UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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 FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No | |
The number of shares of Common Stock, par value $.01 per share, of FelCor
Lodging Trust Incorporated outstanding on May 12, 2003 was 58,899,907.
FELCOR LODGING TRUST INCORPORATED
INDEX
Page
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PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements........................................................................... 3
Consolidated Balance Sheets - March 31, 2003 (unaudited)
and December 31, 2002.................................................................. 3
Consolidated Statements of Operations - For the Three Months
Ended March 31, 2003 and 2002 (unaudited).............................................. 4
Consolidated Statements of Comprehensive Income (Loss) - For the Three Months
Ended March 31, 2003 and 2002 (unaudited) ............................................. 5
Consolidated Statements of Cash Flows - For the Three Months
Ended March 31, 2003 and 2002 (unaudited).............................................. 6
Notes to Consolidated Financial Statements.................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General.. 15
Financial Comparison........................................................................ 15
Results of Operations....................................................................... 15
Liquidity and Capital Resources............................................................. 21
Inflation................................................................................... 25
Seasonality................................................................................. 25
Disclosure Regarding Forward Looking Statements............................................. 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 26
Item 4. Controls and Procedures........................................................................ 26
PART II. - OTHER INFORMATION
Item 5. Other Information.............................................................................. 27
Item 6. Exhibits and Reports on Form 8-K............................................................... 27
SIGNATURE.................................................................................................... 29
Certifications Pursuant to Section 302 of Sarbanes-Oxley Act of 2002......................................... 30
2
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $819,094
at March 31, 2003 and $782,166 at December 31, 2002 ...................... $ 3,466,924 $ 3,473,452
Investment in unconsolidated entities ....................................... 141,170 141,943
Cash and cash equivalents ................................................... 155,671 66,542
Accounts receivable, net of allowance for doubtful accounts of $1,134
in 2003 and $1,413 in 2002 ............................................... 53,557 48,548
Deferred expenses, net of accumulated amortization of $14,554
at March 31, 2003 and $13,357 at December 31, 2002 ....................... 23,636 24,185
Other assets ................................................................ 31,930 25,693
----------- -----------
Total assets ....................................................... $ 3,872,888 $ 3,780,363
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt, net of discount of $4,093 at March 31, 2003 and
$3,231 at December 31, 2002 .............................................. $ 2,017,294 $ 1,877,134
Distributions payable ....................................................... 5,485 14,792
Accrued expenses and other liabilities ...................................... 135,666 150,385
Minority interest in FelCor LP, 3,288 and 3,290 units issued and
outstanding at March 31, 2003 and December 31, 2002, respectively ........ 71,365 72,639
Minority interest in other partnerships ..................................... 49,026 48,596
----------- -----------
Total liabilities .................................................. 2,278,836 2,163,546
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Convertible Preferred Stock, 5,980 shares issued
and outstanding at March 31, 2003 and December 31, 2002 ............... 149,512 149,512
Series B Cumulative Redeemable Preferred Stock, 68 shares issued
and outstanding at March 31, 2003 and December 31, 2002 ............... 169,395 169,395
Common stock, $.01 par value, 200,000 shares authorized, 75,126 shares
issued, including shares in treasury, at March 31, 2003 and
December 31, 2002 ........................................................ 751 751
Additional paid-in capital .................................................. 2,202,869 2,204,530
Accumulated other comprehensive income ...................................... 4,720 (99)
Distributions in excess of earnings ......................................... (621,652) (593,834)
Less: Common stock in treasury, at cost, 16,277 and 16,369 shares
at March 31, 2003 and December 31, 2002, respectively .................... (311,543) (313,438)
----------- -----------
Total stockholders' equity ......................................... 1,594,052 1,616,817
----------- -----------
Total liabilities and stockholders' equity ......................... $ 3,872,888 $ 3,780,363
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 2003 AND 2002
(UNAUDITED, IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
Revenues:
Hotel operating revenue ............................ $ 306,946 $ 324,140
Retail space rental and other revenue .............. 400 670
--------- ---------
Total revenues ........................................ 307,346 324,810
--------- ---------
Expenses:
Hotel departmental expenses ........................ 109,919 110,540
Other property operating costs ..................... 91,824 89,160
Management and franchise fees ...................... 16,310 15,648
Taxes, insurance and lease expense ................. 32,533 34,570
Corporate expenses ................................. 3,423 3,746
Depreciation ....................................... 36,107 38,618
--------- ---------
Total operating expenses .............................. 290,116 292,282
--------- ---------
Operating income ...................................... 17,230 32,528
Interest expense, net ................................. (40,253) (41,196)
Gain on early extinguishment of debt .................. 953
--------- ---------
Loss before equity in income of unconsolidated entities
and minority interests ............................. (22,070) (8,668)
Equity in income (loss) from unconsolidated entities (148) 1,221
Minority interests ................................. 1,127 1,301
--------- ---------
Net loss .............................................. (21,091) (6,146)
Preferred dividends ................................ (6,726) (6,150)
--------- ---------
Net loss applicable to common stockholders ............ $ (27,817) $ (12,296)
========= =========
Earnings (loss) per share data:
Basic:
Net loss applicable to common stockholders ....... $ (0.48) $ (0.23)
========= =========
Weighted average common shares outstanding ....... 58,532 52,717
Diluted:
Net loss applicable to common stockholders ....... $ (0.48) $ (0.23)
========= =========
Weighted average common shares outstanding ....... 58,532 52,717
Cash dividends declared on common stock ............... $ (0.00) $ (0.15)
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2003 2002
-------- -------
Net loss .............................. $(21,091) $(6,146)
Foreign currency translation adjustment 4,819 581
-------- -------
Comprehensive loss ............... $(16,272) $(5,565)
======== =======
The accompanying notes are an integral part of these
consolidated financial statements.
5
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss ................................................................... $ (21,091) $ (6,146)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation ..................................................... 36,107 38,618
Amortization of deferred financing fees .......................... 1,197 1,305
Accretion of debt, net of discount ............................... 91 103
Amortization of unearned compensation ............................ 517 509
Equity in loss (income) from unconsolidated entities ............. 148 (1,221)
Gain on debt extinguishment ...................................... (953)
Minority interests ............................................... (1,127) (1,301)
Changes in assets and liabilities:
Accounts receivable .............................................. (5,080) (5,932)
Deferred expenses ................................................ (648) (233)
Other assets ..................................................... (6,349) (10,217)
Accrued expenses and other liabilities ........................... (14,719) (4,201)
--------- ---------
Net cash flow provided by (used in) operating activities (11,907) 11,284
--------- ---------
Cash flows (used in) provided by investing activities:
Improvements and additions to hotels ....................................... (24,373) (8,448)
Cash distributions from unconsolidated entities ............................ 625 2,265
--------- ---------
Net cash flow used in investing activities ............. (23,748) (6,183)
--------- ---------
Cash flows (used in) provided by financing activities:
Proceeds from borrowings ................................................... 149,119
Repayment of borrowings .................................................... (8,379) (13,202)
Purchase of treasury stock, stock grants, and assumed stock options ........ (92)
Distributions paid to FelCor LP limited partners ........................... (493) (1,351)
Distributions paid to preferred stockholders ............................... (6,726) (6,150)
Distributions paid to common stockholders .................................. (8,815) (1,749)
--------- ---------
Net cash flow provided by (used in) financing activities 124,706 (22,544)
--------- ---------
Effect of exchange rate changes on cash .............................................. 78 732
Net change in cash and cash equivalents .............................................. 89,129 (16,711)
Cash and cash equivalents at beginning of periods .................................... 66,542 128,742
--------- ---------
Cash and cash equivalents at end of periods .......................................... $ 155,671 $ 112,031
========= =========
Supplemental cash flow information--
Interest paid .............................................................. $ 44,053 $ 41,594
========= =========
The accompanying notes are an integral part of these
consolidated financial statements
6
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
In 1994, FelCor Lodging Trust Incorporated, or FelCor, went public as a
real estate investment trust (REIT) with six hotels and a market capitalization
of $120 million. At March 31, 2003, FelCor was the nation's second largest
lodging REIT and the largest owner of full service, all-suite hotels. As the
sole general partner of, and the owner of a greater than 95% partnership
interest in, FelCor Lodging Limited Partnership, or FelCor LP, our portfolio at
March 31, 2003, was comprised of 169 hotels, the operating revenues and expenses
of which are reflected in our consolidated statements of operations because of
our ownership of the operating lessees of these hotels. We owned 77 upscale,
all-suite hotels, 83 hotels in the upscale or full service segments and are the
largest owner of Embassy Suites(R) Hotels and Doubletree Guest Suites(R) hotels,
at March 31, 2003. All of our operations are conducted solely through FelCor LP
or its subsidiaries. At March 31, 2003, 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 March 31, 2003, we had an aggregate of 62,154,164 shares of FelCor
common stock and units of FelCor LP limited partnership interest outstanding.
The following table provides a schedule of our 169 consolidated hotel
operations, by brand, at March 31, 2003:
BRAND
Hilton Hotels Corporation, or Hilton, brands:
Embassy Suites Hotels ................................... 59
Doubletree(R) and Doubletree Guest Suites ............... 13
Hampton Inn(R) .......................................... 7
Hilton Suites(R) ........................................ 1
Homewood Suites(R) ...................................... 1
InterContinental Hotels Group 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
===
At March 31, 2003, 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 54% of our hotel room revenues were generated from hotels
in these four states during the quarter.
7
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION -- (CONTINUED)
At March 31, 2003, of the 169 hotels, (i) subsidiaries of InterContinental
Hotels Group 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 one each.
Certain reclassifications have been made to prior period financial
information to conform to the current period's presentation with no effect to
previously reported net income or stockholders' equity.
The financial information for the three months ended March 31, 2003, and
2002, is unaudited. 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. The accompanying financial statements for the
three months ended March 31, 2003, and 2002, include adjustments made to
management's estimates (consisting only of normal recurring accruals) which the
Company considers necessary for a fair presentation of the results for the
periods. The financial information should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2002, included
in the Company's Annual Report on Form 10-K for the year ended December 31, 2002
("Form 10-K"). Operating results for the three months ended March 31, 2003, are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 2003.
2. INVESTMENT IN UNCONSOLIDATED ENTITIES
We owned 50% interests in joint venture entities that owned 29 hotels at
March 31, 2003, and 24 hotels at March 31, 2002. We also owned a 50% interest in
entities that own an undeveloped parcel of land, provide condominium management
services, develop condominiums in Myrtle Beach, South Carolina, and lease 13
hotels. We account for our investments in these unconsolidated entities under
the equity method.
Summarized combined financial information for 100% of these unconsolidated
entities is as follows (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
-------- --------
Balance sheet information:
Investment in hotels, net of accumulated depreciation $388,530 $383,249
Total assets ........................................ $416,604 $408,979
Debt ................................................ $285,341 $278,978
Total liabilities ................................... $286,415 $279,887
Equity .............................................. $129,811 $129,854
Debt of our unconsolidated entities at March 31, 2003, consisted of $266.7
million of non-recourse mortgage debt. It also included $9.5 million of mortgage
debt guaranteed by us and $9.2 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 $18.4 million was outstanding as of March 31,
2003. 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 March 31, 2003, we had not
established any liability related to our guarantees of debt because it was not
believed to be probable that we would be required to perform under the
guarantees.
8
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENT IN UNCONSOLIDATED ENTITIES - (CONTINUED)
Summarized combined statement of operations information for 100% of these
unconsolidated entities is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
2003 2002
------- -------
Total revenues ................... $21,148 $19,177
Net income ....................... $ 720 $ 1,719
3. DEBT
Debt at March 31, 2003, and December 31, 2002, consisted of the following
(in thousands):
COLLATERAL(a) AT INTEREST RATE AT
MARCH 31, MARCH 31, MARCH 31, DECEMBER 31,
2003 2003 MATURITY DATE 2003 2002
------------- -------------- ------------- ------------- ---------
FLOATING RATE DEBT:
Line of credit None 4.55% October 2004 $ 149,497
Publicly-traded term notes-swapped None 4.50(b) October 2004 174,792 $ 174,760
Publicly-traded term notes-swapped None 5.37(b) October 2007 75,000 25,000
Promissory note None 3.34 June 2016 650 650
---- ---------- ----------
Total floating rate debt(c) 4.69% 399,939 200,410
---- ---------- ----------
FIXED RATE DEBT:
Publicly-traded term notes None 7.63 October 2007 49,543 99,518
Publicly-traded term notes None 9.50 September 2008 596,363 596,195
Publicly-traded term notes None 8.50 June 2011 297,969 297,907
Mortgage debt 15 hotels 7.24 November 2007 133,970 134,738
Mortgage debt 7 hotels 7.54 April 2009 93,840 94,288
Mortgage debt 6 hotels 7.55 June 2009 70,604 70,937
Mortgage debt 7 hotels 8.73 May 2010 139,803 140,315
Mortgage debt 8 hotels 8.70 May 2010 179,890 180,534
Mortgage debt 5 hotels 7.20 2005 - 2008 48,338 54,993
Other 1 hotel 9.08 2011 7,035 7,299
---- ---------- ----------
Total fixed rate debt(c) 8.65 1,617,355 1,676,724
---- ---------- ----------
Total debt(c) 7.86% $2,017,294 $1,877,134
==== ========== ==========
(a) At March 31, 2003, we had unencumbered investments in hotels with a
net book value totaling $2.3 billion.
(b) At March 31, 2003, our $175 million publicly-traded notes due
October 2004 and $75 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 $1.6 million for the three months ended March 31, 2003.
(c) Calculated based on the weighted average outstanding debt at March
31, 2003.
All of our floating rate debt at March 31, 2003, was based upon LIBOR
(1.30% as of March 31, 2003).
We reported interest expense, net of interest income, of $0.4 million and
$0.6 million, and capitalized interest of $0.3 million and $0.1 million, for the
three months ended March 31, 2003 and 2002, respectively.
We recorded a gain of $1 million as a result of the early extinguishment
of a mortgage note, maturing in 2003, during the three months ended March 31,
2003.
9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT -- (CONTINUED)
Effective March 31, 2003, we completed the refinancing of $16 million of
secured debt that was to mature in late 2003. Under the refinancing terms, this
7.15% fixed rate debt will convert to a floating interest rate of LIBOR plus 285
basis points in August 2003. The new maturity is August 2008.
In January and February 2003, we entered into 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 are marked to market through the
income statement, but 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%.
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. At March 31, 2003, we were in compliance
with all covenants under our line of credit.
If revenue per available room 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 that would be 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 or a
change of control.
Our other borrowings contain affirmative and negative covenants that are
generally equal to or less restrictive than those in our line of credit. Most of
our mortgage debt is non-recourse to us 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
indentures; pay dividends in excess of the minimum dividend required to meet the
REIT qualification test; repurchase stock; or merge. As of March 31, 2003, and
the date of this filing, we have satisfied all such incurrence tests.
10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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+, from BB-, in February
2003, and subsequently revised their outlook from stable to negative. 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 one level, 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.
4. 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). For a fair value hedge, the gain or loss is
recognized in earnings in the period of change, together with the offsetting
loss or gain on the hedged item attributable to the risk being hedged. The
effect of that accounting is to reflect in earnings the extent to which the
hedge is not effective in achieving offsetting changes in fair value. For a cash
flow hedge the effective portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. The ineffective portion of the gain or loss is reported in earnings
immediately. At March 31, 2003, 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, relating to
our 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.
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. 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 March 31, 2003, we had entered into nine interest rate swap
agreements with five financial institutions with an aggregate notional value of
$250 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 March 31, 2003, 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 $10.1 million at March 31, 2003, and represents the amount we
would receive if the agreements were terminated based on current market rates.
11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DERIVATIVES -- (CONTINUED)
The fixed rates we will receive and the variable rate we will pay under
these swaps as of March 31, 2003, are summarized in the following table:
Weighted-average
Notional Amount Number of Spread Paid in Fixed Rate
Swap Maturity (in millions) Swaps Excess of LIBOR Received
------------- ------------- ----- --------------- --------
October 2004 $175 6 3.2043% 7.3750%
October 2007 75 3 4.0725% 7.6250%
----
$250
====
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. Our interest rate swaps have semiannual settlement dates in
April and October. Agreements such as these 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 our interest rate swap agreements range
from A to AA-.
5. HOTEL OPERATING REVENUE AND EXPENSE, AND OTHER PROPERTY OPERATING COSTS
Hotel operating revenue was comprised of the following (in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Room ......................................... $242,972 $257,230
Food and beverage ............................ 47,914 50,691
Other operating departments .................. 16,060 16,219
-------- --------
Total hotel operating revenues .... $306,946 $324,140
======== ========
Hotel departmental expenses were comprised of the following (in
thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Room ......................................... $ 63,464 $ 63,233
Food and beverage ............................ 38,939 39,991
Other operating departments .................. 7,516 7,316
-------- --------
Total hotel departmental expenses . $109,919 $110,540
======== ========
Other property operating costs were comprised of the following (in
thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------
2003 2002
------- -------
Hotel general and administrative expense ....... $30,344 $31,204
Marketing ...................................... 27,746 26,545
Repair and maintenance ......................... 17,797 16,798
Utilities ...................................... 15,937 14,613
------- -------
Total other property operating costs $91,824 $89,160
======= =======
Included in hotel departmental expenses and other property operating costs
were hotel compensation and benefit expenses of $103.4 million and $101.0
million for the three months ended March 31, 2003 and 2002, respectively.
12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. TAXES, INSURANCE AND LEASE EXPENSE
Taxes, insurance and lease expense is comprised of the following (in
thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------
2003 2002
------- -------
Real estate and personal property taxes ............................... $13,393 $14,794
Operating lease expense, including $2,050 and $3,325 of percentage rent
in 2003 and 2002, respectively(a) .................................. 13,483 14,852
Property and general liability insurance .............................. 4,985 4,282
State franchise and Canadian income taxes ............................. 672 642
------- -------
Total taxes, insurance and lease expense ................... $32,533 $34,570
======= =======
(a) Includes lease expense associated with 15 hotels owned by unconsolidated
entities.
7. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
-------- --------
Numerator:
Loss from continuing operations .......................... $(21,091) $ (6,146)
Less: Preferred dividends ............................. (6,726) (6,150)
-------- --------
Loss from continuing operations and net loss applicable to
common stockholders .................................... $(27,817) $(12,296)
======== ========
Denominator:
Denominator for basic and diluted earnings per share -
weighted average shares ................................ 58,532 52,717
Earnings (loss) per share data:
Basic:
Net loss ................................................. $ (0.48) $ (0.23)
======== ========
Diluted:
Net loss ................................................. $ (0.48) $ (0.23)
======== ========
Securities that could potentially dilute basic earnings per share in the
future that were not included in the computation of diluted earnings per share,
because they would have been antidilutive for the periods presented, are as
follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
----- -----
2003 2002
----- -----
Stock Options ........................................ 35
Restricted shares granted but not vested ............. 309 322
Series A preferred shares ............................ 4,636 4,636
Series A preferred dividends that would be excluded from net loss
applicable to common stockholders, if the Series A preferred shares were
dilutive, were $2.9 million for the three months ended March 31, 2003 and 2002,
respectively.
13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK BASED COMPENSATION PLANS
We apply APB Opinion 25 and related interpretations in accounting for our
stock based compensation plans for stock based compensation issued prior to
January 1, 2003. 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. As permitted under the transition
provisions of SFAS 148, we began recognizing compensation expense for all new
awards issued after December 31, 2002. Had the compensation cost for all of 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 the three months
ended March 31, 2003 and 2002 would approximate the pro forma amounts below (in
thousands, except per share data):
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------
2003 2002
------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
SFAS 123 charge.................................... $ 559 $ 628
APB 25 charge...................................... $ 517 $ 509
Income (loss) from continuing operations and net
income (loss) applicable to common stockholders.. $ (27,817) $ (27,859) $ (12,296) $ (12,415)
Diluted net income (loss) applicable to common
stockholders per
common share..................................... $ (0.48) $ (0.48) $ (0.23) $ (0.24)
The effects of applying SFAS 123 in this pro forma disclosure are not
necessarily indicative of future results.
9. SUBSEQUENT EVENTS
On April 24, 2003, we completed a $150 million non-recourse loan, at a
floating interest rate of LIBOR plus 250 basis points, secured by 10 full
service hotels. The loan matures in May 2006, with two, one-year extension
options. The proceeds were used to pay off all outstanding borrowings under our
unsecured line of credit. We also reduced our line of credit from $300 million
to $150 million in total commitments for excess capacity and to reduce unused
line fees. The reduction in our line of credit commitments will result in a $1.6
million expense in the second quarter of 2003, related to the write off of
unamortized loan costs.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
For background information relating to us and the definition of certain
capitalized terms used herein, reference is made to Notes 1 and 2 of Notes to
Consolidated Financial Statements of FelCor Lodging Trust Incorporated appearing
elsewhere herein.
We have identified three strategic objectives for 2003: improve the
competitive positioning of our hotel portfolio, maintain our financial
flexibility, and reposition our portfolio. We have made the following progress
in meeting these objectives through the date of this filing:
- Improve the competitive positioning of our hotel portfolio
- The Hilton Myrtle Beach Resort was converted from a Wyndham
following the completion of a $15 million renovation.
- We continue to provide the necessary capital spending to add
long-term value to our hotels. We spent approximately 8% of
our revenues, or $24.6 million, on capital expenditures in the
first quarter of 2003 and we expect to spend a total of $60 to
$70 million for the full year.
- Maintenance of our financial flexibility and liquidity
- We closed on a $150 million non-recourse secured loan in April
and used the proceeds to payoff all outstanding balances under
our line of credit.
- We had cash on hand at March 31, 2003, of $156 million.
- Repositioning our portfolio
- We have retained brokers to market 27 of our previously
identified 33 non-strategic hotels.
- We expect to close on the sale of two non-strategic hotels and
a parking garage in the second quarter of 2003, with total
cash proceeds of approximately $15 million.
FINANCIAL COMPARISON (IN MILLIONS, EXCEPT REVPAR, OPERATING MARGIN AND
PERCENTAGE CHANGE)
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2003 2002 % CHANGE
---- ---- --------
RevPAR ...................................... $ 58.13 $ 61.36 (5.3)%
Operating Margin(1) ......................... 29.0% 33.6% (13.7)%
Funds From Operations ("FFO")(2) ............ $ 9.6 $ 29.3 (67.2)%
Earnings Before Interest, Taxes, Depreciation
and Amortization ("EBITDA")(2) ......... $ 59.8 $ 77.2 (22.5)%
Net loss .................................... $ (21.1) $ (6.1) (245.9)%
- ----------
(1) Operating margin is calculated as the percentage of hotel operating
revenue in excess of hotel departmental expenses, other property operating
costs, and management and franchise fees to hotel operating revenue.
(2) For a discussion of the computation of FFO and EBITDA, and a
reconciliation thereof to net loss, see "Results of Operations - Funds
From Operations and EBITDA" below.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2003 and 2002
We recorded a net loss of $21.1 million for the three months ended March
31, 2003, compared to a loss of $6.1 million for the same period in 2002. The
principal reason for the increased loss in 2003 was that total revenue decreased
$17.5 million for the three months ended March 31, 2003, compared to the same
period in 2002. The primary component of this decrease was a decrease in room
revenue of $14.3 million. The principal industry measurement of hotel room
revenue is RevPAR. The Company's hotel portfolio RevPAR for the three months
ended March 31, 2003, was 5.3% below that of the same period in 2002. The
decrease in RevPAR was comprised of a
15
4.1% decrease in average daily rate ("ADR"), and a 1.2% decrease in occupied
rooms as a percentage of available rooms, ("Occupancy"). The most significant
factor contributing to the decreased revenue is the 4.1% decrease in ADR, which
reflected the decline in both business and leisure travel for the three months
ended March 31, 2003, compared to the same period in the prior year. Travel was
negatively affected during the three months ended March 31, 2003, by the war in
Iraq, the continued weak economic environment and the SARS outbreak. In
addition, the disposition of seven hotels, and acquisition of two hotels, that
occurred in 2002 resulted in a net decrease of $1.2 million in total revenue.
Total operating expenses decreased by $2.2 million to $290.1 million, for
the three months ended March 31, 2003, compared to the same period in 2002. This
decrease consisted of decreases in taxes, insurance and lease expense and
depreciation expense somewhat offset by increases in hotel operating expenses
(defined as hotel departmental expenses, other property operating costs and
management and franchise fees).
Hotel operating expenses increased by $2.7 million, for the three months
ended March 31, 2003, compared to the same period in 2002. Hotel operating
margins as a percentage of hotel operating revenue decreased by 460 basis points
compared to the same period last year. The deterioration in margins is
principally related to a 4.1% decline in ADR and increases in labor related
expenses, including health and workers compensation insurance (260 basis
points), utility costs (70 basis points) and marketing and repair and
maintenance costs, other than labor (80 basis points).
Taxes, insurance and lease expense decreased $2.0 million, compared to the
same period of 2002, principally as the result of decreases in percentage rent
expense of $1.4 million and decreased property taxes of $1.4 million. These
decreases were partially offset by an increase in general liability insurance
expense of $0.7 million. The decrease in percentage rent expense is from a
decrease in hotel revenue for those hotels with participating leases. Property
taxes decreased primarily as a result of the resolution in the current quarter
of prior year tax disputes.
Interest expense, net of interest income, decreased $0.9 million for the
three months ended March 31, 2003, from the same period in 2002. The decrease
during the first quarter is primarily related to the lower average interest
rate. The current quarter includes $1.0 million of gain on early extinguishment
of debt.
Equity in the income of unconsolidated entities decreased nearly $1.4
million for the three months ended March 31, 2003, compared to the same period
in 2002. The change relates principally to a 5.1% decrease in RevPAR from our
unconsolidated hotels.
Funds From Operations and EBITDA
Historical cost accounting for real estate assets implicitly assumes that
the value of real estate assets diminish predictably over time. Since real
estate values instead have historically risen or fallen with market conditions,
most industry investors consider supplemental measurements of performance to be
helpful in evaluating a real estate company's operations. We consider Funds From
Operations ("FFO") and Earnings Before Interest, Taxes, Depreciation, and
Amortization ("EBITDA") to be key measures of a REIT's performance and should be
considered along with, but not as an alternative to, net income and cash flow as
a measure of our operating performance and liquidity.
The White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") defines FFO as net income or loss (computed in accordance with
generally accepted accounting principles), excluding gains or losses from sales
of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect funds from operations
on the same basis. We believe that FFO and EBITDA are helpful to investors as a
measure of the performance of an equity REIT. We compute FFO in accordance with
standards established by NAREIT. 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
16
NAREIT definition differently than we do.
The following table details our computation of FFO and EBITDA (in
thousands):
THREE MONTHS
ENDED MARCH 31,
2003 2002
-------- --------
FUNDS FROM OPERATIONS
Net loss $(21,091) $ (6,146)
Depreciation 36,107 38,618
Depreciation from unconsolidated entities 2,859 2,178
Preferred dividends:
Series A preferred dividends (2,915) --
Series B preferred dividends (3,811) (3,234)
Minority interest in FelCor LP (1,557) (2,087)
-------- --------
FFO(a) $ 9,592 $ 29,329
======== ========
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
FFO $ 9,592 $ 29,329
Interest expense 40,628 41,775
Interest expense from unconsolidated entities 2,339 2,359
Amortization expense 516 509
Preferred dividends:
Series A preferred dividends 2,915 --
Series B preferred dividends 3,811 3,234
-------- --------
EBITDA(a) $ 59,801 $ 77,206
======== ========
WEIGHTED AVERAGE SHARES AND UNITS
Weighted average common shares outstanding 58,532 52,717
Weighted average FelCor LP units outstanding 3,289 9,005
Conversion of Series A preferred shares -- 4,636
Conversion of options and stock grants 309 357
-------- --------
Weighted average common shares and units outstanding 62,130 66,715
======== ========
(a) Includes a $953,000 gain on early extinguishment of debt during the
three months ended March 31, 2003.
17
Hotel Portfolio Composition
The following tables set forth as of March 31, 2003, our hotel portfolio
distribution by brand, by our top metropolitan markets, by selected states, by
type of location, and by market segment. For comparative purposes, also set
forth below is the percentage of EBITDA contributed by each grouping for the
year ended December 31, 2002.
Brand Hotels Rooms % of Total Rooms % of 2002 EBITDA
- ----- ------ ----- ---------------- ----------------
Embassy Suites(R) 59 14,842 32% 42%
Holiday Inn(R)-branded 53 16,019 34 26
Crowne Plaza(R) 18 5,963 13 11
Sheraton(R)-branded 10 3,269 7 8
Doubletree(R)-branded 13 2,675 6 6
Other 16 3,673 8 7
Top Markets
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
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
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
Segment
Upscale all-suite 77 18,357 39% 52%
Full service 55 17,088 37 29
Upscale 28 9,667 21 18
Limited service 9 1,329 3 2
Potential Sale Candidates 33 6,468 14% 7%
18
Hotel Operating Statistics
The following tables set forth historical occupancy, ADR and RevPAR at
March 31, 2003 and 2002, and the percentage changes therein between the periods
presented, for our 169 consolidated hotels:
OPERATING STATISTICS BY BRAND
(FOR THE THREE MONTHS ENDED MARCH 31)
OCCUPANCY (%)
------------------------------------
2003 2002 %VARIANCE
---- ---- ---------
Embassy Suites hotels 66.7 66.5 0.3
Holiday Inn-branded hotels 58.2 59.3 (1.8)
Crowne Plaza hotels 55.4 56.8 (2.4)
Doubletree-branded hotels 64.8 60.4 7.3
Sheraton-branded hotels 58.9 56.4 4.4
Other hotels 45.5 54.2 (16.1)
Total hotels 60.0 60.7 (1.2)
ADR ($)
------------------------------------
2003 2002 %VARIANCE
---- ---- ---------
Embassy Suites hotels 119.18 124.89 (4.6)
Holiday Inn-branded hotels 77.25 80.37 (3.9)
Crowne Plaza hotels 89.36 94.04 (5.0)
Doubletree-branded hotels 100.72 105.23 (4.3)
Sheraton-branded hotels 98.40 104.89 (6.2)
Other hotels 84.08 86.45 (2.7)
Total hotels 96.92 101.05 (4.1)
REVPAR ($)
------------------------------------
2003 2002 %VARIANCE
---- ---- ---------
Embassy Suites hotels 79.49 83.06 (4.3)
Holiday Inn-branded hotels 44.95 47.62 (5.6)
Crowne Plaza hotels 49.52 53.40 (7.3)
Doubletree-branded hotels 65.27 63.54 2.7
Sheraton-branded hotels 57.98 59.20 (2.1)
Other hotels 38.27 46.90 (18.4)
Total hotels 58.13 61.36 (5.3)
19
OPERATING STATISTICS FOR OUR TOP 10 MARKETS
(FOR THE THREE MONTHS ENDED MARCH 31)
OCCUPANCY (%)
------------------------------------
2003 2002 %VARIANCE
---- ---- ---------
Atlanta 67.1 70.1 (4.3)
Dallas 45.7 51.7 (11.6)
San Francisco Bay Area 59.8 58.2 2.7
New Orleans 62.2 73.5 (15.4)
Orlando 65.7 69.5 (5.5)
Philadelphia 52.6 53.8 (2.3)
Houston 62.6 69.7 (10.2)
Phoenix 80.5 71.9 11.8
Minneapolis 59.6 59.2 0.7
Chicago 58.3 53.2 9.7
ADR ($)
------------------------------------
2003 2002 %VARIANCE
---- ---- ---------
Atlanta 88.96 95.28 (6.6)
Dallas 86.95 93.12 (6.6)
San Francisco Bay Area 107.06 119.22 (9.1)
New Orleans 156.18 165.08 (5.4)
Orlando 83.48 89.60 (6.8)
Philadelphia 99.47 110.53 (10.0)
Houston 74.21 76.23 (2.7)
Phoenix 128.61 138.17 (6.9)
Minneapolis 119.86 121.72 (1.5)
Chicago 101.30 112.38 (9.9)
REVPAR ($)
------------------------------------
2003 2002 %VARIANCE
---- ---- ---------
Atlanta 59.66 66.75 (10.6)
Dallas 39.71 48.14 (17.5)
San Francisco Bay Area 64.85 69.44 (6.6)
New Orleans 97.12 121.31 (19.9)
Orlando 54.87 62.30 (11.9)
Philadelphia 52.34 59.51 (12.0)
Houston 46.44 53.16 (12.6)
Phoenix 103.49 99.40 4.1
Minneapolis 71.42 72.00 (0.8)
Chicago 59.07 59.76 (1.1)
20
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 three months ended March 31, 2003,
net cash flow used in operating activities, consisting primarily of hotel
operations, was $12 million. We currently expect that our cash flow provided by
operating activities for 2003 will be approximately $58 million to $68 million
using current RevPAR forecasts. We expect our 2003 capital expenditures to be
approximately $60 to $70 million and we have no remaining debt maturities during
2003, other than $11 million in normal recurring principal payments. Cash
necessary to fund cash flow shortfalls and distributions, if any, will be funded
from our cash balances, which were $156 million at March 31, 2003, proceeds from
the sale of hotels or additional borrowings. We expect our Board of Directors to
defer future common dividends until our hotels experience a 2% to 4% increase in
RevPAR over 2002, and to determine the amount of preferred dividends, if any,
for each quarterly period, based upon the operating results of that quarter,
economic conditions, other operating trends and minimum REIT distribution
requirements. We do not currently anticipate paying any dividends on our common
stock during 2003.
Recent events, including the threat of additional terrorist attacks, the
war in Iraq and the bankruptcy of several major corporations, have had an
adverse impact on the capital markets. These events, new terrorist attacks or
additional bankruptcies could further adversely affect the availability and cost
of capital for our business. In addition, should the anticipated recovery of the
overall economy, and of the lodging industry, 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 one level, from BB- to B+, in February 2003, and subsequently
revised their outlook from stable to negative. 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 increases in wage and benefit costs,
repair and maintenance expenses, utilities, insurance, and other operating
expenses that can fluctuate disproportionately to revenues. Theses 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 24, 2003, we completed a $150 million non-recourse loan, at a
floating interest rate of LIBOR plus 250 basis points secured by 10 full service
hotels. The loan matures in May 2006, with two, one-year extension options. The
proceeds were used to pay off all outstanding borrowings under our unsecured
line of credit. We also reduced our line of credit from $300 million to $150
million in total commitments, for excess capacity and to save unused fees. We
have no remaining debt maturing during 2003, other than $11 million in normal
recurring principal payments. Our next significant debt maturity is our $175
million of senior notes maturing in October 2004. We expect to satisfy this
obligation primarily from our excess cash and additional secured debt capacity.
However, we also anticipate that we will have positive cash flow from operations
and net sales proceeds from the sale of non-strategic hotels that may be
available as secondary sources of funds for repayment of this debt.
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; limitations
21
on our ability to modify certain instruments; limitations on our ability to
create liens; limitations on our ability to enter into transactions with
affiliates; and limitations on our ability to enter into joint ventures. At
March 31, 2003, we were in compliance with all of these covenants.
Unless our business and cash flow stabilizes, we may not be able to
satisfy the current 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. However, at March 31, 2003, we had $156 million in cash and
our next significant debt maturity is our $175 million of senior notes maturing
in October 2004. We expect to satisfy this obligation primarily from our excess
cash and additional secured debt capacity. We also anticipate that we will have
positive cash flow from operations and net sales proceeds from the sale of
non-strategic hotels that may be available as secondary sources of funds for
repayment of this debt.
Our other borrowings contain affirmative and negative covenants that are
generally equal to or less restrictive than those in our line of credit. Most of
our mortgage debt is non-recourse to us 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. After the $150 million of secured debt
obtained in April 2003, we still have unencumbered investments in hotels with a
net book value totaling $2.1 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; pay
dividends in excess of the minimum dividend required to meet the REIT
qualification test; repurchase stock; or 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 anticipate meeting our debt service obligations through a
combination of cash on hand, cash flow from operations, additional secured debt
and the sale of non-strategic hotel assets.
We are currently negotiating with a lender to restructure two non-recourse
cross collateralized loans related to two of our Dallas, Texas, hotels, one of
which is currently closed.
22
SELECTED RATIOS
MARCH 31,
-------------
2003 2002
---- ----
Consolidated debt (net of cash) to trailing twelve month EBITDA 6.5x 5.9x
Total debt (net of cash) to trailing twelve month EBITDA 7.0x 6.4x
Total debt (net of cash) to investment in hotels, at cost(a) 42.7% 41.8%
EBITDA to consolidated interest paid(b) 1.8x 1.9x
EBITDA to total interest expense(c) 1.7x 1.7x
Fixed charge coverage ratio(d) 1.4x 1.5x
(a) Investment in hotels at cost is defined as consolidated investment
in hotels, before accumulated depreciation, plus our pro rata share
of unconsolidated investment in hotels, before accumulated
depreciation.
(b) EBITDA to consolidated interest paid represents trailing twelve
month consolidated EBITDA divided by trailing twelve month interest
expense before capitalized interest and amortization of debt costs.
(c) EBITDA to total interest expense represents trailing twelve month
consolidated EBITDA divided by trailing twelve month interest
expense, including the Company's pro rata share of unconsolidated
interest expense.
(d) Fixed charges include preferred dividends, consolidated interest
expense and interest expense from unconsolidated entities.
At March 31, 2003, we had:
- $155.7 million of cash and cash equivalents
- Fixed interest rate debt equal to 80% of our total debt
- Weighted average maturity of fixed interest rate debt of
approximately 5.7 years, and
- Secured debt to total assets of 17.4%
Due to the uncertainties following the war in Iraq, heightened terrorism
alerts, SARS and the impact of these events on the nation's economy, it is
difficult to develop a meaningful earnings forecast.
For the second quarter of 2003, we currently anticipate our portfolio
RevPAR to be 7% to 8% below the comparable period of the prior year and
operating margins to decrease 3% to 4%. Net loss for the second quarter of 2003,
is expected to be within the range of $12 million to $18 million. FFO for the
second quarter is expected to be within the range of $20 million to $27 million,
and EBITDA is expected to be within the range of $70 million to $77 million for
the same period.
We estimate our full year 2003 hotel portfolio RevPAR to be 3% to 4% below
2002 and operating margins to decrease 2.25% to 2.75%. Net loss for the full
year 2003, is expected to be within the range of $93 million to $103 million.
Our FFO for the full year 2003 is currently anticipated to be within the range
of $50 million to $60 million, and EBITDA is expected to be within the range of
$250 million to $260 million for the same period.
In the event that RevPAR declines, compared to the prior year, are greater
than anticipated in the preparation of this forecast, or operating margins are
lower than anticipated, we may not meet our forecast for the remainder of the
year. RevPAR results for April 2003 were approximately 11% below the same period
in 2002 and the first 12 days of May were approximately 6.5% below the same
period in 2002. We attribute the April RevPAR decline to reduced travel during
the war in Iraq, the lack of comparability due to the occurrence of Easter in
April 2003, as compared to March in 2002, and the continued economic softness.
Non-GAAP estimates of FFO and EBITDA are derived from our estimate of net
loss applicable to common shareholders. Estimated FFO was computed by taking
estimated net loss applicable to common shareholders, adding forecasted
depreciation expense ($40 million for the second quarter and $157 million for
the year) and deducting forecasted minority interest in FelCor LP ($1 million
for the second quarter and $5 million for the year). To derive estimated EBITDA,
FelCor started with estimated FFO and added back interest expense ($43 million
for the second quarter and $173 million for the year), amortization ($0.5
million for the second quarter and $2 million for the year) and preferred stock
dividends ($7 million for the second quarter and $27 million for the year).
23
The following details our debt outstanding at March 31, 2003, and December
31, 2002 (in thousands):
COLLATERAL(a) AT INTEREST RATE
MARCH 31, MARCH 31, MARCH 31, DECEMBER 31,
2003 2003 MATURITY DATE 2003 2002
---------------- ---------------- ------------- ---------- ----------
FLOATING RATE DEBT:
Line of credit None 4.55% October 2004 $ 149,497
Publicly-traded term notes-swapped None 4.50(b) October 2004 174,792 $ 174,760
Publicly-traded term notes-swapped None 5.37(b) October 2007 75,000 25,000
Promissory note None 3.34 June 2016 650 650
---- ---------- ----------
Total floating rate debt(c) 4.69% 399,939 200,410
---- ---------- ----------
FIXED RATE DEBT:
Publicly-traded term notes None 7.63 October 2007 49,543 99,518
Publicly-traded term notes None 9.50 September 2008 596,363 596,195
Publicly-traded term notes None 8.50 June 2011 297,969 297,907
Mortgage debt 15 hotels 7.24 November 2007 133,970 134,738
Mortgage debt 7 hotels 7.54 April 2009 93,840 94,288
Mortgage debt 6 hotels 7.55 June 2009 70,604 70,937
Mortgage debt 7 hotels 8.73 May 2010 139,803 140,315
Mortgage debt 8 hotels 8.70 May 2010 179,890 180,534
Mortgage debt 5 hotels 7.20 2005 - 2008 48,338 54,993
Other 1 hotel 9.08 2011 7,035 7,299
---- ---------- ----------
Total fixed rate debt(c) 8.65 1,617,355 1,676,724
---- ---------- ----------
Total debt(c) 7.86% $2,017,294 $1,877,134
==== ========== ==========
(a) At March 31, 2003, we had unencumbered investments in hotels with a
net book value totaling $2.3 billion.
(b) At March 31, 2003, our $175 million publicly-traded notes due
October 2004 and $75 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 $1.6 million for the three months ended March 31, 2003.
(c) Calculated based on the weighted average outstanding debt as of
March 31, 2003.
At March 31, 2003, we had $175 million of publicly traded term notes due
October 2004, and $75 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 five 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 4.38%. The weighted
average spread over LIBOR at March 31, 2003, was 3.46%.
We spent approximately $24 million on capital expenditures at our hotels
during the three months ended March 31, 2003. Our unconsolidated entities spent
approximately $2.5 million on capital expenditures at hotels, and approximately
$6.9 million on a residential condominium development project, during the three
months ended March 31, 2003. 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.
Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2003, approximately 80% 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.
24
The following table provides information about our financial instruments
that are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. For debt obligations at March 31, 2003, the table presents
scheduled maturities and weighted average interest rates, by maturity dates. For
interest rate swaps, the table presents the notional amount and weighted average
interest rate, by contractual maturity dates. Weighted average variable rates
are based on implied forward rates in the yield curve as of March 31, 2003. 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
March 31, 2003, at then current market interest rates.
EXPECTED DEBT MATURITY DATES
(DOLLARS IN THOUSANDS)
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate:
Debt $ 10,078 $189,083 $ 41,103 $ 13,978 $257,990 $1,359,008 $1,871,240 $1,751,278
Interest rate swaps (a) (175,000) (75,000) (250,000)
Average interest rate 7.87% 7.91% 7.49% 8.05% 7.41% 8.87% 8.65%
Floating rate:
Debt 149,497 650 150,147 150,147
Interest rate swaps (a) 175,000 75,000 250,000 10,058
Average interest rate 4.53% 5.37% 10.20% 4.70%
Total debt $ 10,078 $338,580 $ 41,103 $ 13,978 $257,990 $1,359,658 $2,021,387
Average interest rate 7.87% 4.67% 7.49% 8.05% 6.82% 8.87% 7.86%
Net discount (4,093)
Total debt $2,017,294
(a) At March 31, 2003, the Company's $175 million and $75 million in
publicly-traded notes due October 2004 and October 2007,
respectively, were matched with interest rate swap agreements that
effectively converted the fixed interest rate on the notes to a
variable interest rate tied to LIBOR. The interest rate swap
agreements have the same maturity as the notes.
Swap agreements, such as described above, contain a credit risk, in that
the counterparties may be unable to fulfill the terms of the agreement. We
minimize that risk by evaluating the creditworthiness of our counterparties, who
are limited to major banks and financial institutions, and we do not anticipate
nonperformance by the counterparties. The credit ratings for the financial
institutions that are counterparties to our 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 meet our cash requirements.
25
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Quarterly Report on Form 10-Q include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. 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, some of which are discussed more fully 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; the availability of capital; the continuing effects of the war in
Iraq; the effects of SARS on the travel industry; and numerous other factors
that 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to FelCor is
incorporated herein by reference to the discussion under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" contained elsewhere in this
Quarterly Report on Form 10-Q for the three months ended March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 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.
26
PART II. -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
For information relating to certain other transactions by the Company
through March 31, 2003, see Note 1 of Notes to Consolidated Financial Statements
of FelCor Lodging Trust Incorporated contained in Item 1 of Part I of this
Quarterly Report on Form 10-Q. Such information is incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The following exhibits are filed as part of this Quarterly
Report on Form 10-Q:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.28 - Loan Agreement, dated April 24, 2003, by and between FelCor/JPM
Hotels, L.L.C., as borrower, and JPMorgan Chase Bank, as lender,
relating to a $115 million loan from lender to borrower (the
"Mortgage Loan").
10.28.1 - Form of Mortgage, Deed of Trust and Security Agreement, each dated
April 24, 2003, from FelCor/JPM Hotels, L.L.C., as borrower, and
DJONT/JPM Leasing, L.L.C., as lessee, (and, in the case of the
Mortgages with respect to the properties located in the State of
Florida, FelCor Lodging Limited Partnership) in favor of JPMorgan
Chase Bank, as lender, each covering a separate hotel and securing
the Mortgage Loan.
10.28.2 - Promissory Note, dated April 24, 2003, made by FelCor/JPM Hotels,
L.L.C. payable to the order of JPMorgan Chase Bank in the original
principal amount of $115 million.
10.29 - Mezzanine Loan Agreement, dated April 24, 2003, by and between
FelCor/JPM Holdings, L.L.C., as borrower, and JPMorgan Chase Bank,
as lender, relating to a $10 million senior mezzanine loan from
lender to borrower (the "Senior Mezzanine Loan").
10.29.1 - Pledge and Security Agreement, dated April 24, 2003, from FelCor/JPM
Holdings, L.L.C., as pledgor, in favor of JPMorgan Chase Bank, as
lender, securing the Senior Mezzanine Loan.
10.29.2 - Promissory Note, dated April 24, 2003, made by FelCor/JPM Holdings,
L.L.C. payable to the order of JPMorgan Chase Bank in the original
principal amount of $10 million.
10.30 - Junior Mezzanine Loan Agreement, dated April 24, 2003, by and
between DJONT/JPM Tenant Co., L.L.C., as borrower, and JPMorgan
Chase Bank, as lender, relating to a $25 million junior mezzanine
loan from lender to borrower (the "Junior Mezzanine Loan").
10.30.1 - Pledge and Security Agreement, dated April 24, 2003, from DJONT/JPM
Tenant Co., L.L.C., as pledgor, in favor of JPMorgan Chase Bank, as
lender, securing the Junior Mezzanine Loan.
10.30.2 - Promissory Note, dated April 24, 2003, made by DJONT/JPM Tenant Co.,
L.L.C. payable to the order of JPMorgan Chase Bank in the original
principal amount of $25 million.
10.30.3 - Security Agreement, dated April 24, 2003, from DJONT/JPM Tenant Co.,
L.L.C. in favor of JPMorgan Chase Bank, securing the Junior
Mezzanine Loan.
27
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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.
(b) Reports on Form 8-K:
A current report on Form 8-K dated April 30, 2003, was filed
by FelCor on May 1, 2003. This filing, under Item 7 and Item 9, disclosed that
on April 30, 2003, FelCor Lodging Trust Incorporated issued a press release
announcing its results of operations for the quarterly period ended March 31,
2003, and published its First Quarter 2003 Supplemental Information, which
provided additional corporate data, financial highlights and portfolio
statistical data for the quarter ended March 31, 2003. Copies of the press
release and the First Quarter 2003 Supplemental Information were furnished as
Exhibits 99.1 and 99.2, respectively.
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 2003
FELCOR LODGING TRUST INCORPORATED
By: /s/ Richard J. O'Brien
----------------------------
Richard J. O'Brien
Executive Vice President and
Chief Financial Officer
By: /s/ Lester C. Johnson
----------------------------
Lester C. Johnson
Senior Vice President and
Principal Accounting Officer
29
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Thomas J. Corcoran, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of FelCor Lodging Trust
Incorporated;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we
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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly report whether or not 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.
Date: May 15, 2003
/s/ Thomas J. Corcoran, Jr.
-----------------------------
Thomas J. Corcoran, Jr.
Chief Executive Officer
30
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Richard J. O'Brien, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FelCor Lodging Trust
Incorporated;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we
have:
d) 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
quarterly report is being prepared;
e) 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 quarterly report (the "Evaluation Date"); and
f) presented in this quarterly 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 function):
c) 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
d) 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
quarterly report whether or not 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.
Date: May 15, 2003
/s/ Richard J. O'Brien
-----------------------
Richard J. O'Brien
Chief Financial Officer
31
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.28 - Loan Agreement, dated April 24, 2003, by and between FelCor/JPM
Hotels, L.L.C., as borrower, and JPMorgan Chase Bank, as lender,
relating to a $115 million loan from lender to borrower (the
"Mortgage Loan").
10.28.1 - Form of Mortgage, Deed of Trust and Security Agreement, each dated
April 24, 2003, from FelCor/JPM Hotels, L.L.C., as borrower, and
DJONT/JPM Leasing, L.L.C., as lessee, (and, in the case of the
Mortgages with respect to the properties located in the State of
Florida, FelCor Lodging Limited Partnership) in favor of JPMorgan
Chase Bank, as lender, each covering a separate hotel and securing
the Mortgage Loan.
10.28.2 - Promissory Note, dated April 24, 2003, made by FelCor/JPM Hotels,
L.L.C. payable to the order of JPMorgan Chase Bank in the original
principal amount of $115 million.
10.29 - Mezzanine Loan Agreement, dated April 24, 2003, by and between
FelCor/JPM Holdings, L.L.C., as borrower, and JPMorgan Chase Bank,
as lender, relating to a $10 million senior mezzanine loan from
lender to borrower (the "Senior Mezzanine Loan").
10.29.1 - Pledge and Security Agreement, dated April 24, 2003, from FelCor/JPM
Holdings, L.L.C., as pledgor, in favor of JPMorgan Chase Bank, as
lender, securing the Senior Mezzanine Loan.
10.29.2 - Promissory Note, dated April 24, 2003, made by FelCor/JPM Holdings,
L.L.C. payable to the order of JPMorgan Chase Bank in the original
principal amount of $10 million.
10.30 - Junior Mezzanine Loan Agreement, dated April 24, 2003, by and
between DJONT/JPM Tenant Co., L.L.C., as borrower, and JPMorgan
Chase Bank, as lender, relating to a $25 million junior mezzanine
loan from lender to borrower (the "Junior Mezzanine Loan").
10.30.1 - Pledge and Security Agreement, dated April 24, 2003, from DJONT/JPM
Tenant Co., L.L.C., as pledgor, in favor of JPMorgan Chase Bank, as
lender, securing the Junior Mezzanine Loan.
10.30.2 - Promissory Note, dated April 24, 2003, made by DJONT/JPM Tenant Co.,
L.L.C. payable to the order of JPMorgan Chase Bank in the original
principal amount of $25 million.
10.30.3 - Security Agreement, dated April 24, 2003, from DJONT/JPM Tenant Co.,
L.L.C. in favor of JPMorgan Chase Bank, securing the Junior
Mezzanine Loan.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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.