1
- --------------------------------------------------------------------------------
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 SEPTEMBER 30, 1996
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 0-24250
FELCOR SUITE HOTELS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 72-2541756
(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
--- ---
The number of shares of Common Stock, par value $.01 per share, of
FelCor Suite Hotels, Inc. outstanding on November 1, 1996 was 23,495,057.
- --------------------------------------------------------------------------------
2
FELCOR SUITE HOTELS, INC.
INDEX
PART I. -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FELCOR SUITE HOTELS, INC.
Condensed Consolidated Balance Sheets -- September 30, 1996 (Unaudited)
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations -- For the Three and Nine Months
Ended September 30, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . 7
DJONT OPERATIONS, L.L.C.
Consolidated Balance Sheets -- September 30, 1996 (Unaudited)
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Consolidated Statements of Operations -- For the Three and Nine Months
Ended September 30, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . 13
Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . 14
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II. -- OTHER INFORMATION
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR SUITE HOTELS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
September 30, December 31,
1996 1995
----------- --------
(UNAUDITED)
Investment in hotel properties, net . . . . . . . . . . . . . . . . . . . . . $ 804,097 $325,155
Investment in unconsolidated subsidiaries . . . . . . . . . . . . . . . . . . 44,941 13,819
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 8,083 166,821
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,616 35,317
Due from Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,755 2,396
Deferred expenses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,409 1,713
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,012 3,138
----------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 866,913 $548,359
=========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Distributions payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,949 $ 4,918
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . 1,152 3,552
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,550 8,410
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 13,339 11,256
Minority interest in Partnership, 2,787 and 2,695 units issued and
outstanding at September 30, 1996 and December 31, 1995,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,220 58,837
----------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 207,210 86,973
----------- --------
Commitments and contingencies (Note 2)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized, 6,050 shares
issued and outstanding at September 30, 1996 . . . . . . . . . . . . . . 151,250
Common stock, $.01 par value, 50,000 shares authorized, 23,501 and
21,135 shares issued and outstanding at September 30, 1996
and December 31, 1995, respectively . . . . . . . . . . . . . . . . . . 235 211
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . 504,791 463,524
Unearned officers' and directors' compensation . . . . . . . . . . . . . . . (1,646) (473)
Earnings in excess (deficient) of distributions . . . . . . . . . . . . . . . 5,073 (1,876)
----------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 659,703 461,386
----------- --------
Total liabilities and shareholders' equity . . . . . . . . . . . . $ 866,913 $548,359
=========== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
4
FELCOR SUITE HOTELS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1996 1995 1996 1995
------- ------ ------- -------
Revenues:
Percentage lease revenue . . . . . . . . . . . . . . . . . $25,263 $6,138 $72,648 $17,487
Other revenue . . . . . . . . . . . . . . . . . . . . . . . 163 215 937 432
Income from unconsolidated subsidiaries . . . . . . . . . . 927 290 1,412 290
------- ------ ------- -------
Total revenue . . . . . . . . . . . . . . . . . . 26,353 6,643 74,997 18,209
------- ------ ------- -------
Expenses:
General and administrative . . . . . . . . . . . . . . . . 458 215 1,307 640
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 7,529 1,455 17,833 3,691
Taxes, insurance and other . . . . . . . . . . . . . . . . 3,260 616 9,859 1,755
Interest expense . . . . . . . . . . . . . . . . . . . . . 1,760 143 6,273 1,061
Minority interest . . . . . . . . . . . . . . . . . . . . . 1,477 724 4,619 2,392
------- ------ ------- -------
Total expenses . . . . . . . . . . . . . . . . . . 14,484 3,153 39,891 9,539
------- ------ ------- -------
Net income before extraordinary charge . . . . . . . . . . . 11,869 3,490 35,106 8,670
Extraordinary charge from write off of deferred financing fees 2,354 2,354
------- ------ ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 9,515 3,490 32,752 8,670
Preferred dividends . . . . . . . . . . . . . . . . . . . . . 2,949 4,784
------- ------ ------- -------
Net income applicable to common shareholders . . . . . . . . $ 6,566 $3,490 $27,968 $ 8,670
======= ====== ======= =======
Per common share information:
Net income applicable to common shareholders
before extraordinary charge . . . . . . . . . . . . . . $ 0.38 $ 0.43 $ 1.32 $ 1.39
Extraordinary charge . . . . . . . . . . . . . . . . . . . (0.10) (0.10)
------- ------ ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 0.28 $ 0.43 $ 1.22 $ 1.39
======= ====== ======= =======
Weighted average number of common shares outstanding . . . 23,276 8,170 22,933 6,255
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
5
FELCOR SUITE HOTELS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
-------- -------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,752 $ 8,670
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 18,417 3,966
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 4,619 2,392
Income from unconsolidated subsidiaries . . . . . . . . . . . . . . . (1,412) (290)
Extraordinary charge for write off of deferred financing fees . . . . 2,354
Changes in assets and liabilities:
Due from Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,359) 50
Deferred expenses and other assets . . . . . . . . . . . . . . . . . . 423 (1,202)
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . (3,142) (1,740)
-------- -------
Net cash flow provided by operating activities . . . . . . . . 52,652 11,846
-------- -------
Cash flows from investing activities:
Acquisition of hotel properties and related accounts . . . . . . . . . . . . (287,715) (54,853)
Acquisition of unconsolidated subsidiaries . . . . . . . . . . . . . . . . . (28,204) (13,221)
Cash distributions from unconsolidated subsidiaries . . . . . . . . . . . . 896
Prepayment under purchase agreement . . . . . . . . . . . . . . . . . . . . (15,000)
Improvements and additions to hotel properties . . . . . . . . . . . . . . . (44,960) (3,337)
-------- -------
Net cash flow used in investing activities . . . . . . . . . . (359,983) (86,411)
-------- -------
Cash flows from financing activities:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 185,350 40,100
Repayment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . (190,954) (35,949)
Loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,402)
Proceeds from sale of common stock . . . . . . . . . . . . . . . . . . . . . 44,978 81,011
Proceeds from sale of preferred stock . . . . . . . . . . . . . . . . . . . 144,251
Distributions paid to limited partners . . . . . . . . . . . . . . . . . . . (3,960) (2,212)
Distributions paid to preferred shareholders . . . . . . . . . . . . . . . . (1,835)
Distributions paid to common shareholders . . . . . . . . . . . . . . . . . (24,835) (7,729)
-------- -------
Net cash flow provided by financing activities . . . . . . . . 148,593 75,221
-------- -------
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . (158,738) 656
Cash and cash equivalents at beginning of periods . . . . . . . . . . . . . . . . . 166,821 1,118
-------- -------
Cash and cash equivalents at end of periods . . . . . . . . . . . . . . . . . . . . $ 8,083 $ 1,774
======== =======
Supplemental cash flow information --
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,971 $ 452
======== =======
Supplemental disclosure of noncash financing activities:
In the first nine months of 1996 the Company provided for the grant of an
aggregate of 53,000 shares of restricted common stock to officers and directors
which, at date of issuance, were valued at $26.50 to $31.375 per share.
5
6
FELCOR SUITE HOTELS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Supplemental disclosure of noncash financing activities: -- (continued)
In connection with certain unit and common stock transactions, $4.2
million was allocated to minority interest in Partnership from additional paid
in capital.
In the first nine months of 1996 the Company purchased certain assets and
assumed certain liabilities of hotel properties. These purchases were recorded
under the purchase method of accounting. The fair value of the acquired assets
and liabilities recorded at the date of acquisition are as follows:
Assets acquired . . . . . . . . . . . . . . . . $451,617
Application of prepayments to acquisition
of hotel properties . . . . . . . . . . . . (35,455)
Debt assumed . . . . . . . . . . . . . . . . . (108,744)
Capital equipment leases assumed . . . . . . . (2,823)
Partnership units issued . . . . . . . . . . . (10,880)
Common stock issued . . . . . . . . . . . . . . (6,000)
--------
Net cash paid . . . . . . . . . . . . . $287,715
========
During the third quarter of 1996 the Company purchased interests in
unconsolidated subsidiaries that hold hotel properties. The hotel properties
associated with these unconsolidated subsidiaries are located in, Marin County,
California; Parsippany, New Jersey; Charlotte, North Carolina; and
Indianapolis, Indiana. These purchases were recorded under the equity method
of accounting. The value of the assets recorded at the date of acquisition are
as follows:
Assets acquired . . . . . . . . . . . . . . . . $ 30,772
Partnership units issued . . . . . . . . . . . (2,568)
---------
Net cash paid . . . . . . . . . . . . . $ 28,204
=========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
7
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS
FelCor Suite Hotels, Inc., formed as a self-administered real estate
investment trust ("REIT"), was incorporated on May 16, 1994 and commenced
operations on July 28, 1994. At the commencement of operations, FelCor Suite
Hotels, Inc. ("FelCor") acquired an equity interest of approximately 74% in
FelCor Suites Limited Partnership (the "Partnership"), which owned six Embassy
Suites(R) hotels (the "Initial Hotels") with an aggregate of 1,479 suites. At
September 30, 1996, FelCor owned, through its 89.4% ownership of the
Partnership and its consolidated subsidiaries (collectively the "Company"),
interests in 41 hotels with an aggregate of 9,593 suites (collectively the
"Hotels"). The Company owns 100% equity interests in 35 of the Hotels, a 97%
interest in the partnership that owns the Los Angeles International Airport
hotel and 50% interests in separate partnerships that own five hotels. Of the
Hotels, 17 were Embassy Suites hotels at the time of acquisition, and at
September 30, 1996, 19 hotels had been converted to either Embassy Suites
hotels (17) or to Doubletree Guest Suites(R) hotels (2), 4 hotels were in the
process of being upgraded or renovated in preparation for their conversion to
Embassy Suites hotels and one was a Hilton Suites(R) hotel. The following table
provides certain information regarding the Company's Hotels acquired through
September 30, 1996:
NUMBER OF HOTELS NUMBER OF SUITES AGGREGATE
Quarter Acquired Acquired Purchase Price
------- ---------------- ---------------- --------------
(DOLLARS IN MILLIONS)
Initial Hotels 6 1,479 $ 81.5
4th Quarter 1994 1 251 25.8
1st Quarter 1995 2 350 27.4
2nd Quarter 1995 1 100 9.4
3rd Quarter 1995 3 542 31.3
4th Quarter 1995 7 1,657 169.0
1st Quarter 1996 14 3,501 383.5
2nd Quarter 1996 3 708* 68.1
3rd Quarter 1996 4 1,005 30.8
-- ----- ------
41 9,593 $826.8
== ===== ======
*Includes 17 suites constructed by the Company at one of the hotels
following acquisition.
In addition, the Company has started construction on additions to two of
the acquired properties which include an aggregate of 160 net additional
suites, meeting rooms and other public area upgrades, at an estimated aggregate
cost of $19.3 million.
The Company leased all of the Hotels to DJONT Operations, L.L.C. or a
wholly-owned subsidiary (collectively the "Lessee") under operating leases
providing for the payment of percentage rent (the "Percentage Leases"). Hervey
A. Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board and Chief
Executive Officer of the Company, respectively, beneficially own 50% of the
Lessee. The remaining 50% of the Lessee is beneficially owned by the children
of Charles N. Mathewson, a director of the Company. The Lessee has entered
into management agreements pursuant to which 36 of the Hotels are managed by
Promus Hotels, Inc. ("Promus"), two of the Hotels are managed by a subsidiary
of Doubletree Hotel Corporation ("Doubletree"), two of the Hotels are managed
by American General Hospitality, Inc. ("AGHI") and one is managed by Coastal
Hotel Group, Inc. ("Coastal").
A brief discussion of the hotel assets acquired and other significant
transactions occurring in the third quarter of 1996 follows:
On July 16, 1996, Promus purchased 165,569 shares of the Company's common
stock for $4.4 million relating to the Company's acquisition of the Mandalay
Beach and Napa hotels on May 8, 1996 pursuant to an existing subscription
agreement.
7
8
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS -- (CONTINUED)
On July 22, 1996, the Company acquired a 50% interest in a 235-suite
Embassy Suites hotel in San Rafael, Marin County, California, located across
the bay from San Francisco. The Company paid approximately $4.1 million for
its fifty percent interest, subject to a 50% share of $20.1 million in existing
nonrecourse debt. Promus will continue to hold the remaining 50% interest in
this hotel.
On August 1, 1996, the Company acquired a 50% interest in a 274-suite
Embassy Suites hotel in Parsippany, New Jersey for approximately $15.4 million.
Promus will continue to hold the remaining 50% interest in this hotel.
On September 12, 1996, the Company acquired 50% interests in two
partnerships owning Embassy Suite hotels located in Charlotte, North Carolina
and Indianapolis, Indiana. The Company's 50% interests in the 274-suite
Charlotte and the 222-suite Indianapolis hotels were acquired for an aggregate
purchase price of $11.3 million, including funds for renovations, and are
subject to a 50% share of $30.0 million in existing nonrecourse debt on the
properties.
On September 30, 1996, the Company closed a $250 million, three year,
unsecured revolving line of credit, initially priced at LIBOR plus 175 basis
points. Simultaneous with the closing of the unsecured revolving line of
credit, the Company retired a $65 million secured term loan through the
replacement of an existing $100 million secured revolving credit facility with
an $85 million four-year secured term loan at an interest rate of LIBOR plus
150 basis points. In conjunction with the retirement of the existing debt, the
Company recorded an extraordinary charge of approximately $2.4 million for the
write off of deferred financing fees that related to the retired term loan and
the retirement of the secured revolving credit facility.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") and
should be read in conjunction with the financial statements and notes thereto
of the Company and the Lessee included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 (the "10-K"). The notes to
the financial statements included herein highlight significant changes to the
notes included in the 10-K and present interim disclosures required by the SEC.
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the third quarter presentation. The reclassifications
have no effect on previously reported shareholder's equity or net income. The
accompanying financial statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the interim financial
statements. All such adjustments are of a normal and recurring nature.
2. COMMITMENTS AND CONTINGENCIES
Upon completion of the capital upgrade and renovation program discussed
below, and the conversion of the remaining Crown Sterling Suites(R) hotels
("CSS Hotels"), the Hotels will operate as Embassy Suites (38), Doubletree
Guest Suites (2) and Hilton Suites (1). The Embassy Suites hotels and Hilton
Suites hotel will operate pursuant to franchise license agreements which
require the payment of fees based on a percentage of suite revenue. These fees
are paid by the Lessee. There are no separate franchise license agreements
with respect to the Doubletree Guest Suites hotels.
The Hotels are managed by Promus (36), Doubletree (2), AGHI (2) and
Coastal (1) on behalf of the Lessee. The Lessee pays the managers a base
management fee based on a percentage of total revenue and an incentive
management fee based on the Lessee's net income before overhead expenses.
8
9
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Lessee has future lease commitments to the Company under the
Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels) and 2006
(17 hotels). The lease commitment under the Percentage Leases between the
Lessee and the partnerships that own the Chicago-Lombard, Marin County,
Parsippany, Charlotte and Indianapolis hotels, of which the Company owns 50%,
are payable to the respective partnerships and as such are not included in the
following schedule of future lease commitments to the Company. Minimum future
rental income (i.e., base rents) under these noncancellable operating leases
(excluding the hotels owned by the previously noted partnerships) at September
30, 1996 is as follows (in thousands):
Year
----
Remainder of 1996 . . . . . . . . . . . . . . . . . . . . . $ 13,869
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,477
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,477
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,477
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,477
2001 and thereafter . . . . . . . . . . . . . . . . . . . . 264,637
--------
$500,414
========
The Company has a capital upgrade and renovation program for the 18
CSS Hotels and 6 of the other hotels acquired since September 1995 and has
committed approximately $64 million to be invested in 1995, 1996, and early
1997 for this program. The Company had invested approximately $35.4 million on
such capital improvements through the end of the third quarter of 1996 and
expects to substantially complete the renovation of the CSS Hotels by the end
of 1996 and the renovation of the other 6 hotels in early 1997.
3. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations at September 30, 1996 and December 31,
1995 consist of the following (in thousands):
September 30, December 31,
1996 1995
------------- ------------
Secured term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,000
Renovation loan facility . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Promus note related to CSS purchase . . . . . . . . . . . . . . . . . . . $ 7,500
Other debt payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,550 910
Capital equipment lease obligations . . . . . . . . . . . . . . . . . . . 3,582 1,213
Capital land and building lease obligations . . . . . . . . . . . . . . . 9,757 10,043
-------- -------
$124,889 $19,666
======== =======
On September 30, 1996, the Company obtained a $250 million unsecured
revolving credit facility ("Line of Credit"). Under this facility, the Company
has the right to borrow up to $250 million based upon its ownership of
qualifying unencumbered hotel assets, until October 1, 1999 at which time the
principal amount then outstanding will be due and payable. Interest payable on
borrowings is variable, based on a ratings based pricing matrix, initially set
at LIBOR plus 175 basis points. Additionally, the Company is required to pay
an unused commitment fee which is variable, based on a ratings based pricing
matrix, initially set at 0.35%. There were no borrowings outstanding under the
Line of Credit at September 30, 1996.
9
10
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
Simultaneous with the closing of the Line of Credit, the Company retired
a $65 million secured term loan and replaced an existing $100 million secured
revolving credit facility with an $85 million four-year secured term loan.
This term loan bears interest at LIBOR plus 150 basis points and is secured by
interests in nine of the Company's hotel properties. Principal payments
commence on October 1, 1997 and are based on a 15 year amortization schedule,
adjusted annually for the then current interest rates. All outstanding
principal and accrued interest is due and payable on September 30, 2000.
The Company has a $25 million loan facility ("Renovation Loan") which has
been used to fund a portion of the renovation cost of the CSS Hotels being
converted to Embassy Suites hotels. The facility is guaranteed by Promus and
at September 30, 1996, the loan bears interest at LIBOR plus 52.5 basis points,
requires quarterly principal payments of $1.25 million beginning June 1999 and
matures in June 2000. The Company had drawn the full $25 million under this
loan facility at September 30, 1996.
Under its loan agreements the Company is required to satisfy various
affirmative and negative covenants. The Company was in compliance with these
covenants at September 30, 1996.
4. PRO FORMA INFORMATION
The following unaudited Pro Forma Consolidated Statements of Operations
for the nine months ended September 30, 1996 and 1995 are presented as
if the acquisition of the Company's interest in all the Hotels and the
consummation of the Company's securities offerings through September 30, 1996
had occurred on January 1, 1995, and all of the 41 hotels had been leased to
Lessee pursuant to the Percentage Leases since that date. Such pro forma
information is based in part upon the Statements of Operations of Lessee
included elsewhere in this Quarterly Report on Form 10-Q. Such information
should be read in conjunction with the financial statements listed in the Index
on page 2. In management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made. The pro forma information does
not include earnings on the Company's cash and short term investments and does
not purport to represent what the actual results of operations of the Company
would have been if the previously mentioned transactions had occurred on such
date or to project the results of operations of the Company for any future
period.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
------- -------
REVENUES:
Percentage lease revenue . . . . . . . . . . . . . . . . . . . . . . . . $77,276 $72,953
Income from unconsolidated subsidiaries . . . . . . . . . . . . . . . . 2,201 1,720
------- -------
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,477 74,673
------- -------
EXPENSES:
General and administrative . . . . . . . . . . . . . . . . . . . . . . . 1,366 1,282
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,301 18,083
Taxes, insurance and other . . . . . . . . . . . . . . . . . . . . . . . 10,386 10,160
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,039 7,535
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,175 3,987
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,210 33,626
Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . 8,847 8,847
------- -------
Net income applicable to common shareholders . . . . . . . . . . . . . . $26,363 $24,779
======= =======
Net income per common share . . . . . . . . . . . . . . . . . . . . . . $ 1.12 $ 1.06
======= =======
Weighted average number of common shares outstanding . . . . . . . . . . 23,474 23,439
10
11
FELCOR SUITE HOTELS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. SUBSEQUENT EVENTS
On October 3, 1996, the Company declared dividends of $0.50 per share of
common stock and $0.4875 per share of preferred stock for the third quarter of
1996, which dividends were paid on October 31, 1996 to holders of record on
October 15, 1996.
On October 17, 1996 the Company purchased the 317-suite Embassy Suites -
Atlanta Buckhead hotel for approximately $48.5 million. Promus will continue
to manage the hotel under the Embassy Suites brand.
On October 21 and November 4, 1996 the Company entered into two separate
interest rate swaps to fix the interest rate on an aggregate of $75 million of
the Company's floating rate secured term loan for three years at a rate of
7.611% for $50 million and 7.455% for $25 million.
11
12
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------- --------
(UNAUDITED)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,478 $ 5,345
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . 8,851 3,129
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740 532
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722 288
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 305
------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,253 $ 9,599
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,168 $ 1,393
Accounts payable, other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,970 605
Due to FelCor Suite Hotels, Inc. . . . . . . . . . . . . . . . . . . . . . . 3,755 2,396
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . 15,025 5,978
------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 22,918 10,372
------- --------
Shareholders' equity (deficit):
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,666) (774)
------- --------
Total shareholders' equity (deficit) . . . . . . . . . . . . . . . . . (3,665) (773)
------- --------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . $19,253 $ 9,599
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
12
13
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
------- ------- -------- -------
Revenue:
Suite revenue . . . . . . . . . . . . . . . . . . . . . $63,393 $16,699 $168,950 $43,923
Food and beverage revenue . . . . . . . . . . . . . . . 3,091 351 11,235 1,641
Food and beverage rent . . . . . . . . . . . . . . . . . 743 132 1,742 319
Other revenue . . . . . . . . . . . . . . . . . . . . . 4,617 1,055 12,457 2,573
------- ------- -------- -------
Total revenues . . . . . . . . . . . . . . . . . . 71,844 18,237 194,384 48,456
------- ------- -------- -------
Expenses:
Property operating costs and expenses . . . . . . . . . 18,427 4,725 46,878 12,082
General and administrative . . . . . . . . . . . . . . . 5,292 1,447 14,033 3,591
Advertising and promotion . . . . . . . . . . . . . . . 4,957 1,379 12,807 3,635
Repair and maintenance . . . . . . . . . . . . . . . . . 4,044 1,019 10,031 2,572
Utilities . . . . . . . . . . . . . . . . . . . . . . . 3,654 942 8,801 2,207
Management fee . . . . . . . . . . . . . . . . . . . . . 1,747 394 4,761 1,019
Franchise fee . . . . . . . . . . . . . . . . . . . . . 1,631 668 3,852 1,757
Food and beverage expenses . . . . . . . . . . . . . . . 3,336 527 11,748 1,739
Percentage lease payments . . . . . . . . . . . . . . . 29,152 6,787 78,307 18,135
Lessee overhead expenses . . . . . . . . . . . . . . . . 421 208 1,148 595
Liability insurance . . . . . . . . . . . . . . . . . . 476 128 1,276 291
Conversion costs . . . . . . . . . . . . . . . . . . . . 787 96 2,174 128
Other . . . . . . . . . . . . . . . . . . . . . . . . . 608 140 1,460 356
------- ------- -------- -------
Total expenses . . . . . . . . . . . . . . . . . . 74,532 18,460 197,276 48,107
------- ------- -------- -------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $(2,688) $ (223) $ (2,892) $ 349
======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
13
14
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
------- -------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($2,892) $ 349
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . (5,722) (1,270)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (208) (130)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (434) (259)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (157) (130)
Due to FelCor Suite Hotels, Inc. . . . . . . . . . . . . . . . . . . . . 1,359 11,950
Accounts payable, accrued expenses and other liabilities . . . . . . . . 11,187 2,525
------- -------
Net cash flow provided by operating activities . . . . . . . . . . . 3,133 13,035
------- -------
Cash flows from investing activities:
Hotel purchase deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,000)
------- -------
Net cash flow used in investing activities . . . . . . . . . . . . . . . . . . (12,000)
------- -------
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 3,133 1,035
Cash and cash equivalents at beginning of periods . . . . . . . . . . . . . . . . . 5,345 3,259
------- -------
Cash and cash equivalents at end of periods . . . . . . . . . . . . . . . . . . . . $ 8,478 $ 4,294
======= =======
The accompany notes are an integral part of these consolidated financial
statements.
14
15
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
DJONT Operations, L.L.C. is a Delaware limited liability company
(together with its wholly owned subsidiary, the "Lessee") which was formed on
June 29, 1994 and began operations on July 28, 1994. All of the voting Class A
membership interest in Lessee (representing a 50% equity interest) is owned by
Hervey A. Feldman and Thomas J. Corcoran, Jr. who serve as directors and
officers of FelCor Suite Hotels, Inc. (the "Company") and as managers and
officers of the Lessee. All of the non-voting Class B membership interest in
Lessee (representing the remaining 50% equity interest) is owned by RGC
Leasing, Inc., a Nevada corporation owned by the children of Mr. Mathewson, a
director of the Company. The Lessee leases each of the 41 hotels in which
FelCor Suites Limited Partnership (the "Partnership") had an ownership interest
at September 30, 1996 (the "Hotels"), pursuant to percentage leases
("Percentage Leases").
Messrs. Feldman and Corcoran, as the beneficial owners of an aggregate
50% of the Lessee, have entered into an agreement with the Company pursuant to
which they have agreed that, for a period of ten years, any distributions
received by them from the Lessee (in excess of their tax liabilities with
respect to the income of the Lessee) will be utilized to purchase common stock
from the Company annually, at a price based upon a formula approved by the
independent directors of the company relating to the then current market
prices. The agreement stipulates that Messrs. Feldman and Corcoran are
restricted from selling any stock so acquired for a period of two years from
the date of purchase. RGC Leasing, Inc., which owns the other 50% of the
Lessee, may elect to purchase common stock or units of Partnership interest
upon similar terms, at its option. The independent directors of the Company
may suspend or terminate such agreement at any time.
Thirty-six of the Hotels are, and two are expected to be converted, by
year end, to Embassy Suites(R) hotels, 36 of which are being managed for the
Lessee by a subsidiary of Promus Hotel Corporation ("Promus"). The two
remaining Embassy Suites hotels are managed for the Lessee by American General
Hospitality, Inc. ("AGHI") and Coastal Hotel Group, Inc. ("Coastal"). Two of
the Hotels are operated as Doubletree Guest Suites(R) hotels and managed by a
subsidiary of Doubletree Hotels Corporation ("Doubletree"). One of the Hotels
is operated under a Hilton Suites(R) hotel franchise and managed by AGHI.
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Lessee has future lease commitments under the Percentage Leases
which expire in 2004 (7 hotels), 2005 (13 hotels) and 2006 (21 hotels).
Minimum future rental payments are computed based on the base rent as defined
under these noncancellable operating leases and are as follows (in thousands):
Year Amount
---- ------
Remainder of 1996 . . . . . . . . . . . $ 16,398
1997 . . . . . . . . . . . . . . . . . 65,594
1998 . . . . . . . . . . . . . . . . . 65,594
1999 . . . . . . . . . . . . . . . . . 65,594
2000 . . . . . . . . . . . . . . . . . 65,594
2001 and thereafter . . . . . . . . . . 320,197
--------
$598,971
========
Under the franchise agreements, the Lessee typically remits to Promus
a franchise fee of 4% of suite revenue, a marketing and reservation
contribution (for the benefit of Embassy Suites hotels system wide) of 3.5% of
suite revenue, and certain additional fees for each of the Hotels operated as
an Embassy Suites hotel. With regard to the properties acquired as Crown
Sterling Suites(R) hotels (the "CSS Hotels"), in the first and second year of
operations, Promus has agreed to reduced franchise fees of 1.5% and 3.5% of
suite revenue, respectively. Additionally, with regard to the CSS Hotels,
Promus has agreed to reductions in the marketing and reservations contribution
for the first three years of operations to 2%, 2.5% and 3% of suite revenue,
respectively.
15
16
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The franchise fees will revert to 4% of suite revenue beginning with the third
year of operations of the CSS Hotels and the marketing and reservation
contribution will return to 3.5% of suite revenue beginning in the fourth year.
The Lessee pays Hilton Inns, Inc. a franchise fee of 5% of suite revenue and an
advertising fee of 1.0% of suite revenue for the Lexington Hilton Suites hotel.
There are no separate franchise fees for the properties operated as Doubletree
Guest Suites hotels; however, the Lessee pays a marketing and reservation
contribution of 3.5% of suite revenue under the management agreements.
The Lessee generally pays a base management fee of 2% of adjusted
gross revenue for each hotel managed by Promus, AGHI, Doubletree and Coastal
(collectively the "Hotel Managers"). In addition, the Lessee pays the Hotel
Managers an incentive management fee, which typically ranges from 50% to 75% of
a hotel's net income (after lease payments but before Lessee overhead expenses)
up to a maximum of 2% to 3% of revenues. In association with the acquisition
of the CSS Hotels, Promus and Doubletree have made their base management fees
and incentive management fees subordinate to the Percentage Lease payments for
a period of two years.
3. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Consolidated Statements of
Operations for the nine months ended September 30, 1996 and 1995 are presented
as if Lessee had leased and operated all of the Hotels beginning on January 1,
1995. Such information should be read in conjunction with the financial
statements listed in the Index on page 2. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made. The Pro Forma Consolidated Statements of Operations do not purport to
represent what actual results of operations would have been if such hotels had
been operated by Lessee pursuant to the Percentage Leases since such date or
to project the results of operations for any future periods.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED, IN THOUSANDS)
Nine Months
Ended September 30,
----------------------
1996 1995
-------- --------
Revenues $226,523 $218,481
Expenses:
Property operating costs and expenses . . . . . . . . . . . . . . . . . . . . 54,475 52,607
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . 16,272 16,131
Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . 15,085 13,692
Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,910 10,828
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,049 9,893
Management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,709 5,885
Franchise fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,322 5,326
Food and beverage expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 13,462 13,320
Percentage lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . 91,047 85,762
Lessee overhead expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,151 1,085
Liability insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,607 1,748
Conversion costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,315
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,728 1,026
-------- --------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228,817 219,618
-------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,294) $ (1,137)
======== ========
16
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
For background information relating to the Company and the definitions
of certain capitalized terms used herein, reference is made to Note 1 of Notes
to Condensed Consolidated Financial Statements of FelCor Suite Hotels, Inc.
appearing elsewhere herein.
In the first nine months of 1995 and the comparable period of 1996,
the Company's revenues increased from approximately $18.2 million to
approximately $75.0 million, net income applicable to common stockholders
increased from approximately $8.7 million to approximately $28.0 million after
an extraordinary charge of $2.4 million related to the write off of deferred
financing fees in the third quarter of 1996. Net income per common share
decreased from $1.39 to $1.22 primarily as a result of increased depreciation
from the acquired properties and the extraordinary charge previously noted. The
Initial Hotels experienced increases of 8.6% in suite revenues, and on a
proforma basis, suite revenue increases ranged from 10% on the first seven
hotels acquired after the Initial Hotels ("Pre-CSS Hotels" and collectively
with the Initial Hotels the "Original Hotels"), to 1.9% for the 18 Crown
Sterling Suites(R) hotels ("CSS Hotels"), to 4.2% for the remaining hotels
acquired ("1996 Acquisitions").
During the first nine months of 1996, the Company acquired interests
in 21 hotels with 5,197 suites for an aggregate purchase price of approximately
$482.4 million. Of the hotels so acquired during the first nine months of
1996, seven were and will remain Embassy Suites hotels, one was and will remain
a Hilton Suites hotel and 13 hotels have been or are in the process of being
converted to the Embassy Suites brand. Twelve of the hotels acquired by the
Company during the first nine months that have been or will be converted into
Embassy Suites hotels had been part of the Crown Sterling Suites chain that the
Company acquired.
The Company has undertaken a $64 million plan for the upgrade and
renovation of the 18 CSS Hotels and 6 of the other hotels acquired since
September 1995. Through September 30, 1996, the Company had invested
approximately $35.4 million under such plan and expects to substantially
complete the renovation of the CSS Hotels by the end of 1996 and the renovation
of the other 6 hotels in early 1997. In addition, the Company has added 17
suites at its Flagstaff hotel and is in the process of adding a net of 160
additional suites, adding meeting rooms and other public area upgrades to two
of its other hotels at an estimated aggregate cost of approximately $19.3
million.
In order for the Company to qualify as a REIT, neither the Company
nor the Partnership can operate hotels. Therefore, the Partnership leases the
Hotels to the Lessee. The Partnership's and, therefore, the Company's
principal sources of revenue are lease payments by the Lessee under the
Percentage Leases. Of the aggregate pro forma Percentage Lease revenue from the
Hotels under the Percentage Leases for the nine months ended September 30,
1996, approximately 97% was derived from suite revenues and 3% was derived from
food and beverage operations. The Lessee's ability to make payments to the
Company under the Percentage Leases is dependent on the operations of the
Hotels.
RESULTS OF OPERATIONS
The Company -- Actual
Nine Months Ended September 30, 1996 and 1995
For the nine months ended September 30, 1996 and 1995, the Company had
revenues of $75.0 million and $18.2 million, respectively, consisting of
Percentage Lease revenues of $72.6 million and $17.5 million, other revenue
(made up primarily of interest income) of $937,000 and $432,000 and income from
unconsolidated subsidiaries of $1.4 million and $290,000, respectively.
The 315% increase in Percentage Lease revenue is attributable
primarily to the Company's acquisition and subsequent leasing, pursuant to
Percentage Leases, of 29 of the 34 hotels acquired in 1995 and through
September 1996. The remaining five properties represent the acquisition of 50%
interests in unconsolidated subsidiaries. As previously noted, Percentage
Lease revenue is dependent on the operations of the Hotels, primarily suite
revenue. The Initial Hotels experienced suite revenue growth of 8.6% and
increases of revenue per available suite ("REVPAR") of 8.2%.
17
18
RESULTS OF OPERATIONS -- (CONTINUED)
All of the Initial Hotels experienced increases in REVPAR, with the increases
ranging from 1.6% to 12.1% over the prior year.
Management believes that the acquired hotels will generally experience
increases in suite revenues (and accordingly, provide the Company with
increases in Percentage Lease revenues) after the completion of the current
renovation and upgrade programs; however, as individual hotels undergo such
renovations, their performance has been, and may continue to be, adversely
affected by such temporary factors as suites out of service and disruptions of
hotel operations. (A more detailed discussion of hotel suite revenue is
contained in "The Hotels - Actual" section of this Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
Total expenses increased $30.4 million in the nine months ended
September 30, 1996 from $9.5 million to $39.9 million compared to the same
period in 1995. The primary components of this increase were: depreciation;
taxes, insurance and other; and interest expense.
Depreciation expense increased to $17.8 million in the nine months
ended September 30, 1996 from $3.7 million in the same period of 1995. The
increase resulted from the acquisition of hotels in 1995 and 1996 and capital
expenditures made on existing and acquired hotels.
Taxes, insurance and other expenses increased $8.1 million from $1.8
million in the first nine months of 1995 to $9.9 million in the first nine
months of 1996. This increase is primarily attributed to the additional hotel
properties acquired in 1995 and 1996.
Interest expense increased from $1.1 million for the nine months ended
September 30, 1995 to $6.3 million for the nine months ended September 30,
1996. The increase in interest expense is primarily associated with debt
assumed or incurred in connection with the hotels purchased during the fourth
quarter of 1995 and the nine months of 1996.
Minority interest in earnings increased from $2.4 million for the nine
months of 1995 to $4.6 million for the same period in 1996. The percentage of
income attributable to minority interests was 11.7% for the nine months ended
September 30, 1996 and 21.3% for the same period in 1995. The decrease in the
minority interest percentage was primarily the result of the Company's
contribution to the Partnership of the proceeds from the common stock issued
during May and December 1995 in registered public offerings partially offset by
additional units of limited partnership interest in the Partnership issued to
Promus and the sellers of acquired hotels.
In the third quarter, the Company recorded an extraordinary charge for
the write off of deferred financing fees of $2.4 million. This write off was
the result of the retirement of debt.
Three Months Ended September 30, 1996 and 1995
For the three months ended September 30, 1996 and 1995, the Company
had revenues of $26.4 million and $6.6 million, respectively, consisting of
Percentage Lease revenues of $25.3 million and $6.1 million, other revenue made
up primarily of interest income of $163,000 and $215,000 and income from
unconsolidated subsidiaries of $927,000 and $290,000, respectively.
The increase in Percentage Lease revenue was attributable primarily to
the Company's acquisition and subsequent leasing, pursuant to Percentage
Leases, of 26 of the 31 hotels acquired in 1995 and through September 1996. The
remaining five properties represent the acquisition of 50% interests in
unconsolidated subsidiaries. As previously noted, Percentage Lease revenue is
dependent on the operations of the Hotels, primarily suite revenue. The
Initial Hotels experienced suite revenue and REVPAR growth of 9.4%. All of the
Initial Hotels experienced increases in REVPAR, with the increases ranging from
3.7% to 18.9% over the prior year. A more detailed discussion of hotel suite
revenue is contained in "The Hotels - Actual" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
18
19
RESULTS OF OPERATIONS -- (CONTINUED)
Total expenses increased $11.3 million in the three months ended
September 30, 1996 from $3.2 million to $14.5 million compared to the same
period in 1995. The primary components of this increase were: depreciation;
taxes, insurance and other; and interest expense. As previously discussed, the
primary reason for this increase is related to the increased number of hotel
properties owned by the Company, from 13 properties at September 30, 1995 to 41
properties at September 30, 1996.
During the period, the Company recorded an extraordinary charge for
the write off of deferred financing fees of $2.4 million. This write off was
the result of the retirement of debt.
Funds From Operations
The Company considers funds from operations to be a key measure 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 the Company's
operating performance and liquidity.
The following table computes "Funds From Operations" under the newly
adopted National Association of Real Estate Investment Trusts ("NAREIT")
definition. Funds From Operations under the NAREIT definition consists of net
income, computed in accordance with generally accepted accounting principles,
excluding gains or losses from debt restructuring and sales of property, plus
depreciation of real property (including furniture and equipment) and after
adjustments for unconsolidated partnerships and joint ventures.
Three Months Ended NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1996 1995 1996 1995
------- ------ ------- -------
Funds From Operations (FFO):
----------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,515 $3,490 $32,752 $ 8,670
Less preferred dividends . . . . . . . . . . . . . . . . . . . . . . 2,949 4,784
------- ------ ------- -------
Net income available for common shares . . . . . . . . . . . . . . . 6,566 3,490 27,968 8,670
Add back:
Extraordinary charge from write off of deferred financing fees . . 2,354 2,354
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . 1,477 724 4,619 2,392
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,529 1,455 17,833 3,691
Depreciation for unconsolidated subsidiaries . . . . . . . . . . . 575 4 1,070 4
------- ------ ------- -------
FFO available to common shares and units . . . . . . . . . . . . . . 18,501 5,673 53,844 14,757
Add preferred dividends . . . . . . . . . . . . . . . . . . . . . . . 2,949 4,784
------- ------ ------- -------
FFO diluted for conversion of preferred stock . . . . . . . . . . . . $21,450 $5,673 $58,628 $14,757
======= ====== ======= =======
Weighted average common shares outstanding . . . . . . . . . . . . . 23,276 8,170 22,933 6,255
Weighted average units outstanding . . . . . . . . . . . . . . . . . 2,896 1,695 3,020 1,695
------- ------ ------- -------
Weighted average common shares and units outstanding . . . . . . . . 26,172 9,865 25,953 7,950
Weighted average common shares and units outstanding,
diluted for conversion of preferred stock . . . . . . . . . . . 30,862 9,865 28,555 7,950
Per share and unit data:
------------------------
FFO per common share and unit outstanding . . . . . . . . . . . . . . $ 0.71 $ 0.58 $ 2.07 $ 1.86
FFO per common share and units outstanding, diluted for
conversion of preferred stock . . . . . . . . .. . . . . . . . . . . $ 0.70 $ 0.58 $ 2.05 $ 1.86
19
20
RESULTS OF OPERATIONS -- (CONTINUED)
The Company -- Pro Forma Nine Months Ended September 30, 1996 and 1995
The following pro forma information is presented as if the acquisition
of all the Hotels and the consummation of the Company's securities offerings
through September 30, 1996 had occurred as of January 1, 1995.
For the nine months ended September 30, 1996, the Company's pro forma
Percentage Lease revenue increased $4.3 million. This increase is primarily
attributable to increases in suite revenue, despite the substantial number of
suites taken out of service for renovation and conversion to the Embassy Suites
brand during the second and third quarters of 1996. The historical suite
revenue increased by 4.6% for the 41 hotels included in the Pro Forma
Consolidated Statements of Operations included herein. (The historical hotel
revenue increase is more fully discussed in "The Hotels - Actual" section of
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
Pro forma depreciation expenses increased by $3.2 million, primarily
reflecting the historical asset additions from property upgrades and
renovations made by the Company during 1995 and through the first nine months
of 1996. Pro forma taxes, insurance and other increased $200,000. Pro forma
interest expense declined by $500,000 reflecting the historical decrease in
LIBOR and the amortization of principal on the capital lease obligations.
Minority interest was $4.2 million and $4.0 million on a pro forma basis, for
1996 and 1995, respectively. Pro forma net income was $26.4 million and $24.8
million for the nine months ended September 30, 1996 and 1995, respectively.
The Lessee -- Actual
The Nine Months Ended September 30, 1996 and 1995
Total revenues increased 301% from $48.5 million for the nine months
ended September 30, 1995 to $194.4 million for the same period of 1996. The
primary reason for this increase is that the number of hotels operated by the
Lessee increased from 13 hotels at September 30, 1995 to 41 hotels at September
30, 1996. The increases in Percentage Lease expense, property operating costs
and other hotel expenses in the first nine months of 1996 compared to the same
period of 1995 relate primarily to the increased number of hotels operated by
the Lessee. The Lessee had a net loss of $2.9 million and a net income of
$349,000 for the nine months ended September 30, 1996 and 1995 respectively.
The principal reasons for this decline in net income for the nine months, is
related to costs of taking over operations of acquired hotels and of
converting, renovating and upgrading the 28 hotels acquired in the fourth
quarter of 1995 and the first nine months of 1996 and the lost revenues
associated with suites out of service for renovation. When these suites are
taken out of service (the Lessee had nearly 7% of total available suites taken
out of service in the second and third quarters of 1996 for renovation), the
Lessee typically experiences temporary reductions in suite revenues and
decreased operating margins.
The Three Months Ended September 30, 1996 and 1995
Total revenues increased 294% from $18.2 million in the third quarter
of 1995 to $71.8 million for the same period of 1996. The primary reason for
this increase is that the number of hotels operated by the Lessee increased
from 13 hotels at September 30, 1995 to 41 hotels at September 30, 1996. The
increases in Percentage Lease expense, property operating costs and other hotel
expenses in the third quarter of 1996 compared to the same period of 1995
relate primarily to the increased number of hotels operated by the Lessee. The
Lessee had a net loss of $2.7 million and $223,000 for the three months ended
September 30, 1996 and 1995 respectively. The principal reasons for this
increase in net loss is related to the start up costs of taking over the
operations of acquired hotels and of converting and upgrading the 28 hotels
acquired in the fourth quarter of 1995 and the first nine months of 1996,
including the lost revenue associated with rooms taken out of service for
renovation and seasonal declines in its Florida properties. The Lessee had
nearly 60,000 suite nights taken out of service in the third quarter
representing 7% of total available suites in the quarter.
The Hotels -- Actual
The following table sets forth historical suite revenue and percentage
changes therein between the periods presented for the 41 hotels included in the
pro forma financial information with respect to the Lessee. The following
table presents comparative information with respect to suite revenue,
occupancy, average daily rate ("ADR") and revenue per available suites
("REVPAR") for the 6 Initial Hotels, the 7 Pre-CSS hotels, the 18 CSS Hotels
and the 10 1996 Acquisitions through September 30, 1996.
20
21
RESULTS OF OPERATIONS -- (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ---------------------
1996 1995 VARIANCE 1996 1995 VARIANCE
------- ------- -------- -------- -------- --------
Suite Revenue (in thousands):
Initial Hotels (6) . . . . . . . . . $10,657 $ 9,740 9.4% $ 32,977 $ 30,361 8.6%
Pre-CSS Hotels (7) . . . . . . . . . 9,171 7,951 15.3% 26,377 23,975 10.0%
------- ------- -------- --------
Original Hotels (13) . . . . . . . . 19,828 17,691 12.1% 59,354 54,337 9.2%
CSS Hotels (18) . . . . . . . . . . 29,317 28,855 1.6% 89,287 87,605 1.9%
1996 Acquisitions (10) . . . . . . . 16,638 15,760 5.6% 48,735 46,792 4.2%
------- ------- -------- --------
Total FelCor Suite Hotels . . . . . $65,783 $62,306 5.6% $197,376 $188,733 4.6%
======= ======= ======== ========
Occupancy:
Initial Hotels . . . . . . . . . . . 77.2% 75.0% 2.2 pts. 78.7% 77.4% 1.3 pts.
Pre-CSS Hotels . . . . . . . . . . . 78.6% 74.3% 4.3 pts. 76.7% 75.5% 1.2 pts.
Original Hotels . . . . . . . . . 77.8% 74.6% 3.2 pts. 77.7% 76.6% 1.1 pts.
CSS Hotels . . . . . . . . . . . . . 68.3% 71.9% (3.6) pts. 68.4% 71.0% (2.6) pts.
1996 Acquisitions . . . . . . . . . 76.5% 75.9% 0.6 pts. 74.1% 75.5% (1.4) pts.
Total FelCor Suite Hotels . . . . . 72.9% 73.6% (0.7) pts. 72.4% 73.7% (1.3) pts.
Average Daily Rate (ADR):
Initial Hotels . . . . . . . . . . . $101.51 $ 95.47 6.3% $ 103.43 $ 97.11 6.5%
Pre-CSS Hotels . . . . . . . . . . . 100.69 93.54 7.6% 100.50 93.47 7.5%
Original Hotels . . . . . . . . . 101.13 94.60 6.9% 102.11 95.47 7.0%
CSS Hotels . . . . . . . . . . . . . 101.30 94.58 7.1% 103.21 98.00 5.3%
1996 Acquisitions . . . . . . . . . 105.49 100.67 4.8% 107.00 101.23 5.7%
Total FelCor Suite Hotels . . . . . 102.28 96.05 6.5% 103.78 98.03 5.9%
Revenue Per Available Suite (REVPAR):
Initial Hotels . . . . . . . . . . . $ 78.32 $ 71.58 9.4% $ 81.37 $ 75.20 8.2%
Pre-CSS Hotels . . . . . . . . . . . 79.12 69.47 13.9% 77.04 70.58 9.2%
Original Hotels . . . . . . . . . 78.69 70.62 11.4% 79.39 73.09 8.6%
CSS Hotels . . . . . . . . . . . . . 69.14 68.03 1.6% 70.60 69.61 1.4%
1996 Acquisitions . . . . . . . . . 80.72 76.46 5.6% 79.32 76.47 3.7%
Total FelCor Suite Hotels . . . . . 74.57 70.74 5.4% 75.14 72.20 4.1%
The variance for suite revenue and REVPAR for the Pre-CSS Hotels in the
three months ended September 30, 1996 do notagree because the Company added 17
suites at one of the Pre-CSS Hotels in the second quarter of 1996. The
variance for suite revenue and REVPAR for the Hotels in the nine months ended
September 30, 1996 do not agree because the leap year in 1996 added one
additional day in the first quarter.
INITIAL HOTELS: Dallas (Park Central), TX, Jacksonville, FL, Nashville, TN, Orlando (North), FL, Orlando
--------------- (South), FL, Tulsa, OK.
PRE-CSS HOTELS: Boston - Marlborough, MA, Brunswick, GA, Chicago - Lombard, IL, Corpus Christi, TX, Dallas
--------------- (Love Field), TX, Flagstaff, AZ, New Orleans, LA.
CSS HOTELS: Anaheim, CA, Baton Rouge, LA, Birmingham, AL, Boca Raton, FL (1), Deerfield Beach, FL, Ft.
----------- Lauderdale, FL, Los Angeles (LAX), CA, Mandalay Beach, CA (3), Miami (Airport), FL, Milpitas,
CA, Minneapolis (Airport), MN, Minneapolis (Downtown), MN, Napa, CA (3), Phoenix (Camelback),
AZ, San Francisco (Airport North), CA, San Francisco (Airport South), CA, St. Paul, MN, Tampa
(Busch Gardens), FL (1).
1996 ACQUISITIONS: Beaver Creek Resort (Avon-Vail), CO, Boca Raton, FL, Charlotte, NC, Chicago (Deerfield), IL,
------------------ Cleveland, OH, Indianapolis, IN, Lexington, KY (2), Marin County, CA, Parsippany, NJ,
Piscataway, NJ.
(1) Operating as a Doubletree Guest Suites hotel
(2) Operating as a Hilton Suites hotel
(3) In the process of conversion to Embassy Suites hotels
21
22
RESULTS OF OPERATIONS -- (CONTINUED)
Comparison of The Hotels' Suite Revenues for the Three and Nine months
Ended September 30, 1996 and 1995
Suite revenues from the 41 Hotels included in the pro forma
information increased 4.6% for the nine months ended September 30, 1996 from
the comparative period of 1995. The Initial 6 Hotels increased 8.6%, the
Pre-CSS Hotels increased 10%, the CSS Hotels increased 1.9% and the 1996
Acquisition Hotels increased 4.2%.
Increases in suite revenues, particularly at the CSS Hotels, were
limited by the number of suites out of service for renovation and conversion
during the three and nine months ended September 30, 1996. The Company had
nearly 110,000 suite nights taken out of service during the second and third
quarters, which represents approximately 7% of the Company's normal suite
inventory for the period.
The increase in suite revenue is primarily the result of increases in
ADR, partially offset by decreases of 1.3 percentage points in occupancy. The
Initial Hotels increased in both ADR and occupancy. ADR increased 6.5% to
$103.43 and occupancy percentage increased from 77.4% to 78.7% (or 1.3
percentage points). The Pre-CSS Hotels increased in both occupancy (1.1
percentage points) and ADR (7.5%) for the nine months of 1996 compared to the
same period in 1995. The Company has committed to a capital program for all
Hotels that ensures that at least 4% of suite revenue will be available for
capital improvements, in addition to normal repair and maintenance
expenditures.
The CSS Hotels experienced an increase in ADR of 5.3% to $103.21 and
a 2.6 percentage point decrease in occupancy to 68.4%. The 1996 Acquisition
Hotels increased ADR by 5.7% to $107.00, which was partially offset by a 1.4
percentage point decrease in occupancy to 74.1%. The Company has committed to
a capital renovation and conversion program for the 18 CSS Hotels and 6 of the
1996 Acquisition Hotels of approximately $64 million and is also reserving 4%
of suite revenue for ongoing capital improvements in addition to making normal
repair and maintenance expenditures. The CSS Hotels either have been or are in
the process of being converted to Embassy Suites hotels (16) or Doubletree
Guest Suites hotels (2). At November 1, 1996, 16 of the 18 CSS Hotels had been
converted to the new franchise brands.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to stockholders, is its share of the Partnership's cash
flow from the Percentage Leases. For the nine months ended September 30, 1996,
cash flow provided by operating activities, consisting primarily of Percentage
Lease revenue, was $52.7 million and funds from operations, which is the sum of
net income, minority interest, depreciation of real property (including
furniture and equipment) and extraordinary charges, was $53.8 million. The
Lessee's obligations under the Percentage Leases are unsecured. The Lessee's
ability to make lease payments under the Percentage Leases and the Company's
liquidity, including its ability to make distributions to stockholders, are
substantially dependent on the ability of the Lessee to generate sufficient
cash flow from the operation of the Hotels.
The Company intends to acquire additional hotels and may incur
indebtedness to make such acquisitions, or to meet distribution requirements
imposed on a REIT under the Internal Revenue Code, to the extent that working
capital and cash flow from the Company's investments are insufficient to make
such distributions.
The Company's Charter limits consolidated indebtedness to 40% of the
Company's investment in hotel properties, at cost, on a consolidated basis,
after giving effect to the Company's use of proceeds from any indebtedness.
For purposes of this limitation, the Company's consolidated investment in hotel
properties, at cost, is its investment, at cost, in hotel properties, as
reflected in its consolidated financial statements plus (to the extent not
otherwise reflected) the value (as determined by the Board of Directors at the
time of issuance) of any equity securities issued, otherwise than for cash, by
the Company or any of its subsidiaries in connection with the acquisition of
hotel properties. Under this definition as of September 30, 1996, the
Company's investment in hotel properties at cost was $913 million.
Accordingly, the Company's maximum permitted indebtedness would have been
approximately $368 million (of which $125 million was borrowed at September 30,
1996). Assuming all of this additional debt capacity, together with the
Company's available cash and cash equivalents, were used for the acquisition of
additional hotel properties, the
22
23
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
Company's investment in hotel properties would increase to approximately $1.5
billion and the maximum permitted indebtedness would increase to approximately
$614 million.
In September 1996, the Company executed an Amended and Restated Loan
Agreement with Boatmen's National Bank of Oklahoma (formerly Bank IV Oklahoma,
National Association) as Agent, and certain other Lenders, which replaced a
$100 million secured revolving line of credit with a term loan of $85 million.
The loan is secured by nine of the twelve hotels previously securing the $100
million line of credit. Interest accrues on the term loan at a rate equal to
150 basis points over LIBOR and the Company must make payments of principal and
interest, on a 15-year constant payment amortization schedule commencing
October 1997, adjusted annually to reflect the then current LIBOR rate. This
term loan matures on September 30, 2000.
On September 30, 1996, the Company obtained a $250 million unsecured
revolving credit facility from a group of lenders co-arranged by The Chase
Manhattan Bank and Wells Fargo Bank, National Association ("Line of Credit").
The Line of Credit has a term of three years ending October 1, 1999.
Borrowings under the Line of Credit bear interest, at the Company's option, (i)
at the higher of the base rate announced from time to time by The Chase
Manhattan Bank or the Federal funds rate plus 0.5%, in either case plus an
applicable margin of 0% to 0.5 %, or (ii) at a Eurodollar rate based upon the
30, 60, 90 or 6-month LIBOR rate plus an applicable margin of 1.25% to 2.0%.
The applicable margin varies depending upon the Company's long-term senior
unsecured implied debt rating. As of September 30, 1996, the Company had no
amounts outstanding under the Line of Credit which currently bears interest at
the LIBOR rate plus 1.75%. Up to 10% of the amount available under the Line of
Credit may be used for general corporate or working capital purposes. The
total amount available under the Line of Credit is limited to 40% of the
aggregate value of the Company's eligible hotels, which generally includes
hotels that are unencumbered. At September 30, 1996, the aggregate amount
available under the Line of Credit was approximately $215 million, which amount
will increase by 40% of the value of each additional eligible hotel acquired,
up to the maximum amount of $250 million. The agreements governing the Line of
Credit also contain various negative and affirmative covenants, including
limitations on total indebtedness, total secured indebtedness and cash
distributions, as well as obligations to maintain a certain minimum tangible
net worth and certain interest and debt service coverage ratios. At September
30, 1996, the Company was in compliance with all such covenants.
The Company has a $25 million Renovation Loan facility which has been
used to fund a portion of the renovation cost of the CSS Hotels being converted
to Embassy Suites hotels. The facility is guaranteed by Promus, bears interest
at LIBOR plus 52.5 basis points, requires quarterly principal payments of $1.25
million beginning June 1999 and matures in June 2000. At September 30, 1996
the Company had drawn the full $25 million under this loan facility.
At September 30, 1996, the Company had $8.1 million of cash and cash
equivalents and had not utilized any of the amount available under the
Company's $250 million unsecured revolving Line of Credit.
Following the end of the third quarter, FelCor entered into two
separate interest rate swap agreements to manage the relative mix of its debt
between fixed and variable rate instruments. These interest rate swap
agreements modify a portion of the interest characteristics of FelCor's
outstanding debt without an exchange of the underlying principal amount and
effectively convert variable rate debt to a fixed rate. The fixed rates to be
paid, the effective fixed rate, and the initial variable rate to be received by
FelCor are summarized in the following table:
Swap Rate
Received
Swap Rate Effective (Variable) at Swap
Notional Amount Paid (Fixed) Fixed Rate 11/5/96 Maturity
--------------- ------------ ---------- -------------- -------------
--
$50 million 6.11125% 7.61125% 5.53516% October 1999
$25 million 5.95500% 7.45500% 5.5000% November 1999
23
24
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
The differences to be paid or received by the Company under the terms
of the interest rate swap agreements will be accrued as interest rates change
and recognized as an adjustment to interest expense over the life of the
agreement by the Company pursuant to the terms of its interest rate agreement
and will have a corresponding effect on its future cash flows. Agreements such
as these contain a credit risk that the counterparties may be unable to meet
the terms of the agreement. The Company minimizes that risk by evaluating the
creditworthiness of its counterparties, which is limited to major banks and
financial institutions, and does not anticipate nonperformance by the
counterparties.
To provide for additional financing flexibility, FelCor has registered
up to an aggregate of $500 million in common stock, preferred stock or debt
securities pursuant to a shelf registration declared effective by the
Securities Exchange Commission. The terms and conditions of the stock or debt
securities will be determined by market conditions at the time of issuance. A
total of 6,050,000 shares of preferred stock at $25.00 per share were issued in
the second quarter of 1996 pursuant to this shelf registration.
The Company has a capital upgrade and renovation program for the 18
CSS Hotels and 6 of the other hotels acquired since September 1995 and has
committed approximately $64 million to be invested in 1995, 1996 and 1997 for
this program. The Company has invested approximately $35.4 million on such
capital improvements through the first nine months of 1996 and expects to
substantially complete the renovation of the CSS Hotels by the end of 1996 and
the renovation of the other 6 hotels in early 1997. These capital
improvements will be funded partially through (i) the $25 million Renovation
Loan facility, (ii) the proceeds of the Series A Preferred Stock offering, and
(iii) the Company's Line of Credit. As individual hotels undergo such upgrade
and renovation, their performances may be adversely affected, although such
effects are expected to be temporary.
The Company constructed and opened 17 additional suites at the
Flagstaff hotel and will complete construction on 32 additional suites at the
New Orleans hotel by year end. Construction has also begun on a net addition
of 128 suites at the Boston-Marlborough hotel. The suite additions, additional
meeting rooms and other public area upgrades for these hotels is projected at
an aggregate cost of approximately $19.3 million.
During 1995, the Company and Promus entered into a subscription
agreement under which Promus has purchased an aggregate of 1,886,792 shares of
Common Stock at a price per share of $26.50, the offering price per share in
the Company's public offering of common stock in December 1995. Such
investment was made in increments in conjunction with the Company's acquisition
of the CSS Hotels and other qualifying hotels. Through September 30, 1996, the
Company had issued an aggregate of 1,886,792 shares of Common Stock to Promus
pursuant to this subscription agreement for an aggregate investment of
approximately $50 million of which $5 million was invested in 1995.
The Company's cash flow from financing activities of
approximately $148.6 million for the nine months ended September 30, 1996
resulted from the issuance of the Series A Preferred Stock for $144.3 million,
the sale of common stock to Promus under the subscription agreement for $45.0
million, net repayments of $5.6 million under a prior secured line of credit
and other borrowing facilities, distributions of $30.6 million and additional
loan costs of $4.4 million.
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates periodically to reflect the effects of inflation. Competitive pressures
may, however, limit the Lessee's ability to raise room rates.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates primarily during the first three quarters of
each year. This seasonality can be expected to cause fluctuations in the
Company's quarterly lease revenue to the extent that it receives Percentage
Rent. To the extent the cash flow from operations are insufficient during any
quarter, due to temporary or seasonal fluctuations in lease revenue, the
Company expects to utilize other cash on hand or borrowings under the Line of
Credit to make distributions to its stockholders.
24
25
PART II. -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
In September 1996, the Company entered into an Amended and Restated
Loan Agreement with Boatmen's National Bank of Oklahoma as Agent replacing a
$100 million revolving line of credit with a term loan of $85 million ("Term
Loan"), and entered into its $250 million unsecured Line of Credit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Item 2 of Part I of this Quarterly Report on Form 10-Q
for more information regarding the Term Loan and the Line of Credit, which
information is incorporated by reference herein. Pursuant to the Line of
Credit, the Company, unless otherwise required in order to maintain its status
as a REIT, is restricted from declaring or making any dividend payment or other
distribution of assets, properties, cash, rights, obligations or securities on
account or in respect of any of its capital stock, provided, that, during any
period of four consecutive fiscal quarters, (i) the Company may make such
payments in an aggregate amount not to exceed 85% of its funds from operations
(with certain adjustments) for such period and (ii) the aggregate amount of
such payments may not exceed 100% of the Company's "free cash flow" for such
period (generally meaning adjusted funds from operations less aggregate
reserves for furniture, fixtures and equipment and scheduled principal payments
on indebtedness). Similarly, the Term Loan restricts declaration and payment of
dividends and similar distributions in any fiscal year to an amount not to
exceed the greater of (x) 85% of the Company's consolidated funds from
operations attributable to such year and (y) the amount necessary in order for
the Company to maintain its status as a REIT.
ITEM 5. OTHER INFORMATION.
For information relating to hotel acquisitions and certain other
transactions by the Company through September 30, 1996, see Note 1 of Notes to
Consolidated Financial Statements of FelCor Suite Hotels, Inc. 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:
Exhibit
Number Description
------ -----------
10.2.2 -- Schedule of executed Lease Agreements identifying material variations from the form of
Lease Agreement with respect to hotels acquired by the Registrant through October 30,
1996.
10.3.4 -- Amended and Restated Loan Agreement dated as of September 26, 1996, among the
Registrant and the Partnership, as Borrowers, Boatmen's National Bank of Oklahoma, as
Agent and Lender, and First Tennessee Bank National Association, Liberty Bank and
Trust Company of Tulsa, National Association, Bank One, Texas, N.A., First National
Bank of Commerce, and AmSouth Bank of Alabama, as Lenders.
25
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. -- (CONTINUED)
10.31 -- Amended and Restated Revolving Credit Agreement dated as of October 18, 1996 among the
Registrant and the Partnership, as Borrower, the Lenders party thereto, The Chase
Manhattan Bank, as Administrative Agent , and Wells Fargo Bank, National Association,
as Documentation Agent.
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
None
26
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1996
FELCOR SUITE HOTELS, INC.
By: \s\ Lester C. Johnson
-------------------------------------
Lester C. Johnson
Vice President and Controller
(Principal Accounting Officer)
27
28
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.2.2 -- Schedule of executed Lease Agreements identifying material variations from the form of
Lease Agreement with respect to hotels acquired by the Registrant through October 30,
1996.
10.3.4 -- Amended and Restated Loan Agreement dated as of September 26, 1996, among the
Registrant and the Partnership, as Borrowers, Boatmen's National Bank of Oklahoma, as
Agent and Lender, and First Tennessee Bank National Association, Liberty Bank and
Trust Company of Tulsa, National Association, Bank One, Texas, N.A., First National
Bank of Commerce, and AmSouth Bank of Alabama, as Lenders.
10.31 -- Amended and Restated Revolving Credit Agreement dated as of October 18, 1996 among the
Registrant and the Partnership, as Borrower, the Lenders party thereto, The Chase
Manhattan Bank, as Administrative Agent , and Wells Fargo Bank, National Association,
as Documentation Agent.
27 -- Financial Data Schedule