Subsidiary Guarantors named therein and
SunTrust Bank, as Trustee (filed as Exhibit 4.7.2 to the 1998
10-K and incorporated herein by reference).
4.7.3 - Third Amendment to Indenture dated as of March 30, 1999 by
and among FelCor, FelCor LP, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.3
to FelCor's Form 10-Q for the quarter ended March 31, 1999
(the "March 1999 10-Q") and incorporated herein by reference).
4.7.4 - Second Supplemental Indenture dated as of August 1, 2000, by
and among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.2.4 to the Registration Statement
on Form S-4 (file no. 333-47506) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.7.5 - Third Supplemental Indenture dated as of July 26, 2001, by
and among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.2.5 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
</Table>
54
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
4.7.6* - Fourth Supplemental Indenture dated October 1, 2002, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee.
4.8 - Indenture dated as of September 15, 2000, by and among
FelCor LP, FelCor, the Subsidiary Guarantors named therein,
and SunTrust Bank, as Trustee (filed as Exhibit 4.3 to the
Registration Statement on Form S-4 (file no. 333-47506) of
FelCor LP and the other co-registrants named therein and
incorporated herein by reference).
4.8.1 - First Supplemental Indenture dated as of July 26, 2001, by
and among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.3.1 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.8.2* - Second Supplemental Indenture dated October 1, 2002, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee.
4.9 - Indenture dated as of June 4, 2001, by and among FelCor LP,
FelCor, the Subsidiary Guarantors named therein, and SunTrust
Bank, as Trustee (filed as Exhibit 4.9 to FelCor's Form 8-K
dated as of June 4, 2001 and filed June 14, 2001, and
incorporated herein by reference).
4.9.1 - First Supplemental Indenture dated as of July 26, 2001, by
and among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.4.1 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.9.2* - Second Supplemental Indenture dated October 1, 2002, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee.
10.1 - Second Amended and Restated Agreement of Limited Partnership
of FelCor LP dated as of December 31, 2001 (filed as Exhibit
10.1 to FelCor's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 (the "2001 Form 10-K"), and
incorporated herein by reference.)
10.1.1 - First Amendment to Second Amended and Restated Agreement of
Limited Partnership of FelCor LP dated April 1, 2002 (filed as
Exhibit 10.1.1 to FelCor's Form 8-K dated April 1, 2002, and
filed on April 4, 2002, and incorporated herein by reference).
10.1.2*- Second Amendment to Second Amended and Restated Agreement of
Limited Partnership of FelCor LP dated August 31, 2002.
10.1.3*- Third Amendment to Second Amended and Restated Agreement of
Limited Partnership of FelCor LP dated October 1, 2002.
10.2 - Contribution Agreement dated as of January 1, 2001, by and
among FelCor, FelCor LP, FelCor, Inc., RGC and DJONT
Operations, L.L.C. (filed as Exhibit 10.27 to FelCor's Form
10-Q for the quarter ended March 31, 2001 (the "March 2001
10-Q"), and incorporated herein by reference).
</Table>
55
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.3 - Leasehold Acquisition Agreement dated as of March 30, 2001, by
and among Bass (U.S.A.) Incorporated, in its individual
capacity and on behalf of its subsidiaries and affiliates, and
FelCor, in its individual capacity and on behalf of its
subsidiaries and affiliates, including as an exhibit thereto
the form of Management Agreement for Six Continents
Hotels-branded hotels (filed as Exhibit 10.28 to the March
2001 10-Q and incorporated herein by reference).
10.4 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Six Continents Hotels, as
manager, with respect to FelCor's Six Continents
Hotels-branded hotels (included as an exhibit to the Leasehold
Acquisition Agreement filed as Exhibit 10.3 above).
10.5 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Hilton Hotels Corporation, as
manager, with respect to FelCor's Embassy Suites Hotels,
including the form of Embassy Suites Hotels License Agreement
attached as an exhibit thereto (filed as Exhibit 10.5 to the
2001 Form 10-K and incorporated herein by reference).
10.6 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Hilton Hotels Corporation, as
manager, with respect to FelCor's Doubletree and Doubletree
Guest Suites hotels (filed as Exhibit 10.6 to the 2001 Form
10-K and incorporated herein by reference).
10.7 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Starwood Hotels & Resorts, Inc.,
as manager, with respect to FelCor's Sheraton and Westin
hotels (filed as Exhibit 10.7 to the 2001 Form 10-K and
incorporated herein by reference).
10.8 - Employment Agreement dated as of July 28, 1994 between FelCor
and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to FelCor's
Annual Report on Form 10-K/A Amendment No. 1 for the fiscal
year ended December 31, 1994 (the "1994 10-K/A") and
incorporated herein by reference).
10.9 - Restricted Stock and Stock Option Plan of FelCor (filed as
Exhibit 10.9 to the 1994 10- K/A and incorporated herein by
reference).
10.10 - Savings and Investment Plan of FelCor (filed as Exhibit
10.10 to the 2001 Form 10-K and incorporated herein by
reference).
10.11 - 1995 Restricted Stock and Stock Option Plan of FelCor (filed
as Exhibit 10.9.2 to FelCor's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (the "1995 10-K") and
incorporated herein by reference).
10.12 - Non-Qualified Deferred Compensation Plan, as amended and
restated July 1999 (filed as Exhibit 10.9 to the September
1999 10-Q and incorporated herein by reference).
10.13 - 1998 Restricted Stock and Stock Option Plan (filed as
Exhibit 4.2 to FelCor's Registration Statement on Form S-8
(file no. 333-66041) and incorporated herein by reference).
10.14* - 2001 Restricted Stock and Stock Option Plan of FelCor.
</Table>
56
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.15 - Second Amended and Restated 1995 Equity Incentive Plan
(filed as Exhibit 99.1 to FelCor's Post-Effective Amendment on
Form S-3 to Form S-4 Registration Statement (file no.
333-50509) and incorporated herein by reference).
10.16 - Amended and Restated Stock Option Plan for Non-Employee
Directors (filed as Exhibit 99.2 to FelCor's Post-Effective
Amendment on Form S-3 to Form S-4 Registration Statement (file
no. 333-50509) and incorporated herein by reference).
10.17 - Form of Severance Agreement for executive officers and
certain key employees of FelCor (filed as Exhibit 10.13 to the
1998 10-K and incorporated herein by reference).
10.18 - Stockholders' and Registration Rights Agreement dated as of
July 27, 1998 by and among FelCor, Bass America, Inc., Holiday
Corporation, Bass plc, United/Harvey Investors I, L.P.,
United/Harvey Investors II, L.P., United/Harvey Investors III,
L.P., United/Harvey Investors IV, L.P., and United/Harvey
Investors V, L.P. (filed as Exhibit 10.18 to FelCor's Form 8-K
dated August 10, 1998, and incorporated herein by reference).
10.19 - Seventh Amended and Restated Credit Agreement dated as of
July 26, 2001, among the FelCor, FelCor LP and FelCor Canada
Co., as Borrowers, the Lenders party thereto, The Chase
Manhattan Bank and The Chase Manhattan Bank of Canada, as
Administrative Agents, Bankers Trust Company, as Syndication
Agent, J.P. Morgan Securities Inc. and Deutsche Banc Alex.
Brown, Inc., as Co-Lead Arrangers and Joint Bookrunners, and
Bank of America, N.A. and Salomon Smith Barney, Inc., as
Document Agents (filed as Exhibit 10.17 to FelCor's Form 10-Q
for the quarter ended June 30, 2001, and incorporated herein
by reference).
10.19.1- First Amendment dated as of November 6, 2001, among FelCor,
FelCor LP and FelCor Canada Co., as borrowers, the lenders
party thereto, The Chase Manhattan Bank and The Chase
Manhattan Bank of Canada, as Administrative Agents, and
Bankers Trust Company, as Syndication Agent (filed as Exhibit
10.17.1 to FelCor's Form 10-Q for the quarter ended September
30, 2001 (the "September 2001 10-Q") and incorporated herein
by reference).
10.19.2- Second Amendment dated as of June 17, 2002, among FelCor,
FelCor LP and FelCor Canada Co., as borrowers, the lenders
party thereto, JPMorgan Chase Bank and J.P. Morgan Bank
Canada, as administrative agents, and Deutsche Bank Trust
Company Americas, as syndication agent (filed as Exhibit
10.18.2 to FelCor's Form 8-K dated June 17, 2002, and filed on
July 1, 2002, and incorporated herein by reference).
10.19.3- Third Amendment and Consent dated December 20, 2002, among
FelCor, FelCor LP and FelCor Canada Co., as borrowers, the
lenders party thereto, JPMorgan Chase Bank and J.P. Morgan
Bank Canada, as administrative agents, and Deutsche Bank Trust
Company Americas, as syndication agent (filed as Exhibit
10.18.3 to FelCor's Form 8-K dated December 20, 2002, and
filed December 23, 2002, and incorporated herein by
reference).
10.20 - Loan Agreement dated as of October 10, 1997 among Bristol
Lodging Company, Bristol Lodging Holding Company, Nomura Asset
Capital Corporation, as administrative agent and collateral
agent for Lenders, and Bankers Trust Company, as co-agent for
Lenders (filed as Exhibit 10.10 to the Bristol Hotel Company
Annual Report on Form 10-K for the fiscal year ended December
31, 1997 and incorporated herein by reference).
</Table>
57
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.20.1- First Amendment to Loan Agreement and Ancillary Loan
Documents made as of May 28, 1999, among FelCor Lodging
Company, L.L.C., FelCor Lodging Holding Company, L.L.C. and
LaSalle National Bank, as Trustee for Nomura Asset Securities
Corporation Commercial Pass-Through Certificates Series
1998-D6, as administrative agent and collateral agent (filed
as Exhibit 10.19.1 to FelCor's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 (the "1999 10-K") and
incorporated herein by reference).
10.21 - Form of Mortgage, Security Agreement and Fixture Filing by
and between FelCor/CSS Holdings, L.P. as Mortgagor and The
Prudential Insurance Company of America, as Mortgagee (filed
as Exhibit 10.23 to the March 1999 10-Q and incorporated
herein by reference).
10.21.1- Promissory Note dated April 1, 1999, in the original
principal amount of $100,000,000 made by FelCor/CSS Holdings,
Ltd., payable to the order of The Prudential Insurance Company
of America (filed as Exhibit 10.23.1 to FelCor's Form 10-Q for
the quarter ended June 30, 1999 (the "June 1999 10-Q") and
incorporated herein by reference).
10.22 - Form of Deed of Trust, Security Agreement and Fixture
Filing, each dated as of May 12, 1999, from FelCor/MM
Holdings, L.P., as Borrower, in favor of Fidelity National
Title Insurance Company, as Trustee, and Massachusetts Mutual
Life Insurance Company, as Beneficiary, each covering a
separate hotel and securing one of the separate Promissory
Notes described in Exhibit 10.21.1, also executed by
FelCor/CSS Holdings, L.P. with respect to the Embassy Suites
Hotels-Anaheim and Embassy Suites Hotels-Deerfield Beach, and
by FelCor LP with respect to the Embassy Suites Hotels-Palm
Desert (filed as Exhibit 10.24.2 to the June 1999 10-Q and
incorporated herein by reference).
10.22.1- Form of six separate Promissory Notes each dated May 12,
1999, made by FelCor/MM Holdings, L.P. payable to the order of
Massachusetts Mutual Life Insurance Company in the respective
original principal amounts of $12,500,000 (Embassy Suites
Hotels-Dallas Market Center), $14,000,000 (Embassy Suites
Hotels-Dallas Love Field), $12,450,000 (Embassy Suites
Hotels-Tempe), $11,550,000 (Embassy Suites Hotels-Anaheim),
$8,900,000 (Embassy Suites Hotels-Palm Desert), $15,600,000
(Embassy Suites Hotels-Deerfield Beach) (filed as Exhibit
10.24.1 to the June 1999 10-Q and incorporated herein by
reference).
10.23 - Form Deed of Trust and Security Agreement and Fixture Filing
with Assignment of Leases and Rents, each dated as of April
20, 2000, from FelCor/MM S-7 Holdings, L.P., as Mortgagor, in
favor of Massachusetts Mutual Life Insurance Company and
Teachers Insurance and Annuity Association of America, as
Mortgagee, each covering a separate hotel and securing one of
the separate Promissory Notes described in Exhibit 10.22.2
(filed as Exhibit 10.24 to FelCor's Form 10-Q for the quarter
ended June 30, 2000 (the "June 2000 10-Q") and incorporated
herein by reference).
10.23.1- Form of Accommodation Cross-Collateralization Mortgage and
Security Agreement, each dated as of April 20, 2000, executed
by FelCor/MM S-7 Holdings, L.P., in favor of Massachusetts
Mutual Life Insurance Company and Teachers Insurance and
Annuity Association of America (filed as Exhibit 10.24.1 to
the June 2000 10-Q and incorporated herein by reference).
</Table>
58
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.23.2- Form of fourteen separate Promissory Notes each dated April
20, 2000, each made by FelCor/MM S-7 Holdings, L.P., each
separately payable to the order of Massachusetts Mutual Life
Insurance Company and Teachers Insurance and Annuity
Association of America, respectively, in the respective
original principal amounts of $13,500,000 (Phoenix (Crescent),
Arizona), $13,500,000 (Phoenix (Crescent), Arizona),
$6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $6,500,000
(Cypress Creek/Ft. Lauderdale, Florida), $9,000,000 (Atlanta
Galleria, Georgia), $9,000,000 (Atlanta Galleria, Georgia),
$12,500,000 (Chicago O'Hare Airport, Illinois), $12,500,000
(Chicago O'Hare Airport, Illinois), $3,500,000 (Lexington,
Kentucky), $3,500,000 (Lexington, Kentucky), $17,000,000
(Philadelphia Society Hill, Philadelphia), $17,000,000
(Philadelphia Society Hill, Philadelphia), $10,500,000 (South
Burlington, Vermont), and, $10,500,000 (South Burlington,
Vermont) (filed as Exhibit 10.24.2 to the June 2000 10-Q and
incorporated herein by reference).
10.24 - Form Deed of Trust and Security Agreement, each dated as of
May 2, 2000, from each of FelCor/CMB Buckhead Hotel, L.L.C.,
FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield
Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB
Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C.,
FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF
Holdings, L.P., each as Borrower, in favor of The Chase
Manhattan Bank, as Beneficiary, each covering a separate hotel
and securing one of the separate Promissory Notes described in
Exhibit 10.23.1 (filed as Exhibit 10.25 to the June 2000 10-Q
and incorporated herein by reference).
10.24.1- Form of eight separate Promissory Notes, each dated May 2,
2000, made by FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB
Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C.,
FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings,
L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB
Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P.,
each separately payable to the order of The Chase Manhattan
Bank in the respective original principal amounts of
$38,250,000 (Atlanta Buckhead, Georgia), $20,500,000 (Boston
Marlborough, Massachusetts), $16,575,000 (Chicago Deerfield,
Illinois), $5,338,000 (Corpus Christi, Texas), $25,583,000
(Orlando South, Florida), $32,650,000 (New Orleans,
Louisiana), $20,728,000 (Piscataway, New Jersey), and
$26,268,000 (South San Francisco, California) (filed as
Exhibit 10.25.1 to the June 2000 10-Q and incorporated herein
by reference).
10.25 - Registration Rights Agreement dated as of June 4, 2001, by
and among FelCor LP, FelCor, and Deutsche Banc Alex. Brown
Inc., in its individual capacity and on behalf of J.P. Morgan
Securities Inc., Banc of America Securities LLC, Salomon Smith
Barney Inc., Morgan Stanley & Co. Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, SG Cowen Securities
Corporation, Credit Lyonnais Securities (USA) Inc., Scotia
Capital (USA) Inc., BMO Nesbitt Burns Corp., Fleet Securities,
Inc., PNC Capital Markets, Inc. and Wells Fargo Brokerage
Services, LLC (filed as Exhibit 10.29 to FelCor's Form 8-K
dated June 4, 2001 and filed June 14, 2001, and incorporated
herein by reference).
10.26 - Registration Rights Agreement dated as of December 3, 2001,
by and among FelCor, FelCor LP, Deutsche Banc Alex. Brown,
J.P. Morgan Securities Inc., Banc of America Securities LLC,
Morgan Stanley & Co. Incorporated and Salomon Smith Barney
Inc. (filed as Exhibit 10.27 to the 2001 Form 10-K and
incorporated herein by reference).
10.27 - Exchange Agreement dated as of October 1, 2002 by and among
FelCor LP, FelCor and Six Continents Hotels Operating Corp.
(filed as Exhibit 10.28 to FelCor's Form 10-Q for the quarter
ended September 30, 2002, and incorporated herein by
reference).
</Table>
59
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
14.1* - FelCor Code of Business Conduct and Ethics.
21* - List of Subsidiaries of FelCor.
23* - Consent of PricewaterhouseCoopers LLP.
99.1* - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the Chief Executive Officer.
99.2* - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the Chief Financial Officer.
</Table>
- -----------------
* Indicates that the document is filed herewith.
(b) Reports on Form 8-K
A current report on Form 8-K dated December 20, 2002 was filed by the
Company on December 20, 2002. This filing, under Item 5, disclosed the execution
of the Company's Third Amendment to the Seventh Amended and Restated Credit
Agreement on December 20, 2002. The amendment was filed as an exhibit to the
8-K.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FELCOR LODGING TRUST INCORPORATED
By: /s/ Lawrence D. Robinson
-------------------------------------
Lawrence D. Robinson
Executive Vice President
Date: March 24, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
DATE SIGNATURE
March 24, 2003 /s/ Donald J. McNamara
----------------------------------------------------
Donald J. McNamara
Chairman of the Board and Director
March 24, 2003 /s/ Thomas J. Corcoran, Jr.
----------------------------------------------------
Thomas J. Corcoran, Jr.
President and Director (Chief Executive Officer)
March 26, 2003 /s/ Richard J. O'Brien
----------------------------------------------------
Richard J. O'Brien
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
March 26, 2003 /s/ Lester C. Johnson
----------------------------------------------------
Lester C. Johnson
Senior Vice President and Controller
(Principal Accounting Officer)
March 24, 2003 /s/ Melinda J. Bush
----------------------------------------------------
Melinda J. Bush, Director
March 24, 2003 /s/ Richard S. Ellwood
----------------------------------------------------
Richard S. Ellwood, Director
March 24, 2003 /s/ Richard O. Jacobson
----------------------------------------------------
Richard O. Jacobson, Director
March 24, 2003 /s/ Charles A. Ledsinger, Jr.
----------------------------------------------------
Charles A. Ledsinger, Jr., Director
March 24, 2003 /s/ Robert H. Lutz, Jr.
----------------------------------------------------
Robert H. Lutz, Jr., Director
March 25, 2003 /s/ Robert A. Mathewson
----------------------------------------------------
Robert A. Mathewson, Director
March 24, 2003 /s/ Richard C. North
----------------------------------------------------
Richard C. North, Director
March 24, 2003 /s/ Michael D. Rose
----------------------------------------------------
Michael D. Rose, Director
61
CERTIFICATIONS
I , Thomas J. Corcoran, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of FelCor Lodging Trust
Incorporated,
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange act rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 27, 2003 /s/ Thomas J. Corcoran, Jr.
-------------------------------------
Thomas J. Corcoran, Jr.
Chief Executive Officer
62
CERTIFICATIONS
I, Richard J. O'Brien, certify that:
1. I have reviewed this annual report on Form 10-K of FelCor Lodging Trust
Incorporated,
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange act rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 27, 2003 /s/ Richard J. O'Brien
-------------------------------------
Richard J. O'Brien
Chief Financial Officer
63
FELCOR LODGING TRUST INCORPORATED
INDEX TO FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
<Table>
Report of Independent Accountants........................................................................F-2
Consolidated Balance Sheets - December, 2002 and 2001....................................................F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000...............F-4
Consolidated Statements of Comprehensive Income..........................................................F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000.....F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000...............F-7
Notes to Consolidated Financial Statements...............................................................F-8
Report of Independent Accountants on Financial Statement Schedule.......................................F-35
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2002.........................F-36
</Table>
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of FelCor Lodging Trust Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of FelCor Lodging Trust Incorporated at December 31, 2002
and 2001, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, effective January 1, 2001,
the Company adopted the provisions of Statement of Financial Accounting Standard
133, "Accounting for Derivative Instruments and Hedging Activities."
PricewaterhouseCoopers LLP
Dallas, Texas
February 3, 2003,
except as to Note 25,
which is as of March 21, 2003
F-2
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS)
<Table>
<Caption>
ASSETS
2002 2001
-------------- --------------
Investment in hotels, net of accumulated depreciation of $782,166 in 2002
and $630,962 in 2001 ..................................................................... $ 3,473,452 $ 3,653,236
Investment in unconsolidated entities ......................................................... 141,943 155,217
Hotels held for sale .......................................................................... 38,937
Cash and cash equivalents ..................................................................... 66,542 128,742
Accounts receivable, net of allowance for doubtful accounts of $1,413 in 2002
and $1,404 in 2001 ....................................................................... 48,548 51,276
Deferred expenses, net of accumulated amortization of $13,357 in 2002
and $10,672 in 2001 ...................................................................... 24,185 31,249
Other assets .................................................................................. 25,693 20,828
-------------- --------------
Total assets ........................................................................ $ 3,780,363 $ 4,079,485
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt, net of discount of $6,620 in 2002 and $7,768 in 2001 .................................... $ 1,877,134 $ 1,938,408
Distributions declared but unpaid ............................................................. 14,792 8,172
Accrued expenses and other liabilities ........................................................ 150,385 164,052
Minority interest in FelCor LP, 3,290 and 9,005 units issued and
outstanding at December 31, 2002 and 2001, respectively .................................. 72,639 236,100
Minority interest in other partnerships ....................................................... 48,596 49,559
-------------- --------------
Total liabilities ................................................................... 2,163,546 2,396,291
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Convertible Preferred Stock, 5,980 and 5,981 shares issued
and outstanding at December 31, 2002 and 2001, respectively ........................... 149,512 149,515
Series B Cumulative Redeemable Preferred Stock, 68 and 58 shares issued and
outstanding at December 31, 2002 and 2001, respectively ............................... 169,395 143,750
Common stock, $.01 par value, 200,000 shares authorized and 75,136 and 69,418
shares issued, including shares in treasury, at December 31, 2002
and 2001, respectively ................................................................... 751 694
Additional paid-in capital .................................................................... 2,204,530 2,059,448
Accumulated other comprehensive income ........................................................ (99) (376)
Distributions in excess of earnings ........................................................... (593,834) (355,391)
Less: Common stock in treasury, at cost, of 16,369 and 16,421 shares
at December 31, 2002 and 2001, respectively .............................................. (313,438) (314,446)
-------------- --------------
Total stockholders' equity .......................................................... 1,616,817 1,683,194
-------------- --------------
Total liabilities and stockholders' equity .......................................... $ 3,780,363 $ 4,079,485
============== ==============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001
AND 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
2002 2001 2000
-------------- -------------- --------------
Revenues:
Hotel operating revenue ................................................ $ 1,316,313 $ 1,082,844
Percentage lease revenue ............................................... 115,137 $ 536,907
Retail space rental and other revenue .................................. 1,646 2,990 3,057
-------------- -------------- --------------
Total revenues ............................................................ 1,317,959 1,200,971 539,964
-------------- -------------- --------------
Expenses:
Hotel operating expenses ............................................... 462,293 362,645
Other property related costs ........................................... 363,931 290,247
Management and franchise fees .......................................... 66,897 57,739
Taxes, insurance and lease expense ..................................... 132,138 140,784 92,633
Corporate expenses ..................................................... 13,756 12,678 12,256
Depreciation ........................................................... 152,817 157,692 160,745
Abandoned project costs ................................................ 1,663 837
Lease termination costs ................................................ 36,604
Merger termination costs ............................................... 19,919
-------------- -------------- --------------
Total operating expenses .................................................. 1,193,495 1,079,145 265,634
-------------- -------------- --------------
Operating income .......................................................... 124,464 121,826 274,330
Interest expense, net:
Recurring financing .................................................... 164,294 158,343 156,712
Merger related financing ............................................... 5,486
Swap termination expense .................................................. 7,049
Charge-off of deferred financing costs .................................... 3,222 1,270 3,865
Impairment loss on investment in hotels and hotels held for sale .......... 144,085 7,000 63,000
-------------- -------------- --------------
Income (loss) before equity in income of unconsolidated entities,
minority interests and gain on sale of assets ....................... (187,137) (57,322) 50,753
Equity in income (loss) of unconsolidated entities, including an
impairment loss in 2002 of $13,419 .................................. (10,127) 7,346 14,820
Minority interests ..................................................... 12,622 7,283 (8,262)
-------------- -------------- --------------
Income (loss) from continuing operations .................................. (184,642) (42,693) 57,311
Gain on sale of assets ................................................. 6,061 3,417 4,388
-------------- -------------- --------------
Net income (loss) ......................................................... (178,581) (39,276) 61,699
Preferred dividends .................................................... (26,292) (24,600) (24,682)
-------------- -------------- --------------
Net income (loss) applicable to common stockholders ....................... $ (204,873) $ (63,876) $ 37,017
============== ============== ==============
Earnings per share data:
Basic:
Income (loss) from continuing operations applicable to common
stockholders ....................................................... $ (3.78) $ (1.21) $ 0.67
============== ============== ==============
Net income (loss) applicable to common stockholders .................. $ (3.78) $ (1.21) $ 0.67
============== ============== ==============
Weighted average common shares outstanding ........................... 54,173 52,622 55,264
Diluted:
Income (loss) from continuing operations applicable to common
stockholders ....................................................... $ (3.78) $ (1.21) $ 0.67
============== ============== ==============
Net income (loss) applicable to common stockholders .................. $ (3.78) $ (1.21) $ 0.67
============== ============== ==============
Weighted average common shares outstanding ........................... 54,173 52,622 55,519
Cash dividends declared on common stock ................................... $ 0.60 $ 1.70 $ 2.20
============== ============== ==============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
<Table>
<Caption>
2002 2001 2000
--------- --------- ---------
Net income (loss) ............................................... $(178,581) $ (39,276) $ 61,699
Cumulative transition adjustment from interest rate swaps........ 248
Unrealized holding losses from interest rate swaps .............. (7,297)
Losses realized on interest rate swap terminations .............. 7,049
Foreign currency translation adjustment ......................... 277 (376)
--------- --------- ---------
Comprehensive income (loss) ................................ $(178,304) $ (39,652) $ 61,699
========= ========= =========
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)
<Table>
<Caption>
COMMON STOCK
--------------- ACCUMULATED
NUMBER ADDITIONAL OTHER DISTRIBUTIONS
PREFERRED OF PAID-IN COMPREHENSIVE IN EXCESS OF
STOCK SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS
--------- ------ ------ ---------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 $ 295,000 69,291 $ 693 $2,138,477 $ (119,385)
Issuance of stock awards 18 (4,340)
Amortization of stock awards 1,478
Conversion of operating partnership units
into common shares 106 1 1,788
Conversion of Series A preferred stock (1,735) 811
Repurchase of common shares
Purchase of options (1,861)
Contribution of shares in exchange for
operating partnership units
Allocation to minority interest (71,628)
Dividends declared:
$2.20 per common share (119,230)
$1.95 per Series A preferred share (11,744)
$2.25 per Series B depository preferred share (12,938)
Net income 61,699
Other, net 184
--------- ------ ------ ---------- ------------- -------------
BALANCE AT DECEMBER 31, 2000 293,265 69,415 694 2,064,909 (201,598)
Foreign exchange translation $(376)
Issuance of treasury shares 1,920
Issuance of stock awards 3 (4,373)
Amortization of stock awards 2,093
Repurchase of common shares
Allocation to minority interest (5,091)
Dividends declared:
$1.70 per common share (89,917)
$1.95 per Series A preferred share (11,662)
$2.25 per Series B depository preferred share (12,938)
Net loss (39,276)
Other, net (10)
--------- ------ ------ ---------- ------------- -------------
BALANCE AT DECEMBER 31, 2001 293,265 69,418 694 2,059,448 (376) (355,391)
Foreign exchange translation 277
Issuance of Series B preferred stock 25,645 (1,836)
Issuance of stock awards 5 (1,121)
Amortization of stock awards 2,088
Conversion of preferred stock (3) 3
Conversion of operating partnership
units into common shares 5,713 57 73,414
Allocation to minority interest 72,534
Dividends declared:
$0.60 per common share (33,570)
$1.95 per Series A preferred share (11,662)
$2.25 per Series B depository preferred share (14,630)
Net loss (178,581)
Other, net
--------- ------ ------ ---------- ------------- -------------
BALANCE AT DECEMBER 31, 2002 $ 318,907 75,136 $ 751 $2,204,530 $ (99) $ (593,834)
========= ====== ====== ========== ============= =============
<Caption>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
--------- -------------
BALANCE AT DECEMBER 31, 1999 $(139,874) $ 2,174,911
Issuance of stock awards 4,340
Amortization of stock awards 1,478
Conversion of operating partnership units
into common shares 1,789
Conversion of Series A preferred stock 924
Repurchase of common shares (86,681) (86,681)
Purchase of options (1,861)
Contribution of shares in exchange for
operating partnership units (101,874) (101,874)
Allocation to minority interest (71,628)
Dividends declared:
$2.20 per common share (119,230)
$1.95 per Series A preferred share (11,744)
$2.25 per Series B depository preferred share (12,938)
Net income 61,699
Other, net 184
--------- -------------
BALANCE AT DECEMBER 31, 2000 (323,165) 1,834,105
Foreign exchange translation (376)
Issuance of treasury shares 7,906 9,826
Issuance of stock awards 4,373
Amortization of stock awards 2,093
Repurchase of common shares (4,127) (4,127)
Allocation to minority interest (5,091)
Dividends declared:
$1.70 per common share (89,917)
$1.95 per Series A preferred share (11,662)
$2.25 per Series B depository preferred share (12,938)
Net loss (39,276)
Other, net 567 557
--------- -------------
BALANCE AT DECEMBER 31, 2001 (314,446) 1,683,194
Foreign exchange translation 277
Issuance of Series B preferred stock 23,809
Issuance of stock awards 1,121
Amortization of stock awards 2,088
Conversion of preferred stock
Conversion of operating partnership
units into common shares 73,471
Allocation to minority interest 72,534
Dividends declared:
$0.60 per common share (33,570)
$1.95 per Series A preferred share (11,662)
$2.25 per Series B depository preferred share (14,630)
Net loss (178,581)
Other, net (113) (113)
--------- -------------
BALANCE AT DECEMBER 31, 2002 $(313,438) $ 1,616,817
========= =============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)
<Table>
<Caption>
2002 2001 2000
------------ ----------- ----------
Cash flows from operating activities:
Net income (loss) ............................................................. $ (178,581) $ (39,276) $ 61,699
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation ........................................................ 152,817 157,692 160,745
Gain on sale of assets .............................................. (6,061) (3,417) (4,388)
Amortization of deferred financing fees ............................. 5,297 5,292 4,628
Accretion (amortization) of debt .................................... 407 17 (692)
Allowance for doubtful accounts ..................................... (9) 220
Amortization of unearned officers' and directors'
compensation .................................................... 2,088 2,093 1,478
Equity in loss (income) from unconsolidated entities ................ 10,127 (7,346) (14,820)
Charge-off of deferred financing costs .............................. 3,222 1,270 3,865
Lease termination costs ............................................. 36,604
Impairment loss on investment in hotels and hotels held
for sale ........................................................ 144,085 7,000 63,000
Minority interests .................................................. (12,622) (7,283) 8,262
Changes in assets and liabilities:
Accounts receivable ................................................. 4,524 6,847 (9,664)
Deferred expenses ................................................... (1,455) (13,801) (16,964)
Other assets ........................................................ (6,253) 1,596 (5,339)
Accrued expenses and other liabilities .............................. (11,750) (16,543) 25,494
------------ ----------- ----------
Net cash flow provided by operating activities ............ 105,836 130,965 277,304
------------ ----------- ----------
Cash flows provided by (used in) investing activities:
Acquisition of hotels ......................................................... (49,778)
Improvements and additions to hotels .......................................... (60,793) (65,446) (95,235)
Operating cash received in acquisition of lessees ............................. 29,731
Proceeds from sale of assets .................................................. 29,001 66,330 35,111
Cash distributions from unconsolidated entities ............................... 11,310 8,132 25,358
------------ ----------- ----------
Net cash flow provided by (used in) investing activities .. (70,260) 38,747 (34,766)
------------ ----------- ----------
Cash flows used in financing activities:
Proceeds from borrowings ...................................................... 1,122,172 997,424
Net proceeds from sale of preferred stock ..................................... 23,809
Repayment of borrowings ....................................................... (62,460) (1,020,290) (992,635)
Purchase of treasury stock, stock grants, and assumed stock options ........... (113) (4,127) (88,542)
Proceeds from exercise of stock options ....................................... 678
Distributions paid to other partnerships' minority interests .................. (2,058) (4,799) (5,229)
Distributions paid to FelCor LP limited partners .............................. (3,696) (20,211) (14,190)
Dividends paid to preferred stockholders ...................................... (25,907) (24,600) (24,691)
Dividends paid to common stockholders ......................................... (27,378) (115,883) (124,738)
------------ ----------- ----------
Net cash flow used in financing activities ................ (97,803) (67,060) (252,601)
------------ ----------- ----------
Effect of exchange rate changes on cash ................................................. 27 30
Net change in cash and cash equivalents ................................................. (62,200) 102,682 (10,063)
Cash and cash equivalents at beginning of periods ....................................... 128,742 26,060 36,123
------------ ----------- ----------
Cash and cash equivalents at end of periods ............................................. $ 66,542 $ 128,742 $ 26,060
============ =========== ==========
Supplemental cash flow information --
Interest paid ................................................................. $ 159,401 $ 164,261 $ 143,594
============ =========== ==========
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
FelCor Lodging Trust Incorporated, or FelCor, a Maryland corporation,
is the nation's second largest hotel real estate investment trust, or REIT. As
the sole general partner of, and the owner of greater than 95% partnership
interest in, FelCor Lodging Limited Partnership, or FelCor LP, we had ownership
interests in the real estate of 183 hotels at December 31, 2002, with nearly
50,000 rooms and suites. All of our operations are conducted solely through
FelCor LP or its subsidiaries. At December 31, 2002, we owned a 100% real estate
interest in 145 hotels, a 90% or greater interest in entities owning seven
hotels, a 60% interest in an entity owning two hotels and 50% interests in
unconsolidated entities that own 29 hotels. The operations of 15 of these 29
hotels are included in our consolidated results of operations due to our
ownership of the lessee of the hotels.
At December 31, 2002, we had an aggregate of 62,056,414 shares of
Felcor common stock, and units of Felcor LP limited partnership interest
outstanding.
On January 1, 2001, the REIT Modernization Act, or RMA, went into
effect. Among other things, the RMA permits a REIT to form taxable subsidiaries,
or TRSs, that lease hotels from the REIT, provided that the hotels continue to
be managed by unrelated third parties. Effective January 1, 2001, we completed
transactions that resulted in our newly formed TRSs acquiring leases for 96
hotels that were previously leased to either DJONT Operations, L.L.C. and its
consolidated subsidiaries, or DJONT, or subsidiaries of Six Continents Hotels.
Effective July 1, 2001, we acquired the remaining 88 hotel leases held by Six
Continents Hotels. By acquiring these leases through our TRSs, we acquired the
economic benefits and risks of the operations of these hotels, and began
reporting hotel revenues and expenses rather than percentage lease revenues.
Through the ownership of our operating lessees, where we have a
majority ownership interest, we consolidate the operating revenues and expenses
of 169 of our hotels. We have 50% unconsolidated interests in the operating
revenues and expenses of the remaining 14 hotels, which are accounted for using
the equity method. The following table provides a schedule of our 169
consolidated hotel operations, by brand, at December 31, 2002:
<Table>
<Caption>
BRAND
-----
Hilton Hotels Corporation, or Hilton, brands:
Embassy Suites Hotels(R).................................................. 59
Doubletree(R) and Doubletree Guest Suites(R).............................. 13
Hampton Inn(R)............................................................ 7
Hilton Suites(R).......................................................... 1
Homewood Suites(R)........................................................ 1
Six Continents Hotels brands:
Holiday Inn(R)............................................................ 39
Crowne Plaza(R) and Crowne Plaza Suites(R)................................ 18
Holiday Inn Select(R)..................................................... 10
Holiday Inn Express(R).................................................... 3
Starwood Hotels & Resorts Worldwide Inc., or Starwood, brands:
Sheraton(R) and Sheraton Suites(R)........................................ 10
Westin(R)................................................................. 1
Other brands................................................................... 7
---
Total hotels................................................................... 169
===
</Table>
F-8
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION -- (CONTINUED)
At December 31, 2002, the operations of our 169 hotels were located in
the United States (35 states) and Canada (six hotels), with a concentration in
Texas (36 hotels), California (19 hotels), Florida (16 hotels) and Georgia (12
hotels). Approximately 51% of our hotel room revenues were generated from hotels
in these four states.
At December 31, 2002 of the 169 hotels, (i) subsidiaries of Six
Continents Hotels managed 82, (ii) subsidiaries of Hilton managed 72, (iii)
subsidiaries of Starwood managed 11, (iv) subsidiaries of Interstate Hotels
Corporation, or IHC, managed two, and (v) two independent management companies
managed two.
Certain reclassifications have been made to prior period financial
information to conform to the current period's presentation, with no effect to
our previously reported net income (loss) or stockholder's equity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- Our accompanying consolidated financial
statements include the assets, liabilities, revenues and expenses of all
majority-owned subsidiaries over which we exercise control, and for which
control is other than temporary. Intercompany transactions and balances are
eliminated in consolidation. Investments in unconsolidated entities (50 percent
owned ventures) are accounted for by the equity method.
Use of Estimates -- The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Investment in Hotels -- Our hotels are stated at cost and are
depreciated using the straight-line method over estimated useful lives of 40
years for buildings, 15 to 20 years for improvements and three to seven years
for furniture, fixtures, and equipment.
We periodically review the carrying value of each of our hotels to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel or that depreciation periods should be modified.
If facts or circumstances support the possibility of impairment, we will prepare
a projection of the undiscounted future cash flows, without interest charges, of
the specific hotel and determine if the investment in such hotel is recoverable
based on the undiscounted future cash flows. If impairment is indicated, we will
make an adjustment to the carrying value of the hotel based on discounted future
cash flows.
Maintenance and repairs are expensed and major renewals and betterments
are capitalized. Upon the sale or disposition of a fixed asset, the asset and
related accumulated depreciation are removed from our accounts and the related
gain or loss is included in operations.
Investment in Unconsolidated Entities --We own a 50% interest in
various real estate ventures in which the partners or members jointly make all
material decisions concerning the business affairs and operations, additionally,
we also own a preferred equity interest in two of these real estate ventures. As
we do not control these entities, we carry our investment in unconsolidated
entities at cost, plus our equity in net earnings or losses, less distributions
received since the date of acquisition, less any adjustment for impairment. Our
equity in net earnings or losses is adjusted for the straight-line depreciation,
over the lower of 40 years or the remaining life of the venture, of the
difference between our cost and our proportionate share of the underlying net
assets at the date of acquisition. Our investment in unconsolidated entities is
periodically reviewed for other than temporary declines in market value. Any
decline that is not expected to recover in the next 12 months is considered
other than temporary and an impairment is recorded as a reduction in the
F-9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
carrying value of the investment. Estimated fair values are based on our
projections of cash flows and market capitalization rates.
Hotels Held for Sale -- We classify any hotel that meets the held for
sale criteria of Statement of Financial Accounting Standards ("SFAS") 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," as held for
sale. We adopted SFAS 144 in 2002, and at December 31, 2002, we had no hotels
held for sale under this new standard. At December 31, 2002, we transferred six
of our hotels designated as held for sale, into investment in hotels at the
lower of estimated fair value at that date or the depreciated value that would
have been the carrying value of these hotels had we not ceased depreciation once
they were transferred to our held for sale portfolio. No adjustment to carrying
value was required upon the transfer of these six hotels into investment in
hotels. We will resume the depreciation of these hotels effective January 1,
2003. We had no discontinued operations in or prior to 2002 under SFAS 144,
because all sales related to assets that either did not meet the definition of a
component or were designated as held for sale prior to the adoption of SFAS 144.
Cash and Cash Equivalents -- All highly liquid investments with a
maturity of three months or less when purchased are considered to be cash
equivalents. Included in cash and cash equivalents is $16.4 million and $13.2
million in 2002 and 2001, respectively, which is held in escrow under certain of
our debt agreements.
We place cash deposits at major banks. Our bank account balances may
exceed the Federal Depository Insurance Limits of $100,000; however, management
believes the credit risk related to these deposits is minimal.
Deferred Expenses -- Deferred expenses, consisting primarily of loan
costs, are recorded at cost. Amortization is computed using a method that
approximates the interest method over the maturity of the related debt. In 2002,
we early adopted the provisions of SFAS 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Under SFAS 145, losses from the extinguishment of debt are no longer considered
extraordinary. The charge-offs of deferred financing costs in 2001 of $1.3
million and in 2000 of $3.9 million have been reclassified from an extraordinary
loss to a component of continuing operations in the accompanying consolidated
statements of operations, consistent with the 2002 treatment.
Other Assets -- Other assets consist primarily of hotel operating
inventories, prepaid expenses and deposits.
Revenue Recognition -- Prior to January 2001, our principal source of
revenue was from percentage lease revenue. Percentage lease revenue was
comprised of fixed base rent and percentage rent based on room revenues above
certain annual thresholds. All annual thresholds were based on periods ending
December 31. We recognized base rent as income on the straight-line basis and
percentage rent when annual thresholds were met. At December 31, 2002, we had no
hotels leased to third parties.
Beginning in January 2001, in conjunction with the effectiveness of the
RMA, we started acquiring our lessees and leases and began to earn room revenue,
food and beverage revenue and other revenue through the operations of our
hotels. We recognize these revenues as the hotel services are performed.
Foreign Currency Translation -- Results of operations for our Canadian
hotels are maintained in Canadian dollars and translated using the average
exchange rates during the period. Assets and liabilities are translated to U.S.
dollars using the exchange rate in effect at the balance sheet date. Resulting
translation adjustments are reflected in accumulated other comprehensive income.
F-10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Capitalized Cost -- We capitalize interest and certain other costs,
such as property taxes, land leases, and property insurance relating to hotels
undergoing major renovations and redevelopments. Such costs capitalized in 2002,
2001, and 2000, were approximately $1.4 million, $1.2 million and $2.0 million,
respectively.
Net Income (Loss) Per Common Share -- We compute basic earnings per
share by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding. We compute diluted
earnings per share by dividing net income (loss) available to common
stockholders by the weighted average number of common shares and equivalents
outstanding. Common stock equivalents represent shares issuable upon exercise of
stock options and unvested officers' restricted stock grants.
At December 31, 2002, 2001, and 2000, our Series A Cumulative Preferred
Stock, or Series A preferred stock, if converted to common shares, would be
antidilutive; accordingly we do not assume conversion of the Series A preferred
stock in the computation of diluted earnings per share. At December 31, 2002,
2001, and 2000, the majority of stock options granted are not included in the
computation of diluted earnings per share because the average market price of
the common stock during each respective year exceeded the exercise price of the
options.
Stock Compensation -- We apply APB Opinion 25 and related
interpretations in accounting for our stock based compensation plans. In 1995,
SFAS 123, "Accounting for Stock-Based Compensation," was issued, which, if fully
adopted by us, would have changed the methods we apply in recognizing the cost
of the plans. Adoption of the cost recognition provisions of SFAS 123 is
optional, and we have decided to adopt the provisions of SFAS 123 beginning in
the first quarter of 2003. Had the compensation cost for our stock-based
compensation plans been determined in accordance with SFAS 123, our net income
or loss and net income or loss per common share for 2002, 2001, and 2000 would
approximate the pro forma amounts below (in thousands, except per share data):
<Table>
<Caption>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002__ 2001___ 2000___
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
SFAS 123 charge ........................ $ 2,617 $ 2,704 $ 1,965
APB 25 charge .......................... $ 2,088 $ 2,093 $ 1,478
Income (loss) from continuing
operations and net income (loss)
applicable to common stockholders .... $ (204,873) $ (205,402) $ (63,876) $ (64,487) $ 37,017 $ 36,530
Diluted net income (loss)
applicable to common stockholders
per common share ..................... $ (3.78) $ (3.79) $ (1.21) $ (1.23) $ 0.67 $ 0.66
</Table>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
Derivatives -- On January 1, 2001, we adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS 133, as amended, establishes accounting and reporting standards for
derivative instruments. Specifically, SFAS 133 requires an entity to recognize
all derivatives as either assets or liabilities on the balance sheet and to
measure those instruments at fair value. Additionally, the fair value
adjustments will affect either stockholders' equity or net income, depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and the nature of the hedging activity.
Upon adoption of SFAS 133, on January 1, 2001, we recorded the fair
value of our interest rate swap agreements, having a notional value of $250
million, as an asset of $248,000 with a corresponding credit to accumulated
other comprehensive income reported in stockholders' equity.
F-11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Segment Information -- SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," requires the disclosure of selected
information about operating segments. Based on the guidance provided in the
standard, we have determined that our business is conducted in one operating
segment.
Distributions and Dividends -- We and FelCor LP have historically paid
regular quarterly distributions on our common stock and partnership units.
Additionally, we have paid regular quarterly dividends on our preferred stock in
accordance with our preferred stock dividend requirements. Our ability to make
distributions is dependent on our receipt of quarterly distributions from FelCor
LP, and FelCor LP's ability to make distributions is dependent upon the results
of operations of our hotels.
For 2002, we paid common dividends of $0.60 per common share, $1.95 per
share of our Series A preferred stock, and $2.25 per depositary share evidencing
our 9% Series B Redeemable Preferred Stock, or Series B preferred stock.
Minority Interests -- Minority interests in FelCor LP and other
consolidated subsidiaries represents the proportionate share of the equity in
FelCor LP and other consolidated subsidiaries not owned by us. We allocate
income and loss to minority interest based on the weighted average percentage
ownership throughout the year.
Income Taxes -- We have elected to be treated as a REIT under Sections
856 to 860 of the Internal Revenue Code. Prior to January 1, 2001, we, as a
REIT, were not subject to federal income taxes. Under the RMA that became
effective January 1, 2001, we generally lease our hotels to wholly-owned TRSs
that are subject to federal and state income taxes. We account for income taxes
in accordance with the provisions of Statement of Financial Accounting Standards
109. Under SFAS 109, we account for income taxes using the asset and liability
method under which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
3. ACQUISITION OF HOTEL LEASES
As a result of the passage of the RMA, effective January 1, 2001, we
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 we assumed DJONT's accumulated stockholders'
deficit of $25 million, which we expensed as lease termination cost in 2001. 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 our common stock valued at approximately $10 million. Of
this $10 million in consideration, we expensed approximately $2 million as lease
termination costs in 2001 and $8 million in 2000, in connection with the
designation of certain of these hotels as held for sale. Of the 11 hotels, two
have been sold, eight have been contributed to a joint venture with IHC, and one
has been classified as held for investment.
F-12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITION OF HOTEL LEASES -- (CONTINUED)
We purchased certain assets and assumed certain liabilities in
connection with the acquisition of the leases on these 96 hotels. The fair
values of the acquired assets and liabilities at January 1, 2001, are as follows
(in thousands):
<Table>
Cash and cash equivalents..................................... $ 25,300
Accounts receivable........................................... 30,214
Other assets.................................................. 17,318
--------
Total assets acquired......................................... 72,832
--------
Accounts payable.............................................. 18,656
Due to FelCor Lodging Trust................................... 30,687
Accrued expenses and other liabilities........................ 40,372
--------
Total liabilities assumed..................................... 89,715
--------
Liabilities assumed in excess of assets acquired.............. 16,883
Value of common stock and FelCor LP units issued.............. 19,721
--------
Lease termination costs.................................. $ 36,604
========
</Table>
We acquired the remaining 88 hotel leases held by Six Continents Hotels
on July 1, 2001. In consideration for the acquisition of these leases, we
entered into long-term management agreements with Six Continents Hotels with
regard to these hotels, and issued to Six Continents Hotels 100 shares of our
common stock. The management fees payable to Six Continents Hotels include
compensation to Six Continents Hotels for both management services and the
acquisition of the 88 leases and, as such, are higher than we pay to other
managers for comparable services. Management fees payable under these management
contracts will be expensed as incurred.
We purchased certain assets and acquired certain liabilities with the
acquisition of the 88 hotel leases. The fair value of the acquired assets and
liabilities at July 1, 2001, are as follows (in thousands):
<Table>
Cash and cash equivalents.............................. $ 4,431
Accounts receivable.................................... 30,964
Other assets........................................... 6,941
---------
Total assets acquired........................ $ 42,336
--=======
Accounts payable....................................... $ 7,660
Accrued expenses and liabilities....................... 34,676
---------
Total liabilities assumed.................... $ 42,336
=========
</Table>
4. INVESTMENT IN HOTELS
Investment in hotels at December 31, 2002 and 2001, consists of the
following (in thousands):
<Table>
<Caption>
2002 2001
---------- ----------
Building and improvements............................... $3,399,151 $3,479,682
Furniture, fixtures and equipment....................... 492,750 446,287
Land.................................................... 353,972 346,468
Construction in progress................................ 9,745 11,761
---------- ----------
4,255,618 4,284,198
Accumulated depreciation................................ (782,166) (630,962)
---------- ----------
$3,473,452 $3,653,236
========== ==========
</Table>
On July 12, 2002, we acquired the 208-suite SouthPark Suite Hotel in
Charlotte, North Carolina for $14.5 million. We converted this hotel to a
Doubletree Guest Suites hotel in October 2002. We entered into a 15-year
management agreement with Hilton for the hotel concurrent with the acquisition
closing. We utilized excess cash on hand to acquire the hotel.
F-13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENT IN HOTELS -- (CONTINUED)
On July 19, 2002, we acquired the 385-room Wyndham(R) resort and a
lease on the Arcadian Shores Golf Club in Myrtle Beach, South Carolina. We
intend to convert this hotel to a Hilton hotel in April 2003. We purchased this
hotel, adjacent land and a leasehold interest in the golf course for $35.3
million. We entered into a 15-year management agreement with Hilton for the
hotel concurrent with the acquisition closing. We utilized excess cash on hand
to acquire this hotel.
In June 2002, we 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. In addition, in 2002 we also recognized
a $0.2 million gain related to the condemnation of land adjacent to one of our
hotels.
In 2001, we received $3.9 million from the condemnation of three
parcels of land and recorded a gain of $2.9 million. In 2001, we sold an
undeveloped parcel of land adjacent to one of our hotels in Atlanta and recorded
a gain of $0.5 million.
In 2000, we sold two hotels for $33.8 million, recognizing a gain of
$2.6 million, and vacant excess land and a billboard for $2.3 million,
recognizing a gain of $1.8 million.
5. HOTELS HELD FOR SALE
In 2000, we identified 25 hotels that we considered non-strategic and
announced our intention to sell such hotels. In connection with the decision to
sell these hotels, in 2000 we recorded an impairment charge of $63 million
representing the difference between the net book value and the then estimated
fair market value of these hotels. In 2001, we recognized an additional $7
million impairment charge to reflect the deterioration of the market value of
the then remaining 13 hotels held for sale. The net valuation allowance on these
13 hotels held for sale as of December 31, 2001 was $39.1 million. At December
31, 2002, we transferred the remaining six hotels to hotels held for investment.
No depreciation expense has been recorded on these hotels since June 30, 2000;
however, since we transferred these hotels to held for investment, depreciation
of these six hotels resumed on January 1, 2003.
During 2000, one of these hotels was sold and we recognized a gain of
approximately $0.1 million, included in the total gains recognized in 2000
discussed previously.
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 IHC
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 an $8 million common equity interest and a $16.6 million
preferred equity interest paying 8.85%. No gain or loss was recorded in
connection with this transaction. We also made a loan of approximately $4
million to IHC, secured by its interest in the venture.
In June 2001, we sold the 140-room Hampton Inn located in Marietta,
Georgia, for a net sales price of $7 million. In September 2001, we sold the
119-room Hampton Inn located in Jackson, Mississippi, for a net sales price of
$4 million. In November 2001, we sold the 129-room Doubletree Hotel located in
Tampa, Florida for a net sales price of $3 million. We recorded no gain or loss
from these sales.
We sold our 183-room Doubletree Guest Suites hotel in Boca Raton,
Florida, in April 2002, and received net sales proceeds of $6.5 million. We
recorded a net gain of approximately $0.8 million on the sale.
In August 2002, we contributed five of the hotels held for sale,
located in Kansas, to a joint venture in which we retain a 50% equity interest
and an independent hotel company holds the other 50% equity interest. We
received net cash proceeds of approximately $4.4 million and retained a $1.4
million common equity
F-14
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. HOTELS HELD FOR SALE -- (CONTINUED)
interest and a $6.3 million preferred equity interest paying 8.19%. Also in
August 2002, we sold our 71-room Holiday Inn Express hotel in Colby, Kansas,
receiving net proceeds of $1.7 million. We recorded no gain or loss in
connection with these transactions as the proceeds received approximated the
book value of the properties.
Revenues related to the hotels held for sale, less costs associated
with those assets, were included in our results of operations for the year ended
December 31, 2002, 2001, and 2000, and represented net income of approximately
$0.1 million, $11 million, and $16 million, (net of $3 million in depreciation
expense for 2000), respectively.
6. INVESTMENT IN UNCONSOLIDATED ENTITIES
We owned 50% interests in joint venture entities that owned 29 hotels
at December 31, 2002, and 24 hotels at December 31, 2001. We also owned a 50%
interest in entities that own an undeveloped parcel of land, provides
condominium management services, develops condominiums in Myrtle Beach, South
Carolina, and leases 13 hotels. We account for our investments in these
unconsolidated entities under the equity method.
Summarized unaudited combined balance sheet information for 100% of
these unconsolidated entities is as follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
---------------------------
2002 2001
-------- --------
Investment in hotels.............................. $383,249 $365,802
Total assets...................................... $408,979 $392,387
Debt.............................................. $278,978 $266,238
Total liabilities................................. $279,887 $276,355
Equity............................................ $129,854 $116,032
</Table>
Debt of our unconsolidated entities at December 31, 2002, consisted of
$267.4 million of non-recourse mortgage debt. It also included $6.0 million of
mortgage debt guaranteed by us and $5.7 million of mortgage debt guaranteed by
Hilton, one of our joint venture partners. The debt guaranteed by us consisted
primarily of 50% of a loan related to the construction of a residential
condominium project in Myrtle Beach, South Carolina. The loan commitment is for
$97.6 million of which approximately $11.4 million was outstanding as of
December 31, 2002. Our guarantee reduces from 50% to 25% of the outstanding
balance when the condominium project is completed and receives a certificate of
occupancy, which we expect to occur in late 2004. Our guarantee is a payment
guarantee and will trigger in the event that the joint venture fails to pay
interest or principal due under the debt agreement. The loan matures in August
2005 and bears interest at LIBOR plus 200 basis points. As of December 31, 2002,
we have not established any liability related to our guarantees of debt because
it is not probable that we will be required to perform under these guarantees.
F-15
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENT IN UNCONSOLIDATED ENTITIES -- (CONTINUED)
Summarized unaudited combined statement of operations information for
100% of these unconsolidated entities is as follows (in thousands):
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Total revenues ................................... $ 84,926 $ 82,776 $ 80,761
Net income ....................................... $ 8,818 $ 17,498 $ 30,729
Net income attributable to FelCor ................ $ 4,409 $ 8,749 $ 16,962
Preferred return ................................. 1,341 1,103
Depreciation of cost in excess of book value ..... (2,458) (2,506) (2,142)
Impairment loss .................................. (13,419)
-------- -------- --------
Equity in income (loss) from
unconsolidated entities .......................... $(10,127) $ 7,346 $ 14,820
======== ======== ========
</Table>
A summary of the components of our investment in unconsolidated
entities as of December 31, 2002 and 2001, is as follows:
<Table>
<Caption>
2002 2001
--------- ---------
Hotel investments ................... $ 141,403 $ 153,052
Land and condominium investments .... 2,452 2,802
Hotel lease investments ............. (1,912) (637)
--------- ---------
$ 141,943 $ 155,217
========= =========
</Table>
This investment included net preferred interests, including unpaid
preferred returns, of $23.8 million and $17.7 million as of December 31, 2002
and 2001, respectively. We cease the accrual of preferred returns if it becomes
probable that the returns will not be realized. Under this policy, we did not
recognize $0.4 million of owed but unpaid preferred returns during the year
ended December 31, 2002.
A summary of the components of our equity in income (loss) of
unconsolidated entities for the years ended December 31, 2002, 2001, and 2000,
are as follows:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Hotel investments, including an impairment loss in
2002 of $13,419 .................................. $ (8,852) $ 7,983 $ 11,577
Net gain on sale of condominium project ............... 3,243
Hotel lessee operations ............................... (1,275) (637)
-------- -------- --------
$(10,127) $ 7,346 $ 14,820
======== ======== ========
</Table>
F-16
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT
Debt at December 31, 2002 and 2001, consists of the following (in
thousands):
<Table>
<Caption>
INTEREST RATE AT
DECEMBER 31,
COLLATERAL(a) 2002 MATURITY DATE 2002 2001
-------------- ---------------- ------------- ------------ ------------
FLOATING RATE DEBT:
Line of credit None 4.48% October 2004 $ 49,674
Publicly-traded term notes-swapped None 4.59(b) October 2004 $ 174,760 174,633
Publicly-traded term notes-swapped None 4.99(b) October 2007 25,000
Promissory note None 3.44 June 2016 650 650
---- ------------ ------------
Total floating rate debt(c) 4.73 200,410 224,957
---- ------------ ------------
FIXED RATE DEBT:
Publicly-traded term notes None 7.63 October 2007 99,518 124,419
Publicly-traded term notes None 9.50 September 2008 596,195 595,525
Publicly-traded term notes None 8.50 June 2011 297,907 297,655
Mortgage debt 15 hotels 7.24 November 2007 134,738 137,541
Mortgage debt 7 hotels 7.54 April 2009 94,288 95,997
Mortgage debt 6 hotels 7.55 June 2009 70,937 72,209
Mortgage debt 7 hotels 8.73 May 2010 140,315 142,254
Mortgage debt 8 hotels 8.70 May 2010 180,534 182,802
Mortgage debt 6 hotels 7.20 2003 - 2005 54,993 57,008
Other 1 hotel 9.10 2010 7,299 8,041
---- ----------- -----------
Total fixed rate debt(c) 8.61 1,676,724 1,713,451
---- ----------- -----------
Total debt(c) 8.18% $ 1,877,134 $1,938,408
==== =========== ==========
</Table>
(a) At December 31, 2002, we had unencumbered investments in
hotels with a net book value totaling $2.3 billion.
(b) At December 31, 2002, our $175 million publicly-traded notes
due October 2004 and $25 million of our publicly traded notes
due October 2007, were matched with interest rate swap
agreements that effectively converted the fixed interest rate
on the notes to a floating interest rate tied to LIBOR. The
differences to be paid or received by us under the terms of
the interest rate swap agreements are accrued as interest
rates change and recognized as an adjustment to interest
expense. The interest rate swaps decreased interest expense by
$4 million during 2002.
(c) Calculated based on the weighted average of outstanding debt
as of December 31, 2002.
All of our floating rate debt at December 31, 2002, was based upon
LIBOR (1.39% as of December 31, 2002).
We reported interest expense net of interest income of $2.1 million,
$2.9 million and $1.9 million and capitalized interest of $0.8 million, $0.8
million and $1.1 million, for the years ended December 31, 2002, 2001 and 2000,
respectively.
Interest expense associated with the $300 million in senior debt that
was repaid in October 2001, relating to our terminated merger with MeriStar
Hospitality Corporation, or MeriStar, was $5.5 million, and is presented net of
$2.9 million of interest income from the proceeds of the senior notes held in
escrow, during the year ended December 31, 2001.
We charged off $3.2 million of unamortized deferred costs as a result
of a reduction of the line of credit commitments in 2002. In 2001, we recorded
charge-offs of $0.2 million and $1 million of unamortized costs related to the
prepayment of floating rate debt and the renewal of the line of credit,
respectively. Also in 2000, we recorded charge-offs of $0.6 million and $3.3
million of unamortized costs related to the reduction of the line of credit and
the repayment of a $375 million floating rate senior term loan, respectively.
F-17
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT -- (CONTINUED)
On January 11, 2001, we completed the private placement of $100 million
in 9 1/2% senior unsecured notes that mature in September 2008. These notes were
issued at a premium to yield an effective rate of 91/8%. The proceeds were used
initially to pay down our line of credit. In October 2001, we exchanged the $100
million in privately placed senior notes for notes with identical terms that are
registered under the Securities Act of 1933.
In June 2001, we completed the private placement of $600 million in 8
1/2% senior unsecured notes that mature in 2011. We placed approximately $315
million of the proceeds in escrow, pending the closing or termination of the
merger with MeriStar. The remaining proceeds were used to pay down the line of
credit and other floating rate debt. In October 2001, as the result of the
merger termination, in accordance with the requirements of the indenture
governing these 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.
In December 2001, we completed the private placement of $100 million in
9 1/2% senior unsecured notes that mature in September 2008. These notes were
issued at a discount to yield 9.6%. The proceeds were used initially to pay down
our line of credit. In connection with the issuance of these notes and the
prepayment of floating rate debt, we terminated $50 million of interest rate
swaps resulting in a $2.2 million swap termination cost during the fourth
quarter of 2001.
In 2002, we entered into two amendments to our line of credit. In June
2002, we amended our line of credit to relax covenant levels to provide us with
greater financial flexibility. In December 2002, we further amended our line of
credit to relax covenant levels and reduce the line to $300 million from $615
million. The maturity of the line of credit remains at October 31, 2004, but we
have the right to extend the maturity date for two consecutive one-year periods,
subject to certain conditions. We charged off $3.2 million of unamortized
deferred financing costs associated with the reduction in our line of credit.
Although we were in compliance with our existing covenants prior to the
amendments, it was necessary to amend the line of credit in anticipation of a
continued negative RevPAR environment. The amended line allows for the
relaxation of certain financial covenants through the maturity date, with a
step-up in covenants on June 30, 2004, including the unsecured interest
coverage, fixed charge coverage, secured leverage, 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 an added tier to reflect the higher
permitted leverage. There was no amount outstanding under the facility at
December 31, 2002.
In addition to 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 (such as distributions on common and preferred stock, share
repurchases and certain investments); 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, at higher permitted leverage
F-18
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT -- (CONTINUED)
levels we agreed to certain more stringent limitations on acquisitions,
restricted payments and discretionary capital expenditures. At December 31,
2002, we were in compliance with all covenants under our line of credit.
If RevPAR declines continue or become more severe, we may be unable to
satisfy all of the covenant requirements under our line of credit. In such an
event, we may need to obtain further amendments from our lenders or seek other
sources of financing. Further amendments to our line of credit, if any, may
result in additional restrictions on our financial flexibility.
Failure to satisfy one or more of the financial or other covenants
under our line of credit could result in an event of default, notwithstanding
our ability to meet our debt service obligations. Other events of default under
our line of credit include a default in the payment of other recourse
indebtedness in the amount 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 the line of credit. Most of our
mortgage debt is non-recourse to us and contains provisions allowing for the
substitution of collateral upon satisfaction of certain conditions. Most of our
mortgage debt is prepayable, subject to various prepayment penalties, yield
maintenance or defeasance obligations.
Our publicly traded senior unsecured notes require that we satisfy a
total leverage, a secured leverage and an interest coverage test in order to
incur additional indebtedness, except under our line of credit or to refinance
maturing debt with replacement debt, as defined in our senior unsecured note
indenture; to pay dividends in excess of the minimum dividend required to meet
the REIT qualification test; to repurchase stock; or to merge. As of December
31, 2002, and the date of this filing, we have satisfied all such incurrence
tests. In addition, the interest rate on $900 million of our senior debt
increases by 50 basis points if two major rating agencies downgrade our debt
below certain levels.
Future scheduled principal payments on debt obligations at December 31,
2002, are as follows (in thousands):
<Table>
<Caption>
YEAR
2003..................................... $ 35,118
2004..................................... 189,228
2005..................................... 42,606
2006..................................... 14,217
2007..................................... 258,428
2008 and thereafter...................... 1,344,157
----------
1,883,754
Discount accretion over term............. (6,620)
----------
$1,877,134
==========
</Table>
8. DERIVATIVES
On the date we enter into a derivative contract, we designate the
derivative as a hedge to the exposure to changes in the fair value of a
recognized asset or liability or a firm commitment (referred to as a fair value
hedge), or the exposure to variable cash flows of a forecasted transaction
(referred to as a cash flow hedge). We have entered into both types of
derivative contracts. For a fair value hedge the gain or loss is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. The effect of that
accounting is to reflect in earnings the extent to which the hedge is not
effective in achieving offsetting changes in fair value. For a cash flow hedge
the effective portion of the derivative's gain or loss is initially reported as
a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. The
ineffective
F-19
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DERIVATIVES -- (CONTINUED)
portion of the gain or loss is reported in earnings immediately. At December 31,
2002, all of our derivative contracts are fair value hedges.
We formally document all relationships between hedging instruments and
hedged items, as well as our risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives to specific assets and liabilities on the balance sheet or specific
firm commitments. We also formally assess (both at the hedge's inception and on
an ongoing basis) whether the derivatives that are used in hedging transactions
have been highly effective in offsetting changes in the cash flows or fair
values of hedged items and whether those derivatives may be expected to remain
highly effective in future periods. When we determine that a derivative is not
(or has ceased to be) highly effective as a hedge, we discontinue hedge
accounting prospectively, as discussed below.
In the normal course of business, we are exposed to the effect of
interest rate changes. We limit these risks by following established risk
management policies and procedures including the use of derivatives. It is our
objective to use interest rate hedges to manage our fixed and floating interest
rate position and not to engage 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, including our revolving line of
credit. We will generally seek to pursue interest rate risk mitigation
strategies that will result in the least amount of reported earnings volatility
under generally accepted accounting principles, while still meeting strategic
economic objectives and maintaining adequate liquidity and flexibility.
Instruments that meet these hedging criteria are formally designated as hedges
at the inception of the derivative contract.
To manage the relative mix of our debt between fixed and variable rate
instruments, at December 31, 2002, we had entered into interest rate swap
agreements with four financial institutions with a notional value of $200
million. These interest rate swap agreements modify a portion of the interest
characteristics of our outstanding fixed rate debt, without an exchange of the
underlying principal amount, and effectively convert fixed rate debt to a
variable rate.
To determine the fair values of our derivative instruments, we use a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. All methods of assessing fair value result
in a general approximation of value, and such value may never actually be
realized.
The interest rate swap agreements held at December 31, 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 our swapped outstanding
fixed rate debt. The estimated unrealized net gain on these interest rate swap
agreements was approximately $7.7 million at December 31, 2002, and represents
the amount we would receive if the agreements were terminated based on current
market rates. At December 31, 2001, we had a net unrealized loss of $1.5 million
related to these agreements.
The fixed rates we will receive and the variable rate we will pay under
these swaps as of December 31, 2002, are summarized in the following table:
<Table>
<Caption>
Weighted-average
Notional Amount Number of Spread Paid in
Swap Maturity (in millions) Swaps Excess of LIBOR Fixed Rate Received
------------- --------------- --------- --------------- -------------------
October 2004 $175 5 3.2043% 7.3750%
October 2007 25 1 3.5675% 7.6250%
----
$200
====
</Table>
F-20
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DERIVATIVES -- (CONTINUED)
The differences to be paid or received by us under the terms of the
interest rate swap agreements are accrued as interest rates change and we
recognize them as an adjustment to interest expense, pursuant to the terms of
our interest rate swap agreement; they will have a corresponding effect on our
future cash flows. Under interest rate swaps then in force, we received $4
million during 2002, paid $0.5 million in 2001 and received $1.8 million during
2000. Agreements such as these contain a credit risk in that the counterparties
may be unable to meet 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-.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 requires disclosures about the fair value of all financial
instruments, whether or not recognized for financial statement purposes.
Disclosures about fair value of financial instruments are based on pertinent
information available to management as of December 31, 2002. Considerable
judgment is necessary to interpret market data and develop estimated fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that we could realize on disposition of the financial instruments.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
Our estimates of the fair value of (i) accounts receivable, accounts
payable and accrued expenses approximate carrying value due to the relatively
short maturity of these instruments; (ii) notes receivable approximate carrying
value based upon effective borrowing rates for issuance of debt with similar
terms and remaining maturities; (iii) the borrowings under our line of credit
approximate carrying value because these borrowings accrue interest at floating
interest rates based on market; and (iv) our interest rate swaps and the hedged
debt are recorded at estimates of fair value. The estimated fair value of our
debt of $1.9 billion is $1.7 billion at December 31, 2002, based on current
market interest rates estimated by us for similar debt with similar maturities.
10. INCOME TAXES
We have elected to be taxed as a REIT under the Internal Revenue Code.
To qualify as a REIT, we must meet a number of organizational and operational
requirements, including a requirement that we distribute at least 90% of our
taxable income to our stockholders. We currently intend to adhere to these
requirements and maintain our REIT status. As a REIT, we generally will not be
subject to corporate level federal income taxes on net income we distribute to
our stockholders. If we fail to qualify as a REIT in any taxable year, we will
be subject to federal income taxes at regular corporate rates (including any
applicable alternative minimum tax) and may not qualify as a REIT for four
subsequent taxable years. Even if we qualify for taxation as a REIT, we may be
subject to certain state and local taxes on our income and property and to
federal income and excise taxes on our undistributed taxable income. In
addition, taxable income from non-REIT activities managed through TRSs is
subject to federal, state and local taxes.
Under the RMA, which became effective January 1, 2001, we generally
lease our hotels to wholly-owned TRSs that are subject to federal and state
income taxes. We account for income taxes in accordance with the provisions of
SFAS 109, "Accounting for Income Taxes." Under SFAS 109, we account for income
taxes using the asset and liability method, under which deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. At December 31, 2002 and 2001,
our
F-21
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES -- (CONTINUED)
TRS had a deferred tax asset, prior to any valuation allowance, primarily
comprised of the following (in thousands):
<Table>
<Caption>
2002 2001
-------- --------
Accumulated net operating losses of our TRS ...... $ 30,986 $ 8,983
Accrued employee benefits ........................ 7,746 8,877
Bad debt allowance ............................... 537 534
-------- --------
Gross deferred tax asset ......................... 39,269 18,394
Valuation allowance .............................. (39,269) (18,394)
-------- --------
Net deferred tax asset ........................... $ -- $ --
======== ========
</Table>
We have provided a 100% valuation allowance against this asset as of
December 31, 2002 and 2001, due to the uncertainty of realization and,
accordingly, no provision or benefit for income taxes is reflected in the
accompanying Consolidated Statements of Operations.
Reconciliation between GAAP net income or loss and taxable income:
The following table reconciles GAAP net income or loss to taxable
income for the years ended December 31, 2002, 2001 and 2000 (in thousands):
<Table>
<Caption>
2002 2001 2000
--------- --------- ---------
GAAP net income (loss) ................................. $(178,581) $ (39,276) $ 61,699
GAAP net loss/(income) of taxable subsidiaries(a) ... 54,986 33,212 (3,243)
--------- --------- ---------
GAAP net income (loss) from REIT operations(b) ......... (123,595) (6,064) 58,456
Book/tax differences, net:
Depreciation and amortization(c) .................... 32,719 34,746 (4,091)
Minority interests .................................. (19,780) (18,680) (8,894)
Gains (losses) from capital transactions ............ (4,681) (4,849) (830)
Lease termination costs not deductible for tax ...... 36,604
Impairment loss not deductible for tax .............. 157,505 7,000 63,000
Other ............................................... 1,354 2,751 9,626
--------- --------- ---------
Taxable income subject to distribution requirement(d) .. $ 43,522 $ 51,508 $ 117,267
========= ========= =========
</Table>
(a) 2002 and 2001 reflect a net loss from our TRSs, while 2000
reflects the net income or loss of our qualified REIT
subsidiary.
(b) All adjustments to GAAP net income (loss) from REIT operations
are net of amounts attributable to minority interest, TRSs and
qualified REIT subsidiaries.
(c) The changes in book/tax differences in depreciation and
amortization principally result from book and tax basis
differences, differences in depreciable lives, and accelerated
depreciation methods used for tax.
(d) The dividend distribution requirement was 90% in 2002 and 2001
and 95% in 2000.
If we sell any asset acquired from Bristol Hotel Company, or Bristol,
within 10 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
F-22
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES -- (CONTINUED)
liability. If we are successful in selling the hotels that we have designated as
non-strategic, the majority of which are Bristol hotels, we could incur
corporate income tax with respect to the related built in gain, the amount of
which cannot yet be determined.
Characterization of distributions:
For income tax purposes, distributions paid consist of ordinary income,
capital gains, return of capital or a combination thereof. For the years ended
December 31, 2002, 2001 and 2000, distributions paid per share were
characterized as follows:
<Table>
<Caption>
2002 2001 2000
--------------------- --------------------- --------------------
Amount Mix Amount Mix Amount Mix
--------- --------- --------- --------- --------- ---------
COMMON STOCK
Ordinary income ................... $ 0.42 70.10% $ 0.94 55.01% $ 2.20 100%
Return of capital ................. 0.18 29.90 0.76 44.99
--------- --------- --------- --------- --------- ---------
$ 0.60 100.00% $ 1.70 100.00% $ 2.20 100%
========= ========= ========= ========= ========= =========
PREFERRED STOCK - SERIES A
Ordinary income ................... $ 1.95 100.00% $ 1.95 100.00% $ 1.95 100%
========= ========= ========= ========= ========= =========
PREFERRED STOCK - SERIES B
Ordinary income ................... $ 2.25 100.00% $ 2.25 100.00% $ 2.25 100%
========= ========= ========= ========= ========= =========
</Table>
11. CAPITAL STOCK
As of December 31, 2002, we had approximately $920 million of common
stock, preferred stock, debt securities, and/or common stock warrants available
for offerings under shelf registration statements previously declared effective.
Preferred Stock
Our board of directors is authorized to provide for the issuance of up
to 20,000,000 shares of preferred stock in one or more series, to establish the
number of shares in each series, to fix the designation, powers preferences and
rights of each such series, and the qualifications, limitations or restrictions
thereof.
In 1996, we issued 6.1 million shares of our Series A preferred stock
at $25 per share. The Series A preferred stock bears an annual cumulative
dividend payable in arrears equal to the greater of $1.95 per share or the cash
distributions declared or paid for the corresponding period on the number of
shares of common stock into which the Series A preferred stock is then
convertible. Each share of the Series A preferred stock is convertible at the
stockholder's option to 0.7752 shares of common stock, subject to certain
adjustments, and could not be redeemed by us before April 30, 2001. During 2000,
holders of 69,400 shares of Series A preferred stock converted their shares to
53,798 common shares, which were issued from treasury shares.
On May 1, 1998, we issued 5.75 million depositary shares, representing
57,500 shares of our Series B preferred stock at $25 per depositary share. We
may call the Series B preferred stock and the corresponding depositary shares at
$25 per depositary share on or after May 7, 2003. These shares have no stated
maturity, sinking fund or mandatory redemption, and are not convertible into any
of our other securities. The Series B preferred stock has a liquidation
preference of $2,500 per share (equivalent to $25 per depositary share) and is
entitled to annual cumulative dividends at the rate of 9% of the liquidation
preference (equivalent to $2.25 annually per depositary share).
F-23
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CAPITAL STOCK -- (CONTINUED)
On April 4, 2002, we issued 1,025,800 depositary shares, representing
10,258 shares of our Series B preferred stock at $24.37 per depositary share to
yield 9.4%. We used the net proceeds of $23.8 million for working capital and
discretionary capital expenditures.
At December 31, 2002, all dividends then payable on the Series A and
Series B preferred stock had been paid.
FelCor LP Units
We are the sole general partner of FelCor LP and are obligated to
contribute the net proceeds from any issuance of our equity securities to FelCor
LP in exchange for units of partnership interest, or Units, corresponding in
number and terms to the equity securities issued by us. Units of limited partner
interest may also be issued by FelCor LP to third parties in exchange for cash
or property, and Units so issued to third parties are redeemable at the option
of the holders thereof for a like number of shares of our common stock or, at
our option, for the cash equivalent thereof. During 2002, 5,713,185 Units owned
by a subsidiary of Six Continents Hotels, were exchanged for a like number of
shares of our newly issued common stock, and 2,492 Units were redeemed for
$49,000 in cash. The exchange with Six Continents Hotels resulted in an increase
in our ownership of limited partnership interests in FelCor LP from
approximately 85% to 95%, which decreased the minority interest liability
related to FelCor LP by approximately $145 million.
In consideration for the acquisition of all the equity interests in
DJONT, FelCor LP issued 416,667 Units on January 1, 2001. This transaction
reduced our ownership of limited partnership interests in FelCor LP from
approximately 86% to approximately 85%, which increased the minority interest
liability related to FelCor LP by approximately $10 million at December 31,
2001.
Treasury Stock Repurchase Program
In 2000, our board of directors authorized the repurchase of up to $300
million of our outstanding common shares. This share repurchase program was
suspended in March 2001. Stock repurchases may, at the discretion of management,
be made from time to time at prevailing prices in the open market or through
privately negotiated transactions. Through March 2001, we repurchased
approximately 10.5 million shares of common stock at an aggregate of
approximately $189 million under the stock repurchase program. We have suspended
the stock repurchase program and, since March 27, 2001, we have not repurchased
any additional shares of our common stock in the open market. We are currently
precluded from repurchasing stock under the terms of our senior notes until our
debt to EBITDA ratio, as defined in the agreement, is in excess of 4.85 times.
In consideration for the acquisition of 12 leases that were held by Six
Continents Hotels, in January 2001 we issued to Six Continents Hotels 413,585
shares of our common stock previously held in treasury. In July 2001, we issued
100 shares of our common stock from treasury to Six Continents Hotels to acquire
the remaining 88 leases still held by Six Continents Hotels.
F-24
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. HOTEL OPERATING REVENUE AND EXPENSES, AND OTHER PROPERTY OPERATING COSTS
Hotel operating revenue is comprised of the following for the year
ended December 31, 2002 and 2001 (in thousands):
<Table>
<Caption>
2002 2001
------------ ------------
Room ................................... $ 1,036,547 $ 866,101
Food and beverage ...................... 212,076 157,812
Other operating departments ............ 67,690 58,931
------------ ------------
Total operating revenues .... $ 1,316,313 $ 1,082,844
============ ============
</Table>
Hotel operating expenses are comprised of the following for the year
ended December 31, 2002 and 2001 (in thousands):
<Table>
<Caption>
2002 2001
---------- ----------
Room ................................... $ 264,480 $ 212,857
Food and beverage ...................... 166,147 122,999
Other operating departments ............ 31,666 26,789
---------- ----------
Total operating expenses .... $ 462,293 $ 362,645
========== ==========
</Table>
Other property operating costs is comprised of the following for the
year ended December 31, 2002 and 2001 (in thousands):
<Table>
<Caption>
2002 2001
---------- ----------
Hotel general administrative expense ............. $ 124,747 $ 99,041
Marketing ........................................ 106,873 87,042
Repair and maintenance ........................... 69,740 54,603
Utilities ........................................ 62,571 49,561
---------- ----------
Total other property operating costs .. $ 363,931 $ 290,247
========== ==========
</Table>
13. TAXES, INSURANCE AND LEASE EXPENSE
Taxes, insurance and lease expense is comprised of the following for
the years ended December 31, 2002, 2001, and 2000 (in thousands):
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
Real estate and personal property taxes ................................... $ 52,074 $ 56,587 $ 63,207
Operating lease expense, including $24,092, $33,668, and $18,058 of
percentage rent in 2002, 2001 and 2000, respectively(a) ................ 61,815 71,479 21,985
Property and general liability insurance .................................. 16,703 11,525 4,065
State franchise and Canadian income taxes ................................. 1,546 1,193 3,376
---------- ---------- ----------
Total taxes, insurance, and lease expense ...................... $ 132,138 $ 140,784 $ 92,633
========== ========== ==========
</Table>
(a) Includes lease expense associated with the hotels owned by
unconsolidated entities.
F-25
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. LAND LEASES AND HOTEL RENT
We lease land occupied by certain hotels from third parties under
various operating leases that expire through 2073. Certain land leases contain
contingent rent features based on gross revenue at the respective hotels. In
addition, we recognize rent expense for 15 hotels that are owned by
unconsolidated entities and are leased to our wholly-owned TRSs. These leases
expire through 2015 and require the payment of base rents and contingent rent
based on revenues at the respective hotels. Future minimum lease payments under
our land lease obligations and hotel leases at December 31, 2002, are as follows
(in thousands):
<Table>
<Caption>
YEAR
2003 ...................... $ 38,027
2004 ...................... 38,095
2005 ...................... 37,230
2006 ...................... 33,205
2007 ...................... 13,538
2008 and thereafter ....... 138,746
----------
$ 298,841
==========
</Table>
15. MERGER TERMINATION COSTS
On May 9, 2001, we entered into a merger agreement with MeriStar. On
September 21, 2001, we announced jointly with MeriStar 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.
16. IMPAIRMENT CHARGE
We recorded impairment charges aggregating $157.5 million during the
fourth quarter of 2002.
The provisions of SFAS 144 resulted in $144.1 million of this
impairment charge. This related principally to our fourth quarter 2002 decision
to sell 33 non-strategic hotels over the next 36 months. An impairment charge of
$118.3 million was recorded on 20 of these 33 hotels. Six of these 33 hotels had
been previously identified for sale and had been included in previous impairment
losses. The 33 hotels identified as non-strategic represented 14% of our hotel
rooms and 9% of our consolidated hotel revenue during the year ended December
31, 2002, and had a net book value of $235.1 million as of December 31, 2002. Of
the remaining 2002 impairment charge, $25.2 million related to two hotels held
for investment that are not included in our disposition plan. In accordance with
the provisions of SFAS 144, because the estimated future undiscounted cash flows
from these individual hotels did not exceed the hotel's carrying values, we
reduced the carrying value of the 22 impaired hotels to our estimate of each
hotel's estimated fair value as of December 31, 2002. In addition, the 2002
impairment charge included a $0.6 million write-down of construction in
progress.
We recorded an impairment charge of $13.4 million related to an other
than temporary decline in value of certain equity method investments under the
provisions of Accounting Principles Board Opinion 18, "The Equity Method of
Accounting for Common Stocks," or APB 18. In accordance with APB 18, other than
temporary declines in fair value of our investment in unconsolidated entities
result in reductions in the carrying value of these investments. We consider a
decline in value in our equity method investments that is not estimated to
recover within 12 months to be other than temporary.
F-26
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. IMPAIRMENT CHARGE -- (CONTINUED)
We recorded impairment charges of $7 million and $63 million in 2001
and 2000, respectively, in conjunction with the designation of certain hotels as
held for sale.
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2002, 2001 and 2000 (in
thousands, except per share data):
<Table>
<Caption>
2002 2001 2000
--------------- --------------- ---------------
Numerator:
Income (loss) from continuing operations .......................... $ (184,642) $ (42,693) $ 57,311
Less: Preferred dividends ...................................... (26,292) (24,600) (24,682)
Gain on sale of assets ......................................... 6,061 3,417 4,388
--------------- --------------- ---------------
Income (loss) from continuing operations and net income (loss)
applicable to common stockholders .............................. $ (204,873) $ (63,876) $ 37,017
=============== =============== ===============
Denominator:
Denominator for basic earnings per share -
weighted average shares ......................................... 54,173 52,622 55,264
Effect of dilutive securities:
Stock options ..................................................... 27
Restricted shares ................................................. 228
--------------- --------------- ---------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions ..................................................... 54,173 52,622 55,519
=============== =============== ===============
Earnings (loss) per share data:
Basic:
Income (loss) from continuing operations
applicable to common stockholders .............................. $ (3.78) $ (1.21) $ 0.67
=============== =============== ===============
Net income (loss) ................................................. $ (3.78) $ (1.21) $ 0.67
=============== =============== ===============
Diluted:
Income (loss) from continuing operations
applicable to common stockholders .............................. $ (3.78) $ (1.21) $ 0.67
=============== =============== ===============
Net income (loss) ................................................. $ (3.78) $ (1.21) $ 0.67
=============== =============== ===============
</Table>
Securities that could potentially dilute basic earnings per share in
the future that were not included in computation of diluted earnings per share,
because they would have been antidilutive for the periods presented, are as
follows (unaudited, in thousands):
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
Stock Options ............................ 7 49
Restricted shares granted but not vested.. 317 355
Series A preferred shares ................ 4,636 4,636 4,636
</Table>
Series A preferred dividends that would be excluded from net income
(loss) applicable to common stockholders, if the Series A preferred shares were
dilutive, were $11.7 million for 2002, 2001 and 2000.
F-27
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The acquisition of DJONT, one of our primary lessees, was completed
effective January 1, 2001. In consideration for the acquisition of DJONT, FelCor
LP issued 416,667 units of limited partnership interest valued at approximately
$10 million. The acquisition of DJONT required negotiations between us and the
owners of DJONT, including Thomas J. Corcoran, Jr., our President, Chief
Executive Officer, and a director of FelCor, and the children of Charles N.
Mathewson, a former 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 of directors'
discussion and vote on this matter.
Prior to our acquisition of DJONT, which was effective January 1, 2001,
we shared the executive offices and certain employees with FelCor, Inc., and
DJONT, (both companies were controlled by Thomas J. Corcoran, Jr., President and
CEO) and each company paid its share of the costs thereof, including an
allocated portion of the rent, compensation of certain personnel, office
supplies, telephones, and depreciation of office furniture, fixtures, and
equipment. Any such allocation of shared expenses to us is required to be
approved by a majority of our independent directors. At December 31, 2002,
FelCor, Inc. had a 10% ownership interest in one hotel and limited other
investments. During 2000, we paid approximately $7.5 million (approximately
89.4%) of the allocable expenses under this arrangement. Following our
acquisition of DJONT, FelCor, Inc. continued to share certain overhead costs.
FelCor, Inc. paid $50,000 and $45,000 for shared office costs in 2002 and 2001,
respectively.
In December 2000, we sold one hotel and, effective January 1, 2001,
completed the acquisition of leases with respect to 12 hotels that had been
leased to and operated by Six Continents Hotels. In consideration for the
acquisition of such leases and termination of the related management agreements,
we issued 413,585 shares of our common stock, valued at approximately $10
million, to Six Continents Hotels. We acquired the remaining leases held by Six
Continents Hotels, effective July 1, 2001. We 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, was the Group Finance Director of Six Continents plc, the parent of
Six Continents Hotels and, together with its affiliates, the owner of
approximately 17% 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.
Following the events of September 11, 2001, certain types of insurance
coverage, such as for acts of terrorism, were only available at a high cost. In
an effort to keep our cost of insurance within reasonable limits, we have only
purchased terrorism insurance for those hotels that are secured by mortgage
debt, as required by our lenders. We have established a self-insured retention
of $250,000 per occurrence for general liability insurance with regard to 68 of
our hotels; the remainder of our hotels participate in general liability
programs, of our managers, with no deductible. Due to the increase in our
general liability deductible for the 68 hotels, we maintain reserves to cover
the estimated ultimate uninsured liability for losses with respect to reported
and unreported claims incurred as of the end of each accounting period. At
December 31, 2002, our reserve for this self-insured portion of general
liability claims was $2.3 million. Our property program has a $100,000 all risk
deductible, a deductible of 2% of insured value for named windstorm and a
deductible of 5% of insured value for California quake. No reserves have been
established as of December 31, 2002, for these property deductibles, as no
related losses are estimated to have been incurred. Should such uninsured or not
fully insured losses be substantial, they could have a material adverse impact
on our operating results and cash flows.
F-28
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
There is no litigation pending or known to be threatened against us or
affecting any of our hotels, other than claims arising in the ordinary course of
business or which are not considered to be material. Furthermore, most of these
claims are substantially covered by insurance. We do not believe that any claims
known to us, individually or in the aggregate, will have a material adverse
effect on us, without regard to any potential recoveries from insurers or other
third parties.
Our hotels are operated under various management agreements that call
for base management fees, which range from 2% to 7% of hotel room revenue and
generally have an incentive provision related to the hotel's profitability. In
addition, the management agreements generally require us to invest approximately
3% to 4% of revenues in capital maintenance. The management agreements have
terms from 10 to 20 years and generally have renewal options.
With the exception of 95 hotels whose rights to use a brand name are
contained in the management agreement governing their operations, and seven of
our hotels that do not operate under a nationally recognized brand name, each of
our hotels operates under a franchise or license agreement. Typically, our
franchise or license agreements provide for a royalty fee of 4% of room revenues
to be paid to the franchisor.
Under our management agreement with Six Continents Hotels, we are
obligated to replace the amount of investment in hotels that were under Six
Continents Hotels management but were sold or otherwise transferred to non-Six
Continents Hotels management or pay liquidated damages. As a result of the 2002
sales and contributions to joint ventures, we are required to spend $13.6
million on the purchase of one or more hotels licensed and managed by Six
Continents Hotels by August 2003. Until that replacement occurs, we must pay a
replacement fee of approximately $21,000 per month. If we do not replace the
investment by August 2003, we may incur liquidated damages of $4.5 million. We
currently expect that this obligation will be satisfied by our investment in one
or more hotels licensed and managed by Six Continents Hotels. Also under our Six
Continents Hotels management agreement, if a TRS breaches the agreement,
resulting in a default and termination thereof, or otherwise causes or suffers a
termination for any reason other than an event of default by Six Continents
Hotels, the TRS may be liable for liquidated damages under the terms of the
management agreement.
In the event we breach one of our Embassy Suites Hotels franchise
license agreements, in addition to losing the right to use the Embassy Suites
Hotels name for the operation of the applicable hotel, we may be liable, under
certain circumstances, for liquidated damages equal to the fees paid to the
franchisor with respect to that hotel during the three preceding years.
19. SUPPLEMENTAL CASH FLOW DISCLOSURE
Approximately $15 million, $8 million, and $34 million of aggregate
preferred stock dividends, common stock and FelCor LP unit distributions had
been declared as of December 31, 2002, 2001, and 2000, respectively. These
amounts were paid in the following January of each year.
As the result of Six Continent's exchange of 5,713,185 units for common
stock in 2002, we allocated $72.5 million of minority interest to additional
paid in capital. In 2001 and 2000, we allocated $5 million and $71.6 million,
respectively, to minority interest from additional paid in capital.
F-29
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. STOCK BASED COMPENSATION PLANS
We sponsor four restricted stock and stock option plans, or the FelCor
Plans. In addition, upon completion of the merger with Bristol in 1998, we
assumed two stock option plans previously sponsored by Bristol, or the Bristol
Plans. We were initially obligated to issue up to 1,271,103 shares of our common
stock pursuant to the Bristol Plans. No additional options may be awarded under
the Bristol Plans. The FelCor Plans and the Bristol Plans are referred to
collectively as the Plans.
We are authorized to issue 3,700,000 shares of common stock under the
FelCor Plans pursuant to awards granted in the form of incentive stock options,
non-qualified stock options, and restricted stock. All options have 10-year
contractual terms and vest either over five equal annual installments (20% per
year), beginning in the year following the date of grant or 100% at the end of a
four-year vesting term. Under the FelCor plans there were approximately
1,133,000 shares available for grant at December 31, 2002.
The options outstanding under the Bristol Plans generally vest either
in four equal annual installments (25% per year) beginning in the second year
following the original date of award, in five equal annual installments (20% per
year) beginning in the year following the original date of award, or on a single
date that is three to five years following the original date of the award.
Options covering 93,434 shares were outstanding under the Bristol Plans at
December 31, 2002.
Stock Options
A summary of the status of our non-qualified stock options under the
Plans as of December 31, 2002, 2001 and 2000, and the changes during these years
are presented in the following tables:
<Table>
<Caption>
2002 2001 2000
------------------------ ----------------------- -----------------------
WEIGHTED NO. SHARES WEIGHTED NO. SHARES WEIGHTED
NO. SHARES OF AVERAGE OF AVERAGE OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
----------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of the year ........ 2,041,212 $ 22.85 1,900,780 $ 23.33 2,496,773 $ 22.32
Granted ..................................... 300,000 $ 17.94 69,000 $ 19.50
Exercised ................................... (48,806) $ 10.33
Retired(a) .................................. (349,443) $ 12.28
Forfeited ................................... (63,738) $ 22.82 (110,762) $ 23.33 (315,550) $ 26.75
--------- --------- ---------
Outstanding at end of year .................. 1,977,474 $ 22.85 2,041,212 $ 22.85 1,900,780 $ 23.33
========= ========= =========
Exercisable at end of year .................. 1,641,944 $ 23.75 1,546,913 $ 23.84 804,066 $ 24.64
</Table>
(a) In the second quarter of 2000, we purchased options covering
an aggregate of 349,443 shares of FelCor's common stock for
approximately $1.9 million. These options were held by
employees of Bristol and were issued in substitution for stock
options previously granted by Bristol Hotel Company that were
outstanding at the time of its merger with us in 1998. These
options so purchased and retired had exercise prices ranging
from $10.33 to $16.95 per share and the majority of these
options were scheduled to vest in the third quarter of 2000.
The purchase price was recorded as a reduction in additional
paid in capital.
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
RANGE OF NUMBER WGTD. AVG. NUMBER
EXERCISE OUTSTANDING REMAINING WGTD AVG. EXERCISABLE WGTD. AVG.
PRICES AT 12/31/02 LIFE EXERCISE PRICE AT 12/31/02 EXERCISE PRICE
------ ----------- --------- -------------- ----------- --------------
$10.33 to $29.92 1,824,523 5.13 $21.81 1,488,993 $22.57
$30.28 to $36.63 152,951 4.44 $35.31 152,951 $35.31
--------- ---------
$10.33 to $36.63 1,977,474 5.08 $22.85 1,641,944 $23.75
========= =========
</Table>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for 2001 and 2000 when options were granted: dividend yield
of 12.44% to 11.28%; risk free interest rates are different for each grant and
range from
F-30
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. STOCK BASED COMPENSATION PLANS -- (CONTINUED)
4.33% to 6.58%; the expected lives of options are six years; and volatility of
21.04% for 2001 grants and 18.22% for 2000 grants. The weighted average fair
value of options granted during 2001 and 2000, was $0.85 and $0.90 per share,
respectively. We issued no stock options in 2002.
Restricted Stock
A summary of the status of our restricted stock grants as of December
31, 2002, 2001, and 2000, and the changes during these years are presented
below:
<Table>
<Caption>
2002 2001 2000
------------------------- ------------------------ ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FAIR MARKET FAIR MARKET FAIR MARKET
VALUE VALUE NO. VALUE
NO. SHARES AT GRANT NO. SHARES AT GRANT SHARES AT GRANT
---------- ----------- ---------- - -------- ------ --------
Outstanding at beginning of the year 570,575 $24.40 367,575 $25.01 138,975 $28.26
Granted(a):
With immediate vesting(b)........ 19,100 $17.55 14,300 $23.74 18,500 $17.81
With 5-year pro rata vesting..... 43,606 $17.71 214,000 $22.89 210,100 $23.50
Forfeited........................... (25,300) $20.23
------- ------- -------
Outstanding at end of year.......... 633,281 $23.73 570,575 $24.40 367,575 $25.01
======= ======= =======
Vested at end of year............... 316,715 $21.78 215,795 $24.09 140,075 $26.97
</Table>
- -------------------------------------
(a) All shares granted are issued out of treasury except for
4,100, 2,700, and 18,500 of the restricted shares issued to
directors during the years ended December 31, 2002, 2001 and
2000, respectively.
(b) Shares awarded to directors.
21. EMPLOYEE BENEFITS
We offer a 401(k) plan, health insurance benefits and a deferred
compensation plan to our employees. Our matching contribution to our 401(k) plan
was $0.5 million, $0.5 million, and $0.4 million and the cost of health
insurance benefits were $0.6 million, $0.5 million, and $0.3 million during the
years ended December 31, 2002, 2001 and 2000, respectively. The deferred
compensation plan we offer is available only to directors and qualifying senior
officers. We make no matching or other contributions to the deferred
compensation plan, other than the payment of its operating and administrative
expenses.
The employees at our hotels are employees of the respective management
companies. Under the management agreements, we reimburse the management
companies for the cost of salaries and employee benefits related to the
employees who work at our hotels. We are not, however, the sponsors of their
employee benefit plans and have no obligation to fund these plans.
22. SEGMENT INFORMATION
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," requires the disclosure of selected information about operating
segments. Based on the guidance provided in the standard, we have determined
that our business is conducted in one operating segment.
22. SEGMENT INFORMATION -- (CONTINUED)
The following table sets forth revenues for, and investment in hotel
assets represented by, the following geographical areas as of and for the years
ended December 31, 2002, 2001 and 2000 (in thousands):
F-31
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
REVENUE(a) INVESTMENT IN HOTEL ASSETS
---------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
California .............. $ 207,094 $ 195,376 $ 118,857 $ 689,761 $ 689,791 $ 679,781
Texas ................... 232,138 206,766 97,274 839,192 867,263 860,093
Florida ................. 135,545 130,402 66,014 547,627 540,155 529,857
Georgia ................. 96,862 89,487 40,183 320,890 318,268 315,497
Other states ............ 608,565 552,964 203,776 1,780,837 1,793,950 1,749,134
Canada .................. 37,755 25,976 13,860 77,311 74,771 79,570
---------- ---------- ---------- ---------- ---------- ----------
Total ........ $1,317,959 $1,200,971 $ 539,964 $4,255,618 $4,284,198 $4,213,932
========== ========== ========== ========== ========== ==========
</Table>
(a) Prior to January 1, 2001, all of the revenues that we derived
from hotel assets consisted of percentage lease revenue.
Effective January 1, 2001, we acquired 96 hotel leases and
effective July 1, 2001, we acquired the remaining 88 hotel
leases. Upon acquisition of these leases, our revenue derived
from hotel assets became hotel operating revenues, including
room revenues, food and beverage revenue and other hotel
operating revenue.
23. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board, or FASB, has issued SFAS 146,
"Accounting for Exit or Disposal Activities." SFAS No. 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") of the FASB 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 No. 146 also included (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 No. 146 will be effective for exit or disposal
activities initiated after December 31, 2002. We do not currently expect SFAS
No. 146 to have a material impact on our results of operations and financial
position.
The FASB has issued SFAS 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to a fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results. We have
adopted the disclosure requirements of SFAS 148. We currently account for
stock-based employee compensation in accordance with APB Opinion 25, "Accounting
for Stock Issued to Employees," and related interpretations. In accordance with
one of the alternative methods of transition for a voluntary change to a fair
value based method of accounting for stock-based employee compensation mandated
by SFAS 148, we intend to adopt the "prospective method" as of January 1, 2003.
Under this method, compensation expense will be recognized for any new awards
issued after December 31, 2002. We do not currently expect the adoption of SFAS
148 to have a material impact on our financial position or results of
operations.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission
of FASB Interpretation No. 34," or FIN 45, was issued in November 2002. FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its
F-32
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS -- (CONTINUED)
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. FIN 45 does not prescribe a specific approach for subsequently
measuring the guarantor's recognized liability over the term of the related
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements in FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. We have made the
disclosures required by FIN 45.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51, or FIN 46, was issued in January
2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the equity to finance its activities
without additional subordinated financial support from other parties.
We have no unconsolidated variable interest entities that would be
consolidated under the requirements of FIN 46.
24. QUARTERLY OPERATING RESULTS (UNAUDITED)
Our unaudited consolidated quarterly operating data for the years ended
December 31, 2002 and 2001, follows (in thousands, except per share data). In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of quarterly results have been
reflected in the data. It is also management's opinion, however, that quarterly
operating data for hotel enterprises are not indicative of results to be
achieved in succeeding quarters or years. In order to obtain a more accurate
indication of performance, there should be a review of operating results,
changes in stockholders' equity and cash flows for a period of several years.
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER(a)
---------- ---------- ---------- ----------
Total revenues ............................................................ $ 324,810 $ 351,726 $ 331,582 $ 309,841
Net income (loss) applicable to common stockholders ....................... $ (12,296) $ 6,314 $ (13,808) $ (185,083)
Diluted per common share data:
Net income (loss) applicable to common stockholders .................. $ (0.23) $ 0.12 $ (0.26) $ (3.17)
Weighted average common shares outstanding ........................... 52,717 53,093 52,729 58,450
</Table>
- ----------
(a) The fourth quarter net loss includes an impairment charge of
$157.5 million
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER(a)
---------- ---------- ---------- ----------
Total revenues ............................................................ $ 285,653 $ 274,649 $ 337,759 $ 302,910
Net income (loss) applicable to common stockholders ....................... $ (12,956) $ 16,409 $ (31,912) $ (35,417)
Diluted per common share data:
Net income (loss) applicable to common stockholders .................. $ (0.25) $ 0.31 $ (0.60) $ (0.67)
Weighted average common shares outstanding ........................... 52,595 53,046 52,634 52,639
</Table>
F-33
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
25. SUBSEQUENT EVENTS
In January and February 2003, we executed two additional interest rate
swaps. These new fair value swaps are the same type as those that existed at
December 31, 2002, in that they modify a portion of the interest characteristics
of our outstanding fixed rate debt, without an exchange of the underlying
principal amount, and effectively convert fixed rate debt to a variable rate. As
designated fair value hedges, these swaps will be marked to market through the
income statement, but are offset by the change in fair value of our swapped
outstanding fixed rate debt. The notional amount of these new swaps is $50
million on which we will receive a fixed rate of 7.625% and pay a rate of LIBOR
plus an average spread of 4.325%.
As a consequence of the economic slowdown in our business, and the
travel and lodging industries generally, Standard & Poor's lowered its ratings
on our $1.2 billion in senior unsecured debt one level, to B+, in February 2003.
Although Moody's affirmed its current rating on our senior debt in February 2003
(Ba3), we remain on negative outlook. Should Moody's downgrade its Ba3 rating on
our senior unsecured debt to B1, the interest rate on $900 million of our $1.2
billion senior unsecured debt would increase by 50 basis points, which would
increase our annual interest expense by approximately $4.5 million.
On February 4, 2003, we announced that, as the result of the uncertain
political environment and soft business climate, together with the risk of
further margin deterioration should we continue to experience declines in our
portfolio's average daily rate, we do not expect our Board of Directors to
declare future common dividends until there is a 2% to 4% increase in hotel
RevPAR.
Subsequent to December 31, 2002 and prior to March 21, 2003, we have
drawn $149 million on our line of credit to increase available cash on hand.
F-34
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of FelCor Lodging Trust Incorporated:
Our audits of the consolidated financial statements referred to in our report
dated February 3, 2003 except as to Note 25, which is as of March 21, 2003,
appearing on page F-2 of the Annual Report on Form 10-K of FelCor Lodging Trust
Incorporated (which report and consolidated financial statements are included in
this Annual Report on Form 10-K) also included an audit of the financial
statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 3, 2003
F-35
FELCOR LODGING TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2002
(IN THOUSANDS)
<Table>
<Caption>
COST CAPITALIZED
INITIAL COST SUBSEQUENT TO ACQUISITION
---------------------- --------------------------
BUILDINGS BUILDINGS
AND AND
LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
- -------- ------------ -------- ------------ ------- ------------
Birmingham, AL (1) $ 11,880 $ 2,843 $ 29,286 0 $ 687
Montgomery E. I-85, AL (2) 602 830 7,221 9 2,759
Texarkana I-30, AR (2) 0 0 5,245 0 1,589
Flagstaff, AZ (1) 0 900 6,825 0 1,671
Phoenix (Airport-44th St.), AZ (1) 0 2,969 25,828 0 1,436
Phoenix (Camelback), AZ (1) 0 0 38,998 4,695 1,174
Phoenix (Crescent), AZ (3) 26,128 3,608 29,583 0 351
Tempe (ASU), AZ (1) 11,776 3,951 34,371 0 1,001
Anaheim (Disney(R) Area), CA (1) 10,924 2,548 14,832 0 797
Burlingame (San Francisco A/P So.), CA (1) 0 0 39,929 0 353
Dana Point, CA (5) 0 1,787 15,545 0 912
El Segundo (LAX Airport South), CA (1) 0 2,660 17,997 0 696
Irvine (Orange County Airport), CA (6) 0 4,953 43,109 0 1,919
Milpitas, CA (1) 20,460 4,021 23,677 0 1,187
Milpitias (San Jose N.), CA (6) 0 4,127 35,917 0 5,948
Napa, CA (1) 10,749 3,287 14,205 0 1,176
Oxnard (Mandalay Beach), CA (1) 0 2,930 22,125 0 1,839
Palm Desert, CA (1) 8,418 2,368 20,598 5 1,744
Pleasanton, CA (6) 0 3,152 27,428 0 242
San Diego (On the Bay), CA (2) 0 0 68,229 0 3,432
San Francisco (Financial District), CA (2) 0 0 21,679 0 1,657
San Francisco (Fisherman's Wharf), CA (2) 0 0 61,883 0 1,086
San Francisco (Union Square), CA (6) 0 8,466 73,685 0 3,799
Santa Barbara, CA (2) 5,322 1,683 14,647 0 226
So. San Francisco (SF Airport No.), CA (1) 25,511 3,418 31,737 0 1,017
Cambridge, Canada (2) 0 478 4,159 (21) 897
Kitchener (Waterloo), Canada (2) 0 0 9,384 0 1,070
Peterbourough (Waterfront), Canada (2) 0 730 6,354 (32) 366
Sarnia, Canada (2) 0 268 2,337 (11) 1,181
Toronto (Airport), Canada (9) 0 0 21,041 0 2,369
Toronto (Yorkdale), Canada (2) 0 1,567 13,634 (69) 3,568
Aurora (Denver Southeast), CO (7) 0 2,432 21,158 0 523
Avon (Beaver Creek Resort), CO (8) 0 1,134 9,864 (16) 403
Hartford Downtown, CT (6) 0 2,310 20,109 0 6,199
Stamford, CT (9) 0 0 37,154 0 2,226
Wilmington, DE (7) 0 1,379 12,487 0 9,715
Boca Raton, FL (1) 0 1,868 16,253 0 92
Cocoa Beach (Oceanfront Resort), FL (2) 0 2,285 19,893 0 10,073
Deerfield Beach, FL (1) 14,755 4,523 29,443 68 1,253
Ft. Lauderdale (Cypress Creek), FL (11) 12,580 3,009 26,177 0 1,109
Ft. Lauderdale, FL (1) 15,746 5,329 47,850 (163) 1,759
Jacksonville, FL (1) 0 1,130 9,608 0 5,281
Kissimmee (Nikki Bird Resort), FL (2) 0 0 31,457 0 6,479
Lake Buena Vista (Disney World (R)), FL (5) 0 2,896 25,196 0 441
Miami Airport, FL (1) 12,729 4,135 24,950 0 780
Miami Airport, FL (6) 0 0 26,007 0 1,105
Orlando (Airport), FL (9) 0 2,549 22,188 0 1,752
Orlando (Int'l Drive Resort), FL (2) 0 5,108 44,459 0 8,784
Orlando (North), FL (1) 0 1,673 14,218 0 5,895
Orlando (South), FL (1) 24,846 1,632 13,870 0 765
Tampa (Near Busch Gardens), FL (2) 0 0 9,425 0 11,328
Tampa Rocky Point, FL (5) 0 2,142 18,639 0 1,344
Atlanta (Airport Gateway), GA (3) 0 5,113 22,857 0 245
Atlanta (Airport North), GA (2) 16,589 0 34,354 0 400
Atlanta (Airport), GA (1) 0 0 22,342 2,568 1,162
Atlanta (Airport), GA (6) 0 0 40,735 0 267
Atlanta (Buckhead), GA (1) 37,147 7,303 38,996 0 856
<Caption>
GROSS AMOUNTS AT
WHICH CARRIED AT
CLOSE OF PERIOD LIFE UPON
------------------------ ACCUMULATED WHICH
BUILDINGS DEPRECIATION DEPRECIATION
AND BUILDING AND YEAR DATE IN STATEMENT
LOCATION LAND IMPROVEMENTS TOTAL IMPROVEMENTS OPENED ACQUIRED IS COMPUTED
- -------- -------- ------------ ---------- ------------ ------ -------- ------------
Birmingham, AL (1) $ 2,843 $ 29,973 $ 32,816 $ 5,383 1987 1/3/1996 15 - 40 Yrs
Montgomery E. I-85, AL (2) 839 9,980 10,819 1,146 1964 7/28/1998 15 - 40 Yrs
Texarkana I-30, AR (2) 0 6,834 6,834 897 1970 7/28/1998 15 - 40 Yrs
Flagstaff, AZ (1) 900 8,496 9,396 1,610 1988 2/16/1995 15 - 40 Yrs
Phoenix (Airport-44th St.), AZ (1) 2,969 27,264 30,233 3,169 1981 5/4/1998 15 - 40 Yrs
Phoenix (Camelback), AZ (1) 4,695 40,172 44,867 7,149 1985 1/3/1996 15 - 40 Yrs
Phoenix (Crescent), AZ (3) 3,608 29,934 33,542 4,088 1986 6/30/1997 15 - 40 Yrs
Tempe (ASU), AZ (1) 3,951 35,372 39,323 4,062 1986 5/4/1998 15 - 40 Yrs
Anaheim (Disney(R) Area), CA (1) 2,548 15,629 18,177 2,963 1987 1/3/1996 15 - 40 Yrs
Burlingame (San Francisco A/P So.), CA (1) 0 40,282 40,282 7,224 1986 11/6/1995 15 - 40 Yrs
Dana Point, CA (5) 1,787 16,457 18,244 2,373 1992 2/21/1997 15 - 40 Yrs
El Segundo (LAX Airport South), CA (1) 2,660 18,693 21,353 4,111 1985 3/27/1996 15 - 40 Yrs
Irvine (Orange County Airport), CA (6) 4,953 45,028 49,981 5,015 1986 7/28/1998 15 - 40 Yrs
Milpitas, CA (1) 4,021 24,864 28,885 4,558 1987 1/3/1996 15 - 40 Yrs
Milpitias (San Jose N.), CA (6) 4,127 41,865 45,992 4,748 1987 7/28/1998 15 - 40 Yrs
Napa, CA (1) 3,287 15,381 18,668 2,654 1985 5/8/1996 15 - 40 Yrs
Oxnard (Mandalay Beach), CA (1) 2,930 23,964 26,894 4,022 1986 5/8/1996 15 - 40 Yrs
Palm Desert, CA (1) 2,373 22,342 24,715 2,604 1984 5/4/1998 15 - 40 Yrs
Pleasanton, CA (6) 3,152 27,670 30,822 3,049 1986 7/28/1998 15 - 40 Yrs
San Diego (On the Bay), CA (2) 0 71,661 71,661 7,610 1965 7/28/1998 15 - 40 Yrs
San Francisco (Financial District), CA (2) 0 23,336 23,336 4,503 1970 7/28/1998 15 - 40 Yrs
San Francisco (Fisherman's Wharf), CA (2) 0 62,969 62,969 6,883 1970 7/28/1998 15 - 40 Yrs
San Francisco (Union Square), CA (6) 8,466 77,484 85,950 8,504 1970 7/28/1998 15 - 40 Yrs
Santa Barbara, CA (2) 1,683 14,873 16,556 1,629 1969 7/28/1998 15 - 40 Yrs
So. San Francisco (SF Airport No.), CA (1) 3,418 32,754 36,172 5,834 1988 1/3/1996 15 - 40 Yrs
Cambridge, Canada (2) 457 5,056 5,513 661 1969 7/28/1998 15 - 40 Yrs
Kitchener (Waterloo), Canada (2) 0 10,454 10,454 1,251 1965 7/28/1998 15 - 40 Yrs
Peterbourough (Waterfront), Canada (2) 698 6,720 7,418 813 1965 7/28/1998 15 - 40 Yrs
Sarnia, Canada (2) 257 3,518 3,775 390 1970 7/28/1998 15 - 40 Yrs
Toronto (Airport), Canada (9) 0 23,410 23,410 2,837 1970 7/28/1998 15 - 40 Yrs
Toronto (Yorkdale), Canada (2) 1,498 17,202 18,700 2,111 1970 7/28/1998 15 - 40 Yrs
Aurora (Denver Southeast), CO (7) 2,432 21,681 24,113 2,510 1989 3/15/1998 15 - 40 Yrs
Avon (Beaver Creek Resort), CO (8) 1,118 10,267 11,385 1,739 1989 2/20/1996 15 - 40 Yrs
Hartford Downtown, CT (6) 2,310 26,308 28,618 2,991 1973 7/28/1998 15 - 40 Yrs
Stamford, CT (9) 0 39,380 39,380 4,236 1984 7/28/1998 15 - 40 Yrs
Wilmington, DE (7) 1,379 22,202 23,581 2,407 1972 3/20/1998 15 - 40 Yrs
Boca Raton, FL (1) 1,868 16,345 18,213 2,996 1989 2/28/1996 15 - 40 Yrs
Cocoa Beach (Oceanfront Resort), FL (2) 2,285 29,966 32,251 3,913 1960 7/28/1998 15 - 40 Yrs
Deerfield Beach, FL (1) 4,591 30,696 35,287 5,496 1987 1/3/1996 15 - 40 Yrs
Ft. Lauderdale (Cypress Creek), FL (11) 3,009 27,286 30,295 3,155 1986 5/4/1998 15 - 40 Yrs
Ft. Lauderdale, FL (1) 5,166 49,609 54,775 8,987 1986 1/3/1996 15 - 40 Yrs
Jacksonville, FL (1) 1,130 14,889 16,019 2,663 1986 7/28/1994 15 - 40 Yrs
Kissimmee (Nikki Bird Resort), FL (2) 0 37,936 37,936 4,540 1974 7/28/1998 15 - 40 Yrs
Lake Buena Vista (Disney World (R)), FL (5) 2,896 25,637 28,533 3,446 1987 7/28/1997 15 - 40 Yrs
Miami Airport, FL (1) 4,135 25,730 29,865 4,688 1983 7/28/1998 15 - 40 Yrs
Miami Airport, FL (6) 0 27,112 27,112 2,997 1987 1/3/1996 15 - 40 Yrs
Orlando (Airport), FL (9) 2,549 23,940 26,489 2,688 1984 7/28/1998 15 - 40 Yrs
Orlando (Int'l Drive Resort), FL (2) 5,108 53,243 58,351 5,890 1972 7/28/1998 15 - 40 Yrs
Orlando (North), FL (1) 1,673 20,113 21,786 3,986 1985 7/28/1994 15 - 40 Yrs
Orlando (South), FL (1) 1,632 14,635 16,267 3,146 1985 7/28/1994 15 - 40 Yrs
Tampa (Near Busch Gardens), FL (2) 0 20,753 20,753 2,937 1966 7/28/1998 15 - 40 Yrs
Tampa Rocky Point, FL (5) 2,142 19,983 22,125 2,720 1986 7/28/1997 15 - 40 Yrs
Atlanta (Airport Gateway), GA (3) 5,113 23,102 28,215 3,171 1986 6/30/1997 15 - 40 Yrs
Atlanta (Airport North), GA (2) 0 34,754 34,754 3,774 1967 7/28/1998 15 - 40 Yrs
Atlanta (Airport), GA (1) 2,568 23,504 26,072 2,664 1989 5/4/1998 15 - 40 Yrs
Atlanta (Airport), GA (6) 0 41,002 41,002 4,542 1975 7/28/1998 15 - 40 Yrs
Atlanta (Buckhead), GA (1) 7,303 39,852 47,155 6,114 1988 10/17/1996 15 - 40 Yrs
</Table>
F-36
FELCOR LODGING TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - (CONTINUED)
AS OF DECEMBER 31, 2002
(IN THOUSANDS)
<Table>
<Caption>
COST CAPITALIZED
INITIAL COST SUBSEQUENT TO ACQUISITION
---------------------- --------------------------
BUILDINGS BUILDINGS
AND AND
LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
- -------- ------------ -------- ------------ ------- ------------
Atlanta (Galleria), GA (11) 17,418 5,052 28,507 0 938
Atlanta (Jonesboro South), GA (2) 2,758 859 7,475 0 183
Atlanta Perimeter, GA (9) 10,295 0 20,450 0 401
Atlanta Powers Ferry, GA (6) 10,041 3,391 29,518 0 630
Brunswick, GA (1) 0 705 6,067 0 110
Columbus (Airport North), GA (2) 0 0 6,979 0 2,033
Davenport, IA (12) 0 434 2,534 0 0
Davenport, IA (2) 0 547 2,192 0 0
Chicago (Allerton), IL (6) 0 3,298 28,723 15,589 28,050
Chicago (O'Hare), IL (3) 24,192 8,178 37,043 0 735
Deerfield, IL (1) 16,097 2,305 20,054 0 570
Moline (Airport), IL (13) 0 232 1,603 0 0
Moline (Airport), IL (2) 0 822 2,015 0 0
Moline, IL (12) 0 505 2,859 0 0
Lexington, KY (11) 6,774 0 21,644 2,488 597
Lexington, KY (14) 0 1,955 13,604 0 149
Baton Rouge, LA (1) 7,637 2,350 19,092 1 998
New Orleans (French Quarter), LA (2) 23,215 5,228 45,504 0 7,736
New Orleans, LA (1) 31,709 3,647 31,993 0 5,914
Boston (Government Center), MA (9) 0 0 45,191 0 5,398
Boston (Marlborough), MA (1) 19,909 948 8,143 761 13,117
Baltimore (BWI), MD (1) 0 2,568 22,433 (2) 1,360
Troy, MI (1) 0 2,968 25,905 0 1,330
Bloomington, MN (1) 0 2,038 17,731 0 584
Minneapolis (Airport), MN (1) 15,086 5,417 36,508 0 62
Minneapolis (Downtown), MN (1) 0 818 16,820 0 495
St Paul, MN (1) 0 1,156 17,315 0 51
Kansas City (Northeast), MO (2) 0 967 8,415 0 46
St. Louis (Downtown), MO (1) 0 3,179 27,659 0 1,424
St. Louis (Westport), MO (2) 7,576 2,767 24,072 0 2,312
Jackson (Downtown), MS (6) 4,841 2,226 19,370 0 448
Jackson (North), MS (15) 5,228 1,643 14,296 0 229
Olive Branch (Whispering Woods
Conference Center), MS (8) 0 1,238 12,084 (158) 1,728
Raleigh/Durham, NC (5) 0 2,124 18,476 0 849
SouthPark Suites (5) 0 1,458 12,681 1 256
Omaha (Central), NE (12) 0 514 4,477 0 923
Omaha (Central), NE (5) 0 1,877 16,328 0 1,163
Omaha (I-80), NE (2) 0 1,782 15,513 0 3,365
Omaha (Old Mill Northwest), NE (6) 0 971 8,448 0 4,876
Omaha (Southwest), NE (12) 0 464 4,036 0 808
Omaha (Southwest), NE (13) 0 917 7,983 0 893
Omaha (Southwest), NE (15) 0 371 3,228 0 24
Piscataway, NJ (1) 20,131 1,755 17,424 0 1,141
Secaucus (Meadowlands), NJ (6) 0 2,339 20,497 0 4,533
Albuquerque (Mountain View), NM (2) 0 1,314 11,439 0 866
Syracuse, NY (1) 0 1,483 13,756 0 329
Cleveland, OH (1) 0 1,755 15,329 0 3,194
Columbus, OH (5) 0 1,918 16,691 0 1,338
Dayton, OH (5) 6,180 1,140 11,223 149 1,235
Tulsa, OK (1) 0 525 7,344 0 651
Philadelphia (Center City), PA (6) 0 5,759 50,127 0 2,737
Philadelphia (Independence Mall), PA (2) 11,955 3,164 27,536 0 5,920
Philadelphia (Society Hill), PA (3) 32,901 4,542 45,121 0 1,328
Pittsburgh, PA (9) 15,500 0 25,031 0 1,613
Charleston (Mills House), SC (2) 0 3,251 28,295 0 429
Greenville (Roper), SC (6) 0 1,551 13,492 (20) 792
Kingston Myrtle Beach (22) 0 12,000 17,689 6 5
Myrtle Beach (Kingston Plantation), SC (1) 0 2,940 24,988 0 1,787
Knoxville (Central), TN (2) 0 0 11,517 0 1,570
<Caption>
GROSS AMOUNTS AT
WHICH CARRIED AT
CLOSE OF PERIOD LIFE UPON
------------------------ ACCUMULATED WHICH
BUILDINGS DEPRECIATION DEPRECIATION
AND BUILDING AND YEAR DATE IN STATEMENT
LOCATION LAND IMPROVEMENTS TOTAL IMPROVEMENTS OPENED ACQUIRED IS COMPUTED
- -------- -------- ------------ ---------- ------------ ------ -------- ------------
Atlanta (Galleria), GA (11) 5,052 29,445 34,497 4,000 1990 6/30/1997 15 - 40 Yrs
Atlanta (Jonesboro South), GA (2) 859 7,658 8,517 836 1973 7/28/1998 15 - 40 Yrs
Atlanta Perimeter, GA (9) 0 20,851 20,851 2,300 1985 7/28/1998 15 - 40 Yrs
Atlanta Powers Ferry, GA (6) 3,391 30,148 33,539 3,350 1981 7/28/1998 15 - 40 Yrs
Brunswick, GA (1) 705 6,177 6,882 1,122 1988 7/19/1995 15 - 40 Yrs
Columbus (Airport North), GA (2) 0 9,012 9,012 1,222 1969 7/28/1998 15 - 40 Yrs
Davenport, IA (12) 434 2,534 2,968 0 1985 7/28/1998 15 - 40 Yrs
Davenport, IA (2) 547 2,192 2,739 0 1966 7/28/1998 15 - 40 Yrs
Chicago (Allerton), IL (6) 18,887 56,773 75,660 7,889 1923 7/28/1998 15 - 40 Yrs
Chicago (O'Hare), IL (3) 8,178 37,778 45,956 5,144 1994 6/30/1997 15 - 40 Yrs
Deerfield, IL (1) 2,305 20,624 22,929 3,321 1987 6/20/1996 15 - 40 Yrs
Moline (Airport), IL (13) 232 1,603 1,835 0 1996 7/28/1998 15 - 40 Yrs
Moline (Airport), IL (2) 822 2,015 2,837 0 1961 7/28/1998 15 - 40 Yrs
Moline, IL (12) 505 2,859 3,364 0 1985 7/28/1998 15 - 40 Yrs
Lexington, KY (11) 2,488 22,241 24,729 2,531 1989 5/4/1998 15 - 40 Yrs
Lexington, KY (14) 1,955 13,753 15,708 2,356 1987 1/10/1996 15 - 40 Yrs
Baton Rouge, LA (1) 2,351 20,090 22,441 3,628 1985 1/3/1996 15 - 40 Yrs
New Orleans (French Quarter), LA (2) 5,228 53,240 58,468 5,522 1969 7/28/1998 15 - 40 Yrs
New Orleans, LA (1) 3,647 37,907 41,554 7,264 1984 12/1/1994 15 - 40 Yrs
Boston (Government Center), MA (9) 0 50,589 50,589 5,601 1968 7/28/1998 15 - 40 Yrs
Boston (Marlborough), MA (1) 1,709 21,260 22,969 3,232 1988 6/30/1995 15 - 40 Yrs
Baltimore (BWI), MD (1) 2,566 23,793 26,359 3,431 1987 3/20/1997 15 - 40 Yrs
Troy, MI (1) 2,968 27,235 30,203 3,931 1987 3/20/1997 15 - 40 Yrs
Bloomington, MN (1) 2,038 18,315 20,353 2,654 1980 2/1/1997 15 - 40 Yrs
Minneapolis (Airport), MN (1) 5,417 36,570 41,987 6,690 1986 11/6/1995 15 - 40 Yrs
Minneapolis (Downtown), MN (1) 818 17,315 18,133 3,178 1984 11/15/1995 15 - 40 Yrs
St Paul, MN (1) 1,156 17,366 18,522 3,324 1983 11/15/1995 15 - 40 Yrs
Kansas City (Northeast), MO (2) 967 8,461 9,428 1,300 1975 7/28/1998 15 - 40 Yrs
St. Louis (Downtown), MO (1) 3,179 29,083 32,262 3,399 1985 5/4/1998 15 - 40 Yrs
St. Louis (Westport), MO (2) 2,767 26,384 29,151 2,827 1979 7/28/1998 15 - 40 Yrs
Jackson (Downtown), MS (6) 2,226 19,818 22,044 2,235 1975 7/28/1998 15 - 40 Yrs
Jackson (North), MS (15) 1,643 14,525 16,168 1,685 1957 7/28/1998 15 - 40 Yrs
Olive Branch (Whispering Woods
Conference Center), MS (8) 1,080 13,812 14,892 1,528 1972 7/28/1998 15 - 40 Yrs
Raleigh/Durham, NC (5) 2,124 19,325 21,449 2,542 1987 7/28/1997 15 - 40 Yrs
SouthPark Suites (5) 1,459 12,937 14,396 159 N/A 7/12/2002 15 - 40 Yrs
Omaha (Central), NE (12) 514 5,400 5,914 672 1965 7/28/1998 15 - 40 Yrs
Omaha (Central), NE (5) 1,877 17,491 19,368 2,465 1973 2/1/1997 15 - 40 Yrs
Omaha (I-80), NE (2) 1,782 18,878 20,660 2,055 1991 7/28/1998 15 - 40 Yrs
Omaha (Old Mill Northwest), NE (6) 971 13,324 14,295 1,842 1974 7/28/1998 15 - 40 Yrs
Omaha (Southwest), NE (12) 464 4,844 5,308 580 1986 7/28/1998 15 - 40 Yrs
Omaha (Southwest), NE (13) 917 8,876 9,793 857 1989 7/28/1998 15 - 40 Yrs
Omaha (Southwest), NE (15) 371 3,252 3,623 448 1996 7/28/1998 15 - 40 Yrs
Piscataway, NJ (1) 1,755 18,565 20,320 3,138 1988 1/10/1996 15 - 40 Yrs
Secaucus (Meadowlands), NJ (6) 2,339 25,030 27,369 2,783 N/A 7/28/1998 15 - 40 Yrs
Albuquerque (Mountain View), NM (2) 1,314 12,305 13,619 1,377 1968 7/28/1998 15 - 40 Yrs
Syracuse, NY (1) 1,483 14,085 15,568 1,964 1989 6/30/1997 15 - 40 Yrs
Cleveland, OH (1) 1,755 18,523 20,278 3,055 1990 11/17/1995 15 - 40 Yrs
Columbus, OH (5) 1,918 18,029 19,947 2,160 1985 2/4/1998 15 - 40 Yrs
Dayton, OH (5) 1,289 12,458 13,747 1,566 1987 12/30/1997 15 - 40 Yrs
Tulsa, OK (1) 525 7,995 8,520 2,440 1985 7/28/1994 15 - 40 Yrs
Philadelphia (Center City), PA (6) 5,759 52,864 58,623 5,806 1970 7/28/1998 15 - 40 Yrs
Philadelphia (Independence Mall), PA (2) 3,164 33,456 36,620 4,176 1972 7/28/1998 15 - 40 Yrs
Philadelphia (Society Hill), PA (3) 4,542 46,449 50,991 6,150 1986 10/1/1997 15 - 40 Yrs
Pittsburgh, PA (9) 0 26,644 26,644 3,082 1988 7/28/1998 15 - 40 Yrs
Charleston (Mills House), SC (2) 3,251 28,724 31,975 3,147 1982 7/28/1998 15 - 40 Yrs
Greenville (Roper), SC (6) 1,531 14,284 15,815 1,589 1984 7/28/1998 15 - 40 Yrs
Kingston Myrtle Beach (22) 12,006 17,694 29,700 360 1974 7/23/2002 15 - 40 Yrs
Myrtle Beach (Kingston Plantation), SC (1) 2,940 26,775 29,715 4,463 1987 12/5/1996 15 - 40 Yrs
Knoxville (Central), TN (2) 0 13,087 13,087 1,472 1966 7/28/1998 15 - 40 Yrs
</Table>
F-37
FELCOR LODGING TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - (CONTINUED)
AS OF DECEMBER 31, 2002
(IN THOUSANDS)
<Table>
<Caption>
COST CAPITALIZED
INITIAL COST SUBSEQUENT TO ACQUISITION
---------------------- --------------------------
BUILDINGS BUILDINGS
AND AND
LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
- -------- ------------ -------- ------------ ------- ------------
Nashville (Airport), TN (5) 0 1,073 1,206 0 0
Nashville (Opryland/Airport), TN (9) 0 0 27,733 0 1,926
Nashville, TN (1) 0 1,118 9,506 0 414
Addison (North Dallas), TX (6) 0 4,938 42,965 0 431
Amarillo (I-40), TX (2) 0 0 5,754 0 2,873
Austin (Downtown), TX (5) 0 2,508 21,908 0 2,003
Austin (Town Lake), TX (2) 0 0 21,433 0 833
Beaumont (Midtown I-10), TX (2) 0 685 5,964 0 2,286
Corpus Christi, TX (1) 5,184 1,113 9,618 51 800
Dallas (Alpha Road), TX (17) 0 0 9,757 1,619 (1,618)
Dallas (Campbell Center), TX (7) 0 3,208 27,907 0 1,360
Dallas (DFW Airport South), TX (1) 0 0 35,156 4,041 519
Dallas (Downtown West End), TX (12) 0 1,953 16,989 0 1,676
Dallas (Love Field), TX (1) 13,242 1,934 16,674 0 522
Dallas (Market Center), TX (1) 11,823 2,560 23,751 0 509
Dallas (Market Center), TX (6) 12,334 4,056 35,303 0 790
Dallas (Park Central), TX (1) 0 1,497 12,722 (19) 895
Dallas (Park Central), TX (20) 0 4,513 43,125 0 4,460
Dallas (Park Central), TX (3) 0 1,720 28,550 (898) 340
Dallas (Park Central), TX (6) 0 0 30,347 5,603 409
Dallas, TX (19) 6,054 0 13,564 2,391 431
Houston (I-10 West), TX (9) 0 3,037 26,431 0 1,179
Houston (Int'l Airport), TX (2) 12,583 3,868 33,664 0 769
Houston (Medical Center), TX (15) 7,930 2,270 19,757 0 2,225
Houston (Medical Center), TX (6) 5,974 2,479 21,573 0 738
Houston (Near Greenway), TX (9) 6,676 3,398 29,579 0 584
Irving (DFW Airport North), TX (19) 0 0 56,404 10,002 1,077
Irving (DFW Airport North), TX (21) 10,351 1,537 13,379 0 304
Midland (Country Villa), TX (2) 0 404 3,517 0 158
Odessa (Centre), TX (15) 0 487 4,238 0 107
Odessa (Parkway Blvd), TX (13) 0 370 3,218 0 92
Plano, TX (19) 7,729 1,813 15,775 0 665
Plano, TX (2) 0 885 7,696 0 207
San Antonio (Downtown), TX (2) 0 0 22,129 0 809
San Antonio (Int'l Airport), TX (9) 0 3,351 29,168 0 1,951
Waco (I-35), TX (2) 0 574 4,994 0 157
Salt Lake City (Airport), UT (2) 0 0 5,302 0 2,767
Burlington, VT (3) 20,321 3,136 27,283 0 647
-------- -------- ---------- ------- --------
$675,806 $305,334 $3,257,683 $48,638 $284,933
======== ======== ========== ======= ========
<Caption>
GROSS AMOUNTS AT
WHICH CARRIED AT
CLOSE OF PERIOD LIFE UPON
------------------------ ACCUMULATED WHICH
BUILDINGS DEPRECIATION DEPRECIATION
AND BUILDING AND YEAR DATE IN STATEMENT
LOCATION LAND IMPROVEMENTS TOTAL IMPROVEMENTS OPENED ACQUIRED IS COMPUTED
- -------- -------- ------------ ---------- ------------ ------ -------- ------------
Nashville (Airport), TN (5) 1,073 1,206 2,279 0 1988 6/5/1997 15 - 40 Yrs
Nashville (Opryland/Airport), TN (9) 0 29,659 29,659 3,332 1981 7/28/1998 15 - 40 Yrs
Nashville, TN (1) 1,118 9,920 11,038 2,689 1985 7/28/1994 15 - 40 Yrs
Addison (North Dallas), TX (6) 4,938 43,396 48,334 4,872 1985 7/28/1998 15 - 40 Yrs
Amarillo (I-40), TX (2) 0 8,627 8,627 1,166 1970 7/28/1998 15 - 40 Yrs
Austin (Downtown), TX (5) 2,508 23,911 26,419 3,299 1987 3/20/1997 15 - 40 Yrs
Austin (Town Lake), TX (2) 0 22,266 22,266 2,484 1967 7/28/1998 15 - 40 Yrs
Beaumont (Midtown I-10), TX (2) 685 8,250 8,935 1,047 1967 7/28/1998 15 - 40 Yrs
Corpus Christi, TX (1) 1,164 10,418 11,582 1,846 1984 7/19/1995 15 - 40 Yrs
Dallas (Alpha Road), TX (17) 1,619 8,139 9,758 2,374 1997 7/28/1998 15 - 40 Yrs
Dallas (Campbell Center), TX (7) 3,208 29,267 32,475 3,269 1982 5/29/1998 15 - 40 Yrs
Dallas (DFW Airport South), TX (1) 4,041 35,675 39,716 4,100 1985 7/28/1998 15 - 40 Yrs
Dallas (Downtown West End), TX (12) 1,953 18,665 20,618 1,858 1969 7/28/1998 15 - 40 Yrs
Dallas (Love Field), TX (1) 1,934 17,196 19,130 3,234 1986 3/29/1995 15 - 40 Yrs
Dallas (Market Center), TX (1) 2,560 24,260 26,820 3,326 1980 6/30/1997 15 - 40 Yrs
Dallas (Market Center), TX (6) 4,056 36,093 40,149 3,903 1983 7/28/1998 15 - 40 Yrs
Dallas (Park Central), TX (1) 1,478 13,617 15,095 3,026 1985 7/28/1994 15 - 40 Yrs
Dallas (Park Central), TX (20) 4,513 47,585 52,098 6,433 1983 6/30/1997 15 - 40 Yrs
Dallas (Park Central), TX (3) 822 28,890 29,712 2,867 1972 11/1/1998 15 - 40 Yrs
Dallas (Park Central), TX (6) 5,603 30,756 36,359 3,374 1981 7/28/1998 15 - 40 Yrs
Dallas, TX (19) 2,391 13,995 16,386 1,544 1988 7/28/1998 15 - 40 Yrs
Houston (I-10 West), TX (9) 3,037 27,610 30,647 2,926 1969 7/28/1998 15 - 40 Yrs
Houston (Int'l Airport), TX (2) 3,868 34,433 38,301 3,772 1971 7/28/1998 15 - 40 Yrs
Houston (Medical Center), TX (15) 2,270 21,982 24,252 2,469 1984 7/28/1998 15 - 40 Yrs
Houston (Medical Center), TX (6) 2,479 22,311 24,790 2,503 1973 7/28/1998 15 - 40 Yrs
Houston (Near Greenway), TX (9) 3,398 30,163 33,561 3,359 1984 7/28/1998 15 - 40 Yrs
Irving (DFW Airport North), TX (19) 10,002 57,481 67,483 6,600 1987 7/28/1998 15 - 40 Yrs
Irving (DFW Airport North), TX (21) 1,537 13,683 15,220 1,478 1989 7/28/1998 15 - 40 Yrs
Midland (Country Villa), TX (2) 404 3,675 4,079 471 1979 7/28/1998 15 - 40 Yrs
Odessa (Centre), TX (15) 487 4,345 4,832 481 1982 7/28/1998 15 - 40 Yrs
Odessa (Parkway Blvd), TX (13) 370 3,310 3,680 403 1977 7/28/1998 15 - 40 Yrs
Plano, TX (19) 1,813 16,440 18,253 1,888 1983 7/28/1998 15 - 40 Yrs
Plano, TX (2) 885 7,903 8,788 911 1983 7/28/1998 15 - 40 Yrs
San Antonio (Downtown), TX (2) 0 22,938 22,938 2,591 1968 7/28/1998 15 - 40 Yrs
San Antonio (Int'l Airport), TX (9) 3,351 31,119 34,470 3,639 1981 7/28/1998 15 - 40 Yrs
Waco (I-35), TX (2) 574 5,151 5,725 601 1970 7/28/1998 15 - 40 Yrs
Salt Lake City (Airport), UT (2) 0 8,069 8,069 1,067 1963 7/28/1998 15 - 40 Yrs
Burlington, VT (3) 3,136 27,930 31,066 3,536 1967 12/4/1997 15 - 40 Yrs
-------- ---------- ---------- --------
$353,972 $3,542,616 $3,896,588 $466,833
======== ========== ========== ========
</Table>
F-38
FELCOR LODGING TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - (CONTINUED)
AS OF DECEMBER 31, 2002
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Reconciliation of Land and building and Improvements
Balance at beginning of period $ 3,826,150 $ 3,790,698
Additions during period:
Acquisitions 43,827
Improvements 23,022 35,452
Reclass of Hotels previously held for sale 16,009
Deductions during period:
Sale of properties (12,420)
Impairment charge (143,465)
------------ ------------
Balance at end of period $ 3,753,123 $ 3,826,150
============ ============
Reconciliation of Accumulated Depreciation
Balance at beginning of period $ 371,282 $ 276,715
Additions during period:
Depreciation for the period 96,773 94,567
Deductions during period:
Sale of properties (1,222)
------------ ------------
Balance at end of period $ 466,833 $ 371,282
============ ============
</Table>
<Table>
1. Embassy Suites 12. Hampton Inn
2. Holiday Inn 13. Holiday Inn Express
3. Sheraton 14. Hilton Suites
4. Fairfield Inn 15. Holiday Inn Hotel & Suites
5. Doubletree Guest Suites 16. Homewood Suites
6. Crowne Plaza 17. Bristol House
7. Doubletree 18. Crowne Plaza Suites
8. Independents 19. Harvey Hotel
9. Holiday Inn Select 20. Westin
10. Courtyard by Marriott 21. Harvey Suites
11. Sheraton Suites
</Table>
F-39
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 - Articles of Amendment and Restatement dated June 22, 1995,
amending and restating the Charter of FelCor Lodging Trust
Incorporated ("FelCor"), as amended or supplemented by
Articles of Merger dated June 23, 1995, Articles Supplementary
dated April 30, 1996, Articles of Amendment dated August 8,
1996, Articles of Amendment dated June 16, 1997, Articles of
Amendment dated October 30, 1997, Articles Supplementary dated
May 6, 1998, Articles of Merger and Articles of Amendment
dated July 27, 1998, and Certificate of Correction dated March
11, 1999 (filed as Exhibit 3.1 to FelCor's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (the
"1998 10-K") and incorporated herein by reference).
3.1.1 - Certificate of Correction to the Articles of Merger between
FelCor and Bristol Hotel Company, dated August 31, 1999 (filed
as Exhibit 3.1.1 to FelCor's Form 10-Q for the quarter ended
September 30, 1999 (the "September 1999 10-Q") and
incorporated herein by reference).
3.1.2 - Articles Supplementary dated April 1, 2002 (filed as Exhibit
3.1.2 to FelCor's Form 8-K dated April 1, 2002, and filed on
April 4, 2002, and incorporated herein by reference).
3.2 - Bylaws of FelCor, as amended (filed as Exhibit 3.2 to
FelCor's Registration Statement on Form S-11 (file no.
333-98332) and incorporated herein by reference).
4.1 - Form of Share Certificate for Common Stock (filed as Exhibit
4.1 to FelCor's Form 10-Q for the quarter ended June 30, 1996,
and incorporated herein by reference).
4.2 - Form of Share Certificate for $1.95 Series A Cumulative
Convertible Preferred Stock (filed as Exhibit 4.4 to FelCor's
Form 8-K dated May 1, 1996, and incorporated herein by
reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
4.3 - Form of Share Certificate for 9% Series B Cumulative
Redeemable Preferred Stock (filed as Exhibit 4.5 to FelCor's
Form 8-K dated May 29, 1998, and incorporated herein by
reference).
4.4 - Deposit Agreement dated April 30, 1998, between FelCor and
SunTrust Bank, Atlanta, as preferred share depositary (filed
as Exhibit 4.6 to FelCor's Form 8-K dated May 29, 1998, and
incorporated herein by reference).
4.4.1 - Supplement and Amendment to Deposit Agreement dated April 4,
2002, among FelCor, SunTrust Bank and the holders (filed as
Exhibit 4.4.1 to FelCor's Form 8-K dated April 1, 2002, and
filed on April 4, 2002, and incorporated herein by reference).
4.5 - Form of Depositary Receipt evidencing the Depositary Shares
(filed as Exhibit 4.7 to FelCor's Form 8-K dated May 29, 1998,
and incorporated herein by reference).
4.6 - Indenture dated as of April 22, 1996 by and between FelCor
and SunTrust Bank, Atlanta, Georgia, as Trustee (filed as
Exhibit 4.2 to FelCor's Form 8-K dated May 1, 1996 and
incorporated herein by reference).
4.7 - Indenture dated as of October 1, 1997 by and among FelCor
Lodging Limited Partnership, formerly FelCor Suites Limited
Partnership ("FelCor LP"), FelCor, the Subsidiary Guarantors
named therein and SunTrust Bank, Atlanta, Georgia, as Trustee
(filed as Exhibit 4.1 to the Registration Statement on Form
S-4 (file no. 333-39595) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.7.1 - First Amendment to Indenture dated as of February 5, 1998 by
and among FelCor, FelCor LP, the Subsidiary Guarantors named
therein and SunTrust Bank, Atlanta, Georgia, as Trustee (filed
as Exhibit 4.2 to the Registration Statement on Form S-4 (file
no. 333-39595) of FelCor LP and the other co-registrants named
therein and incorporated herein by reference).
4.7.2 - Second Amendment to Indenture and First Supplemental Indenture
dated as of December 30, 1998, by and among FelCor, FelCor LP,
the Subsidiary Guarantors named therein and SunTrust Bank, as
Trustee (filed as Exhibit 4.7.2 to the 1998 10-K and
incorporated herein by reference).
4.7.3 - Third Amendment to Indenture dated as of March 30, 1999 by
and among FelCor, FelCor LP, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee (filed as Exhibit 4.7.3
to FelCor's Form 10-Q for the quarter ended March 31, 1999
(the "March 1999 10-Q") and incorporated herein by reference).
4.7.4 - Second Supplemental Indenture dated as of August 1, 2000, by
and among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.2.4 to the Registration Statement
on Form S-4 (file no. 333-47506) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.7.5 - Third Supplemental Indenture dated as of July 26, 2001, by
and among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.2.5 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
4.7.6* - Fourth Supplemental Indenture dated October 1, 2002, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee.
4.8 - Indenture dated as of September 15, 2000, by and among FelCor
LP, FelCor, the Subsidiary Guarantors named therein, and
SunTrust Bank, as Trustee (filed as Exhibit 4.3 to the
Registration Statement on Form S-4 (file no. 333-47506) of
FelCor LP and the other co-registrants named therein and
incorporated herein by reference).
4.8.1 - First Supplemental Indenture dated as of July 26, 2001, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.3.1 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.8.2* - Second Supplemental Indenture dated October 1, 2002, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee.
4.9 - Indenture dated as of June 4, 2001, by and among FelCor LP,
FelCor, the Subsidiary Guarantors named therein, and SunTrust
Bank, as Trustee (filed as Exhibit 4.9 to FelCor's Form 8-K
dated as of June 4, 2001 and filed June 14, 2001, and
incorporated herein by reference).
4.9.1 - First Supplemental Indenture dated as of July 26, 2001, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein, who are signatories thereto, and SunTrust Bank, as
Trustee (filed as Exhibit 4.4.1 to the Registration Statement
on Form S-4 (file no. 333-63092) of FelCor LP and the other
co-registrants named therein and incorporated herein by
reference).
4.9.2* - Second Supplemental Indenture dated October 1, 2002, by and
among FelCor LP, FelCor, the Subsidiary Guarantors named
therein and SunTrust Bank, as Trustee.
10.1 - Second Amended and Restated Agreement of Limited Partnership
of FelCor LP dated as of December 31, 2001 (filed as Exhibit
10.1 to FelCor's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 (the "2001 Form 10-K"), and
incorporated herein by reference.)
10.1.1 - First Amendment to Second Amended and Restated Agreement of
Limited Partnership of FelCor LP dated April 1, 2002 (filed as
Exhibit 10.1.1 to FelCor's Form 8-K dated April 1, 2002, and
filed on April 4, 2002, and incorporated herein by reference).
10.1.2* - Second Amendment to Second Amended and Restated Agreement of
Limited Partnership of FelCor LP dated August 31, 2002.
10.1.3* - Third Amendment to Second Amended and Restated Agreement of
Limited Partnership of FelCor LP dated October 1, 2002.
10.2 - Contribution Agreement dated as of January 1, 2001, by and
among FelCor, FelCor LP, FelCor, Inc., RGC and DJONT
Operations, L.L.C. (filed as Exhibit 10.27 to FelCor's Form
10-Q for the quarter ended March 31, 2001 (the "March 2001
10-Q"), and incorporated herein by reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.3 - Leasehold Acquisition Agreement dated as of March 30, 2001, by
and among Bass (U.S.A.) Incorporated, in its individual
capacity and on behalf of its subsidiaries and affiliates, and
FelCor, in its individual capacity and on behalf of its
subsidiaries and affiliates, including as an exhibit thereto
the form of Management Agreement for Six Continents
Hotels-branded hotels (filed as Exhibit 10.28 to the March
2001 10-Q and incorporated herein by reference).
10.4 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Six Continents Hotels, as
manager, with respect to FelCor's Six Continents
Hotels-branded hotels (included as an exhibit to the Leasehold
Acquisition Agreement filed as Exhibit 10.3 above).
10.5 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Hilton Hotels Corporation, as
manager, with respect to FelCor's Embassy Suites Hotels,
including the form of Embassy Suites Hotels License Agreement
attached as an exhibit thereto (filed as Exhibit 10.5 to the
2001 Form 10-K and incorporated herein by reference).
10.6 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Hilton Hotels Corporation, as
manager, with respect to FelCor's Doubletree and Doubletree
Guest Suites hotels (filed as Exhibit 10.6 to the 2001 Form
10-K and incorporated herein by reference).
10.7 - Form of Management Agreement between subsidiaries of FelCor,
as owner, and a subsidiary of Starwood Hotels & Resorts, Inc.,
as manager, with respect to FelCor's Sheraton and Westin
hotels (filed as Exhibit 10.7 to the 2001 Form 10-K and
incorporated herein by reference).
10.8 - Employment Agreement dated as of July 28, 1994 between FelCor
and Thomas J. Corcoran, Jr. (filed as Exhibit 10.8 to FelCor's
Annual Report on Form 10-K/A Amendment No. 1 for the fiscal
year ended December 31, 1994 (the "1994 10-K/A") and
incorporated herein by reference).
10.9 - Restricted Stock and Stock Option Plan of FelCor (filed as
Exhibit 10.9 to the 1994 10- K/A and incorporated herein by
reference).
10.10 - Savings and Investment Plan of FelCor (filed as Exhibit 10.10
to the 2001 Form 10-K and incorporated herein by reference).
10.11 - 1995 Restricted Stock and Stock Option Plan of FelCor (filed
as Exhibit 10.9.2 to FelCor's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (the "1995 10-K") and
incorporated herein by reference).
10.12 - Non-Qualified Deferred Compensation Plan, as amended and
restated July 1999 (filed as Exhibit 10.9 to the September
1999 10-Q and incorporated herein by reference).
10.13 - 1998 Restricted Stock and Stock Option Plan (filed as Exhibit
4.2 to FelCor's Registration Statement on Form S-8 (file no.
333-66041) and incorporated herein by reference).
10.14* - 2001 Restricted Stock and Stock Option Plan of FelCor.
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.15 - Second Amended and Restated 1995 Equity Incentive Plan (filed
as Exhibit 99.1 to FelCor's Post-Effective Amendment on Form
S-3 to Form S-4 Registration Statement (file no. 333-50509)
and incorporated herein by reference).
10.16 - Amended and Restated Stock Option Plan for Non-Employee
Directors (filed as Exhibit 99.2 to FelCor's Post-Effective
Amendment on Form S-3 to Form S-4 Registration Statement (file
no. 333-50509) and incorporated herein by reference).
10.17 - Form of Severance Agreement for executive officers and certain
key employees of FelCor (filed as Exhibit 10.13 to the 1998
10-K and incorporated herein by reference).
10.18 - Stockholders' and Registration Rights Agreement dated as of
July 27, 1998 by and among FelCor, Bass America, Inc., Holiday
Corporation, Bass plc, United/Harvey Investors I, L.P.,
United/Harvey Investors II, L.P., United/Harvey Investors III,
L.P., United/Harvey Investors IV, L.P., and United/Harvey
Investors V, L.P. (filed as Exhibit 10.18 to FelCor's Form 8-K
dated August 10, 1998, and incorporated herein by reference).
10.19 - Seventh Amended and Restated Credit Agreement dated as of July
26, 2001, among the FelCor, FelCor LP and FelCor Canada Co.,
as Borrowers, the Lenders party thereto, The Chase Manhattan
Bank and The Chase Manhattan Bank of Canada, as Administrative
Agents, Bankers Trust Company, as Syndication Agent, J.P.
Morgan Securities Inc. and Deutsche Banc Alex. Brown, Inc., as
Co-Lead Arrangers and Joint Bookrunners, and Bank of America,
N.A. and Salomon Smith Barney, Inc., as Document Agents (filed
as Exhibit 10.17 to FelCor's Form 10-Q for the quarter ended
June 30, 2001, and incorporated herein by reference).
10.19.1 - First Amendment dated as of November 6, 2001, among FelCor,
FelCor LP and FelCor Canada Co., as borrowers, the lenders
party thereto, The Chase Manhattan Bank and The Chase
Manhattan Bank of Canada, as Administrative Agents, and
Bankers Trust Company, as Syndication Agent (filed as Exhibit
10.17.1 to FelCor's Form 10-Q for the quarter ended September
30, 2001 (the "September 2001 10-Q") and incorporated herein
by reference).
10.19.2 - Second Amendment dated as of June 17, 2002, among FelCor,
FelCor LP and FelCor Canada Co., as borrowers, the lenders
party thereto, JPMorgan Chase Bank and J.P. Morgan Bank
Canada, as administrative agents, and Deutsche Bank Trust
Company Americas, as syndication agent (filed as Exhibit
10.18.2 to FelCor's Form 8-K dated June 17, 2002, and filed on
July 1, 2002, and incorporated herein by reference).
10.19.3 - Third Amendment and Consent dated December 20, 2002, among
FelCor, FelCor LP and FelCor Canada Co., as borrowers, the
lenders party thereto, JPMorgan Chase Bank and J.P. Morgan
Bank Canada, as administrative agents, and Deutsche Bank Trust
Company Americas, as syndication agent (filed as Exhibit
10.18.3 to FelCor's Form 8-K dated December 20, 2002, and
filed December 23, 2002, and incorporated herein by
reference).
10.20 - Loan Agreement dated as of October 10, 1997 among Bristol
Lodging Company, Bristol Lodging Holding Company, Nomura Asset
Capital Corporation, as administrative agent and collateral
agent for Lenders, and Bankers Trust Company, as co-agent for
Lenders (filed as Exhibit 10.10 to the Bristol Hotel Company
Annual Report on Form 10-K for the fiscal year ended December
31, 1997 and incorporated herein by reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.20.1 - First Amendment to Loan Agreement and Ancillary Loan Documents
made as of May 28, 1999, among FelCor Lodging Company, L.L.C.,
FelCor Lodging Holding Company, L.L.C. and LaSalle National
Bank, as Trustee for Nomura Asset Securities Corporation
Commercial Pass-Through Certificates Series 1998-D6, as
administrative agent and collateral agent (filed as Exhibit
10.19.1 to FelCor's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (the "1999 10-K") and
incorporated herein by reference).
10.21 - Form of Mortgage, Security Agreement and Fixture Filing by and
between FelCor/CSS Holdings, L.P. as Mortgagor and The
Prudential Insurance Company of America, as Mortgagee (filed
as Exhibit 10.23 to the March 1999 10-Q and incorporated
herein by reference).
10.21.1 - Promissory Note dated April 1, 1999, in the original principal
amount of $100,000,000 made by FelCor/CSS Holdings, Ltd.,
payable to the order of The Prudential Insurance Company of
America (filed as Exhibit 10.23.1 to FelCor's Form 10-Q for
the quarter ended June 30, 1999 (the "June 1999 10-Q") and
incorporated herein by reference).
10.22 - Form of Deed of Trust, Security Agreement and Fixture Filing,
each dated as of May 12, 1999, from FelCor/MM Holdings, L.P.,
as Borrower, in favor of Fidelity National Title Insurance
Company, as Trustee, and Massachusetts Mutual Life Insurance
Company, as Beneficiary, each covering a separate hotel and
securing one of the separate Promissory Notes described in
Exhibit 10.21.1, also executed by FelCor/CSS Holdings, L.P.
with respect to the Embassy Suites Hotels-Anaheim and Embassy
Suites Hotels-Deerfield Beach, and by FelCor LP with respect
to the Embassy Suites Hotels-Palm Desert (filed as Exhibit
10.24.2 to the June 1999 10-Q and incorporated herein by
reference).
10.22.1 - Form of six separate Promissory Notes each dated May 12, 1999,
made by FelCor/MM Holdings, L.P. payable to the order of
Massachusetts Mutual Life Insurance Company in the respective
original principal amounts of $12,500,000 (Embassy Suites
Hotels-Dallas Market Center), $14,000,000 (Embassy Suites
Hotels-Dallas Love Field), $12,450,000 (Embassy Suites
Hotels-Tempe), $11,550,000 (Embassy Suites Hotels-Anaheim),
$8,900,000 (Embassy Suites Hotels-Palm Desert), $15,600,000
(Embassy Suites Hotels-Deerfield Beach) (filed as Exhibit
10.24.1 to the June 1999 10-Q and incorporated herein by
reference).
10.23 - Form Deed of Trust and Security Agreement and Fixture Filing
with Assignment of Leases and Rents, each dated as of April
20, 2000, from FelCor/MM S-7 Holdings, L.P., as Mortgagor, in
favor of Massachusetts Mutual Life Insurance Company and
Teachers Insurance and Annuity Association of America, as
Mortgagee, each covering a separate hotel and securing one of
the separate Promissory Notes described in Exhibit 10.22.2
(filed as Exhibit 10.24 to FelCor's Form 10-Q for the quarter
ended June 30, 2000 (the "June 2000 10-Q") and incorporated
herein by reference).
10.23.1 - Form of Accommodation Cross-Collateralization Mortgage and
Security Agreement, each dated as of April 20, 2000, executed
by FelCor/MM S-7 Holdings, L.P., in favor of Massachusetts
Mutual Life Insurance Company and Teachers Insurance and
Annuity Association of America (filed as Exhibit 10.24.1 to
the June 2000 10-Q and incorporated herein by reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.23.2 - Form of fourteen separate Promissory Notes each dated April
20, 2000, each made by FelCor/MM S-7 Holdings, L.P., each
separately payable to the order of Massachusetts Mutual Life
Insurance Company and Teachers Insurance and Annuity
Association of America, respectively, in the respective
original principal amounts of $13,500,000 (Phoenix (Crescent),
Arizona), $13,500,000 (Phoenix (Crescent), Arizona),
$6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $6,500,000
(Cypress Creek/Ft. Lauderdale, Florida), $9,000,000 (Atlanta
Galleria, Georgia), $9,000,000 (Atlanta Galleria, Georgia),
$12,500,000 (Chicago O'Hare Airport, Illinois), $12,500,000
(Chicago O'Hare Airport, Illinois), $3,500,000 (Lexington,
Kentucky), $3,500,000 (Lexington, Kentucky), $17,000,000
(Philadelphia Society Hill, Philadelphia), $17,000,000
(Philadelphia Society Hill, Philadelphia), $10,500,000 (South
Burlington, Vermont), and, $10,500,000 (South Burlington,
Vermont) (filed as Exhibit 10.24.2 to the June 2000 10-Q and
incorporated herein by reference).
10.24 - Form Deed of Trust and Security Agreement, each dated as of
May 2, 2000, from each of FelCor/CMB Buckhead Hotel, L.L.C.,
FelCor/CMB Marlborough Hotel, L.L.C., FelCor/CMB Deerfield
Hotel, L.L.C., FelCor/CMB Corpus Holdings, L.P., FelCor/CMB
Orsouth Holdings, L.P., FelCor/CMB New Orleans Hotel, L.L.C.,
FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB SSF
Holdings, L.P., each as Borrower, in favor of The Chase
Manhattan Bank, as Beneficiary, each covering a separate hotel
and securing one of the separate Promissory Notes described in
Exhibit 10.23.1 (filed as Exhibit 10.25 to the June 2000 10-Q
and incorporated herein by reference).
10.24.1 - Form of eight separate Promissory Notes, each dated May 2,
2000, made by FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB
Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C.,
FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings,
L.P., FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB
Piscataway Hotel, L.L.C., and FelCor/CMB SSF Holdings, L.P.,
each separately payable to the order of The Chase Manhattan
Bank in the respective original principal amounts of
$38,250,000 (Atlanta Buckhead, Georgia), $20,500,000 (Boston
Marlborough, Massachusetts), $16,575,000 (Chicago Deerfield,
Illinois), $5,338,000 (Corpus Christi, Texas), $25,583,000
(Orlando South, Florida), $32,650,000 (New Orleans,
Louisiana), $20,728,000 (Piscataway, New Jersey), and
$26,268,000 (South San Francisco, California) (filed as
Exhibit 10.25.1 to the June 2000 10-Q and incorporated herein
by reference).
10.25 - Registration Rights Agreement dated as of June 4, 2001, by
and among FelCor LP, FelCor, and Deutsche Banc Alex. Brown
Inc., in its individual capacity and on behalf of J.P. Morgan
Securities Inc., Banc of America Securities LLC, Salomon Smith
Barney Inc., Morgan Stanley & Co. Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, SG Cowen Securities
Corporation, Credit Lyonnais Securities (USA) Inc., Scotia
Capital (USA) Inc., BMO Nesbitt Burns Corp., Fleet Securities,
Inc., PNC Capital Markets, Inc. and Wells Fargo Brokerage
Services, LLC (filed as Exhibit 10.29 to FelCor's Form 8-K
dated June 4, 2001 and filed June 14, 2001, and incorporated
herein by reference).
10.26 - Registration Rights Agreement dated as of December 3, 2001,
by and among FelCor, FelCor LP, Deutsche Banc Alex. Brown,
J.P. Morgan Securities Inc., Banc of America Securities LLC,
Morgan Stanley & Co. Incorporated and Salomon Smith Barney
Inc. (filed as Exhibit 10.27 to the 2001 Form 10-K and
incorporated herein by reference).
10.27 - Exchange Agreement dated as of October 1, 2002 by and among
FelCor LP, FelCor and Six Continents Hotels Operating Corp.
(filed as Exhibit 10.28 to FelCor's Form 10-Q for the quarter
ended September 30, 2002, and incorporated herein by
reference).
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
14.1* - FelCor Code of Business Conduct and Ethics.
21* - List of Subsidiaries of FelCor.
23* - Consent of PricewaterhouseCoopers LLP.
99.1* - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the Chief Executive Officer.
99.2* - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the Chief Financial Officer.
</Table>
- -----------------
* Indicates that the document is filed herewith.