1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported)
JUNE 4, 1997 (February 1, 1997)
FELCOR SUITE HOTELS, INC.
(Exact name of registrant specified in its charter)
MARYLAND 0-24250 72-2541756
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) 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)
2
ITEM 5. OTHER EVENTS.
This Current Report on Form 8-K is filed to report 1997 acquisitions of
hotels and proposed acquisitions of hotels by FelCor Suites Limited
Partnership, a Delaware limited partnership (the Partnership), of which FelCor
Suite Hotels, Inc., a Maryland corporation (individually and collectively, the
"Company"), is its sole general partner.
RECENT ACQUISITIONS
From January 1, 1997 through May 16, 1997, the Company completed in five
separate transactions, the acquisition of interests in 16 hotels with 3,707
suites at an aggregate purchase price of approximately $216 million plus the
Company's prorata share of unconsolidated nonrecourse debt of $49.2 million.
On February 1, 1997, the Company acquired 50% partnership interests in
eight existing Embassy Suites(R) hotels located in Atlanta (Perimeter Center),
Georgia; Kansas City (Country Club Plaza), Missouri; Overland Park, Kansas;
Raleigh, North Carolina; San Antonio (Northwest), Texas; Austin (Airport
North), Texas; Covina, California; and Secaucus, New Jersey with a total of
1,934 suites for approximately $58 million, plus a 50% share of approximately
$86 million in existing non-recourse debt. A subsidiary of Promus Hotel
Corporation ("Promus") holds the remaining 50% partnership interests in these
hotels. The Company also acquired 100% ownership in two Embassy Suites hotels
located in Bloomington, Minnesota and Omaha, Nebraska with a total of 408
suites for approximately $39 million. These two hotels were subsequently
converted to Doubletree Guest Suites(R) hotels on May 1, 1997. The purchase of
the interests in these hotels was financed primarily from the proceeds of an
underwritten public offering of 3 million shares of Common Stock of the
Company, which resulted in net proceeds to the Company of approximately $100.7
million.
On February 18, 1997, the Company acquired the 215-suite Embassy Suites -
Los Angeles Airport (LAX North) hotel for approximately $22 million from a
Japanese-owned limited partnership which had filed for bankruptcy. The hotel
will remain an Embassy Suites hotel managed by Promus.
On February 21, 1997, the Company acquired the 198-suite Hilton Inn and
Suites (R) hotel in Dana Point, California for approximately $18 million. The
Dana Point hotel was converted to a Doubletree Guest Suites hotel in May 1997
and is managed by a subsidiary of Doubletree Hotels Corporation ("Doubletree").
On March 20, 1997, the Company acquired, through a 90% owned partnership,
interests in three Doubletree Guest Suites hotels, totaling 691 suites, located
in Troy, Michigan; Austin (Downtown), Texas; and near the Baltimore Washington
International (BWI) Airport, Maryland. The Company paid approximately $72
million for its 90% partnership interest and Doubletree paid approximately $8
million for its 10% limited partnership interest. Doubletree will continue to
manage the hotels.
On May 16, 1997, the Company acquired a 50% interest in the 261-suite San
Antonio (Airport), Texas Embassy Suites hotel for approximately $6.5 million in
cash and units of limited partnership interests ("Units") of the Partnership
plus a 50% share of approximately $12.4 million in existing nonrecourse debt.
A brief description of the hotels recently acquired follows:
Atlanta (Perimeter Center), Georgia. This ten-story, 241-suite Embassy Suites
hotel, is located in the Perimeter Office Park in Atlanta, Georgia. The hotel
opened in 1985.
Kansas City (Country Club Plaza), Missouri. This 12-story, 266-suite Embassy
Suites hotel, is located adjacent to the Country Club Plaza in Kansas City,
Missouri. This hotel, which was opened in 1976, is situated upon land leased
under a ground lease expiring in 2023, under which the ground lessor has an
option, exercisable in 2002, to purchase the hotel at its fair market value.
Overland Park, Kansas. This seven-story, 199-suite Embassy Suites hotel is
located in Overland Park, Kansas, a suburb of Kansas City, Missouri. The hotel
opened in 1984.
Raleigh, North Carolina. This nine-story, 225-suite Embassy Suites hotel is
located in Raleigh, North Carolina. The hotel opened in 1987.
2
3
San Antonio (Northwest), Texas. This eight-story, 217-suite Embassy Suites
hotel, is located near the intersection of Interstate Highways 10 and 410
(West) in San Antonio, Texas. This hotel, which was opened in 1979, is situated
upon land leased under a ground lease expiring in 2030, but under which lease
the lessee has an option exercisable in 2011 to purchase the land at fair
market value.
Austin (Airport North), Texas. This ten-story, 261-suite Embassy Suites hotel,
is located near Austin's Robert Mueller Airport, currently the principal airport
in Austin, Texas. The hotel opened in 1984.
Covina, California. This three-story, 264-suite Embassy Suites hotel is
located in Covina, California, near Ontario International Airport. The hotel
opened in 1980.
Secaucus, New Jersey. This nine-story, 261-suite Embassy Suites hotel, is
located in the Plaza in the Meadows in the Meadowlands area of Secaucus, New
Jersey. This hotel, which was opened in 1986, is leased under a ground lease
expiring in 2011, but under which the lessee has two consecutive ten-year
renewal options.
Bloomington, Minnesota. This eight-story, 219-suite Doubletree Guest Suites
hotel is located in Bloomington, Minnesota. The hotel opened in 1980.
Omaha, Nebraska. This six-story, 189-suite Doubletree Guest Suites hotel is
located in Omaha, Nebraska. The hotel opened in 1973.
Los Angeles (LAX Airport North), California. This 215-suite Embassy Suites
hotel is located near the Los Angeles International Airport in Los Angeles,
California. The hotel opened in 1990 and is situated on land leased pursuant to
a ground lease that expires in 2008, and in which the lessee has renewal
options through the year 2062. The hotel will continue to operate as an Embassy
Suites Hotel.
Dana Point, California. This 198-suite Doubletree Guest Suites hotel is readily
accessible from the Pacific Coast Highway and offers ocean views. The hotel
opened in 1992.
Troy, Michigan. This eight-story, 251-suite Doubletree Guest Suites hotel is
located in Troy, Michigan, close to major commercial centers and approximately
15 miles from downtown Detroit. The hotel opened in 1987.
Austin (Downtown), Texas. This 15-story, 189-suite Doubletree Guest Suites hotel
is located in downtown Austin, Texas, convenient to the central business
district, the Capitol and the historic Sixth Street entertainment district. The
hotel opened in 1987.
Baltimore/Washington International Airport (BWI), Washington. This eight-story,
251-suite Doubletree Guest Suites hotel is located in Anne Arundel County,
Maryland, approximately 1.5 miles from the Baltimore/Washington International
airport. The hotel opened in 1987.
3
4
San Antonio (Airport), Texas. This nine-story, 261-suite Embassy Suites hotel
is located in San Antonio, Texas and is located near the San Antonio
International Airport. The hotel was opened in 1985.
PROPOSED ACQUISITIONS
The Company has entered into letters of intent or agreements pursuant to
which it expects to acquire 11 hotels from four sellers ("Proposed
Acquisitions"). The Proposed Acquisitions are as follows:
SELLER HOTEL LOCATION BRAND PURCHASE PRICE
------ -------------- ----- --------------
ITT Sheraton Corporation Atlanta (Airport), Georgia Sheraton(R) $200 million
Atlanta (Galleria), Georgia Sheraton Suites(R)
Chicago (O'Hare), Illinois Sheraton Suites
Dallas (Park Central), Texas Sheraton
Phoenix, Arizona Sheraton
SELLER HOTEL LOCATION BRAND PURCHASE PRICE
------ -------------- ----- --------------
PSH Master L.P. I Lake Buena Vista (Disney World), Florida Doubletree Guest Suites $72.3 million
Raleigh/Durham, North Carolina Doubletree Guest Suites
Tampa (Rocky Point), Florida Doubletree Guest Suites
SELLER HOTEL LOCATION BRAND PURCHASE PRICE
------ -------------- ----- --------------
PC Development I L.P. Nashville (Airport), Tennessee Doubletree Guest Suites $10.8 million
SELLER HOTEL LOCATION BRAND PURCHASE PRICE
------ -------------- ----- --------------
Promus Hotels, Inc. Dallas (Market Center), Texas Embassy Suites $46.7 million
Syracuse, New York Embassy Suites
The proposed acquisitions from ITT Sheraton Corporation and Promus are
subject to normal due diligence and approvals. Additionally, the ITT Sheraton
transaction is contingent upon the proposed June 1997 common stock offering.
A brief description of the Proposed Acquisitions follows:
Atlanta (Airport), Georgia. This 12-story, 395-room Sheraton Gateway hotel is
located near Hartsfield International Airport in Atlanta, Georgia and was opened
in 1986. This hotel is attached to the Georgia International Convention Center.
Atlanta (Galleria), Georgia. This 17-story, 278-suite Sheraton Suites
hotel is located adjacent to the Cumberland Mall and Cobb Galleria Convention
Centre in Atlanta, Georgia. The hotel opened in 1990.
Chicago (O'Hare), Illinois. This 11-story, 297-suite Sheraton Suites hotel is
located in Rosemont, Illinois near Chicago's O'Hare International Airport. The
hotel opened in 1994.
Dallas (Park Central), Texas. This 20-story, 545-room Sheraton hotel is located
near the intersection of I-635 and U.S. 75 in Dallas, Texas. The hotel opened in
1983 and offers 28 meeting rooms with an aggregate of approximately 28,000 sq.
ft. of meeting space. The Grand Ballroom will accommodate up to 2,000 guests.
Phoenix, Arizona. This eight-story, 342-room Sheraton Crescent Hotel is located
adjacent to Metrocenter, one of Arizona's largest shopping and entertainment
complexes, in Phoenix, Arizona. The hotel opened in 1986. This hotel offers 17
meeting rooms with an aggregate of approximately 28,000 sq. ft. of meeting space
and can accommodate groups up to 1,000.
4
5
Lake Buena Vista (Disney World), Florida. This seven-story, 229-suite
Doubletree Guest Suites hotel, is located on the Walt Disney World property
and leased under a ground lease expiring in 2032, with renewal options through
the year 2057. The hotel opened in 1987.
Raleigh/Durham, North Carolina. This seven-story, 203-suite Doubletree Guest
Suites hotel is located within Research Triangle Park, Raleigh, North
Carolina. The hotel opened in 1987.
Tampa (Rocky Point), Florida. This seven-story, 203-suite Doubletree Guest
Suites hotel is located on Tampa Bay in the Rocky Point business district of
Tampa. The hotel opened in 1986.
Nashville (Airport), Tennessee. This three-story, 138-suite Doubletree Guest
Suites hotel is located near Century City Plaza and Highland Ridge office parks
and approximately two miles from Nashville International Airport. The hotel
opened in 1988.
Dallas (Market Center), Texas. This nine-story, 244-suite Embassy Suites Hotel,
is located near the World Trade Center, the Infomart and the garment district
of Dallas, Texas. The hotel was opened in 1980.
Syracuse, New York. This five-story, 215-suite Embassy Suites Hotel, is located
near the Syracuse central business district and Syracuse University in
Syracuse, New York. The hotel was opened in 1989.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Included on the index on page 8 are audited financial statements that
represent a majority of the individually insignificant acquisitions by the
Company from January 1, 1997 through May 16, 1997 and the Proposed
Acquisitions.
(b) PRO FORMA FINANCIAL INFORMATION.
The unaudited pro forma statements of operations of the Company and DJONT
Operations L.L.C. and subsidiaries (the "Lessee") are presented as if (i) the
acquisitions of all hotels owned by the Company at December 31, 1996; (ii) those
hotels acquired or expected to be acquired in 1997 (the "Acquisition Hotels")
(collectively the "Hotels"); (iii) equity offerings consummated during 1996 and
1997 including an anticipated equity offering in June 1997; and (iv) related
transactions, had occurred as of January 1, 1996 and all of the Hotels had
been leased to the Lessee pursuant to Percentage Leases. The unaudited pro
forma condensed consolidated balance sheet of the Company is presented as if
the acquisition of the Acquisition Hotels, the anticipated equity offering in
June 1997 and related transactions had occurred on March 31, 1997.
5
6
(c) EXHIBITS.
Exhibit
Number Description of Exhibit
- ------ ----------------------
1 Underwriting Agreement dated January 28, 1997, between the
Company and the Underwriters named therein.
23.1 Consent of Coopers & Lybrand, L.L.P.
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of Deloitte & Touche LLP
6
7
SIGNATURES
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 hereunto duly authorized.
Dated: June 4, 1997
FELCOR SUITE HOTELS, INC.
By: /s/ Lester C. Johnson
-----------------------------------------
Lester C. Johnson
Chief Accounting Officer
7
8
INDEX TO FINANCIAL STATEMENTS
The following represents (i) audits for the majority of the aggregate
individually insignificant acquisitions by FelCor Suites Limited Partnership
from January 1, 1997 through May 16, 1997 and the Proposed Acquisitions and (ii)
pro forma information as it relates to the Company and DJONT Operations, L.L.C.
PAGE
----
PROMUS/GE EPT COMBINED LIMITED PARTNERSHIP HOTELS
Combined audits on nine of the 10 hotels in which the Company acquired
or purchased partnership interests on February 1, 1997.
Report of Independent Public Accountants ...................................... 10
Combined Balance Sheets as of December 31, 1996 and 1995 (audited) ............ 11
Combined Statements of Operations for the Years Ended December 31, 1996
and 1995 (audited) ......................................................... 12
Combined Statements of Partners' Capital for the Years Ended December 31,
1996 and 1995 (audited) .................................................... 13
Combined Statements of Cash Flows for the Years Ended December 31, 1996
and 1995 (audited) ......................................................... 14
Notes to Combined Financial Statements ........................................ 15
EPT MEADOWLANDS LIMITED PARTNERSHIP HOTEL
Audit on one of the 10 hotels in which the Company acquired a
partnership interest on February 1, 1997.
Report of Independent Public Accountants ...................................... 21
Balance Sheets as of December 31, 1996 and 1995 (audited) ..................... 22
Statements of Income for the Years Ended December 31, 1996 and 1995
(audited) .................................................................. 23
Statements of Partners' Capital for the Years Ended December 31, 1996
and 1995 (audited) ......................................................... 24
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995
(audited) .................................................................. 25
Notes to Financial Statements ................................................. 26
AEW DOUBLETREE PORTFOLIO HOTELS
Combined audits on the three Doubletree hotels in which the Company
purchased 90% partnership interests on March 20, 1997.
Report of Independent Auditors ................................................ 30
Combined Balance Sheet as of December 31, 1996 (audited) ...................... 31
Combined Statement of Operations for the Year Ended December 31, 1996
(audited) .................................................................. 32
Combined Statement of Partners' Equity for the Year Ended December 31,
1996 (audited) ............................................................. 33
Combined Statement of Cash Flows for the Year Ended December 31, 1996
(audited) .................................................................. 34
Notes to Financial Statements ................................................. 35
PSH MASTER L.P. I HOTELS
Audits on three of the Doubletree hotels in which the Company
proposes to acquire.
Independent Auditors' Report .................................................. 39
Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and
1995 (audited) ............................................................. 40
Statements of Operations for the Three Months Ended March 31, 1997 and
1996 (unaudited) and the Years Ended December 31, 1996, 1995 and 1994
(audited) .................................................................. 41
Statements of Partners' Deficit for the Three Months Ended March 31, 1997
(unaudited) and the Years Ended December 31, 1996, 1995, 1994, and
1993 (audited) ............................................................. 42
Statements of Cash Flows for the Three Months Ended March 31, 1997 and
1996 (unaudited) and the Years Ended December 31, 1996, 1995 and 1994
(audited) .................................................................. 43
Notes to the Financial Statements ............................................. 44
8
9
DS Hotels
Audits on the two Embassy Suites hotels in which the Company proposes
to acquire.
Report of Independent Accountants ............................................. 50
Combined Balance Sheets as of December 31, 1996 (audited) and March 31, 1997
(unaudited) ................................................................... 51
Combined Statements of Revenues Over Expenses for the Year Ended
December 31, 1996 (audited) and the Three Months Ended March 31, 1997 and
1996 (unaudited) ........................................................... 52
Combined Statements of Equity for the Year Ended December 31, 1996 (audited)
and Three Months Ended March 31, 1997 (unaudited) .......................... 53
Combined Statements of Cash Flows for the Year Ended December 31, 1996
(audited) and the Three Months Ended March 31, 1997 and 1996 (unaudited) ... 54
Notes to Combined Financial Statements ........................................ 55
BARSHOP - HII JOINT VENTURE HOTEL
Audit on the San Antonio (Airport) Embassy Suites in which the Company
acquired a 50% partnership interest on May 16, 1997.
Report of Independent Public Accountants ...................................... 58
Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and
1995 (audited) ............................................................. 59
Statements of Income for the Three Months Ended March 31, 1997 and 1996
(unaudited) and the Years Ended December 31, 1996 and 1995 (audited) ....... 60
Statements of Partners' Deficit for the Years Ended December 31, 1996 and
1995 (audited) ............................................................. 61
Statements of Cash Flows for the Three Months Ended March 31, 1997 and
1996 (unaudited) and the Years Ended December 31, 1996 and 1995
(audited) .................................................................. 62
Notes to Financial Statements ................................................. 63
PRO FORMA INFORMATION
(UNAUDITED)
FelCor Suite Hotels, Inc. Pro Forma Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and the Year Ended
December 31, 1996 .......................................................... 67
FelCor Suite Hotels, Inc. Pro Forma Consolidated Balance Sheet --
March 31, 1997 ............................................................. 77
DJONT Operations, L.L.C. Pro Forma Condensed Consolidated Statements of
Operations for the Three Months Ended March 31, 1997 and the Year
Ended December 31, 1996 .................................................... 79
9
10
Report of Independent Public Accountants
To the Partners of EPT Atlanta Perimeter Center Limited Partnership,
EPT Austin Limited Partnership, EPT Bloomington Limited
Partnership, EPT Covina Limited Partnership, EPT Kansas City
Limited Partnership, EPT Omaha Limited Partnership, EPT
Overland Park Limited Partnership, EPT Raleigh Limited
Partnership and EPT San Antonio Limited Partnership:
We have audited the accompanying combined balance sheets of the partnerships
identified in Note 1 (Delaware limited partnerships, the "Partnerships"), as of
December 31, 1996 and 1995, and the related combined statements of operations,
partners' capital and cash flows for the years then ended. These combined
financial statements are the responsibility of the Partnerships' management.
Our responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Partnerships as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Memphis, Tennessee,
February 27, 1997.
10
11
PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS
COMBINED BALANCE SHEETS
AS OF DECEMBER 31
ASSETS 1996 1995
------ ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,854,623 $ 2,685,452
Accounts receivable, less allowances for doubtful accounts
of $27,822 and $23,323 1,192,936 1,427,619
Inventories, at cost 101,736 94,586
Prepaids and other 39,961 1,774,637
Restricted cash (Note 7) 473,052 --
------------- -------------
Total current assets 8,662,308 5,982,294
PROPERTY AND EQUIPMENT:
Land 15,013,281 15,013,281
Buildings and improvements 162,273,770 161,949,801
Furniture, fixtures and equipment 51,252,272 46,310,976
------------- -------------
228,539,323 223,274,058
Less accumulated depreciation (94,945,195) (82,969,215)
------------- -------------
133,594,128 140,304,843
OTHER ASSETS, net of amortization 1,770,281 98,873
------------- -------------
$ 144,026,717 $ 146,386,010
============= =============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 3,652,268 $ 4,579,673
Due to Promus Hotels, Inc. 108,168 408,452
Current portion of long-term debt (Note 3) 2,713,741 115,990,194
------------- -------------
Total current liabilities 6,474,177 120,978,319
LONG-TERM DEBT (Note 3) 112,625,000 13,685
COMMITMENTS AND CONTINGENCIES (NOTES 4, 5, 6, & 8) 418,399 336,474
PARTNERS' CAPITAL 24,509,141 25,057,532
------------- -------------
$ 144,026,717 $ 146,386,010
============= =============
The accompanying notes are an integral part of these combined balance sheets.
11
12
PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
1996 1995
----------- ------------
REVENUES:
Suites $57,210,445 $ 53,895,121
Food and beverage 240,764 304,872
Restaurant rental 496,039 464,642
Telephone 1,868,348 1,827,164
Interest income 233,616 304,068
Other 1,458,757 1,391,381
----------- ------------
61,507,969 58,187,248
----------- ------------
COSTS AND EXPENSES:
Suites 14,142,830 13,117,659
Food and beverage 276,587 321,429
Administrative and general 13,945,396 13,473,999
Telephone 710,371 685,888
Management fees 3,063,641 2,895,575
Taxes and insurance 2,616,734 3,385,603
Other 1,911,408 2,336,421
----------- ------------
Income before depreciation and amortization
and interest expense 24,841,002 21,970,674
Depreciation and amortization 11,975,980 11,388,667
Interest expense 10,707,169 11,656,550
----------- ------------
NET INCOME/(LOSS) $ 2,157,853 $ (1,074,543)
=========== ============
The accompanying notes are an integral part of these combined statements.
12
13
PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31
General Limited
Partners Partners Total
--------- ------------ ------------
BALANCE, December 31, 1994 $ 581,134 $28,637,060 $ 29,218,194
Net loss (21,491) (1,053,052) (1,074,543)
Contributions 77,181 3,781,891 3,859,072
Distributions (138,904) (6,806,287) (6,945,191)
--------- ----------- ------------
BALANCE, December 31, 1995 497,920 24,559,612 25,057,532
Net income 43,157 2,114,696 2,157,853
Contributions 406,894 19,882,508 20,289,402
Distributions (459,915) (22,535,731) (22,995,646)
--------- ----------- ------------
BALANCE, December 31, 1996 $ 488,056 $24,021,085 $ 24,509,141
========= =========== ============
The accompanying notes are an integral part of these combined statements.
13
14
PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
1996 1995
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,157,853 $ (1,074,543)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,975,980 11,388,667
Amortization of deferred financing costs 280,271 --
Loss on disposal of assets -- 41,693
Decrease (increase) in accounts receivable 234,683 (357,522)
Increase in inventories (7,150) (7,736)
Decrease (increase) in prepaids and other 1,734,676 (1,021,832)
Financing costs (1,951,679) --
Increase in restricted cash (473,052) --
(Decrease) increase in accounts payable and accrued
liabilities (927,405) 361,941
Increase (decrease) in deferred credits 81,925 (17,591)
Net change in due to Promus Hotels, Inc. (300,284) (77,383)
------------- ------------
Cash flows provided by operating activities 12,805,818 9,235,694
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,347,141) (7,512,074)
Retirement of property and equipment 81,876 95,940
------------- ------------
Cash flows used in investing activities (5,265,265) (7,416,134)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (116,665,138) (1,014,108)
Proceeds of long-term debt 116,000,000 --
Cash contributions from partners 20,289,402 3,859,072
Cash distributions to partners (22,995,646) (6,945,191)
------------- ------------
Cash flows used in financing activities (3,371,382) (4,100,227)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,169,171 (2,280,667)
Cash and cash equivalents at beginning of year 2,685,452 4,966,119
------------- ------------
Cash and cash equivalents at end of year $ 6,854,623 $ 2,685,452
============= ============
The accompanying notes are an integral part of these combined statements.
14
15
PROMUS HOTELS, INC. GE EPT COMBINED LIMITED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization-
Promus Hotels, Inc. GE EPT Combined Limited Partnerships (the "Partnerships")
consists of nine affiliated limited partnerships organized to acquire, own and
operate Embassy Suites Hotels (the "Hotels"). Promus Hotels, Inc. ("PHI") owns
a 49% limited partner interest and Suitelife, Inc., a subsidiary of PHI, owns a
1% general partner interest and serves as managing general partner. General
Electric Employee Pension Trust ("GE EPT") Hotel Equities, Inc. owns a 49%
limited partner interest and GE EPT Realty Group, an affiliate of GE EPT Hotel
Equities, Inc., owns a 1% general partner interest. PHI and Suitelife, Inc.
are collectively referred to as "Promus." GE EPT Hotel Equities, Inc. and GE
EPT Realty Group are collectively referred to as "EPT." The Hotels are as
follows:
EPT Atlanta Perimeter Center Limited Partnership, organized on December 3,
1987; operating in Atlanta, Georgia ("Atlanta Perimeter")
EPT Austin Limited Partnership, organized on July 11, 1986; operating in
Austin, Texas ("Austin")
EPT Bloomington Limited Partnership, organized on July 11, 1986; operating
in Bloomington, Minnesota ("Bloomington")
EPT Covina Limited Partnership, organized on July 11, 1986; operating in
Covina, California ("Covina")
EPT Kansas City Limited Partnership, organized on July 11, 1986; operating
in Kansas City, Missouri ("Kansas City")
EPT Omaha Limited Partnership, organized on July 11, 1986; operating in
Omaha, Nebraska ("Omaha")
EPT Overland Park Limited Partnership, organized on December 3, 1987;
operating in Overland Park, Kansas ("Overland Park")
EPT Raleigh Limited Partnership, organized on December 3, 1987; operating
in Raleigh, North Carolina ("Raleigh")
EPT San Antonio Limited Partnership, organized on July 11, 1986; operating
in San Antonio, Texas ("San Antonio")
Cash and Cash Equivalents-
Cash and cash equivalents includes short-term interest bearing accounts with
original maturities of 90 days or less.
Pervasiveness of Estimates-
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property and Equipment-
Property and equipment are stated at cost. Costs of normal repairs and
maintenance are expensed while major expenditures which extend the useful lives
of the assets are capitalized.
15
16
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Depreciation-
Provisions for depreciation are computed using the straight-line method over
the following average estimated useful lives:
Building and improvements 15-40 years
Furniture, fixtures and equipment 2-10 years
Other Assets-
Other assets consist primarily of unamortized deferred financing costs which
are being amortized over the term of the related debt (Note 3).
Deferred Credits-
Deferred credits represent unamortized deferred income on long-term contracts
with a third party provider of in-suite movie services. The credits are being
amortized into other revenues over the term of the related contracts.
Partners' Capital-
The Partnerships' Agreements provide that items of income or loss, with certain
defined exceptions, together with any contributions from or distributions to
partners, are to be allocated on the basis of the partners' percentage
ownership interests.
Revenue Recognition-
Suite revenue represents revenue derived from the rental of suites for the
hotels owned by the Partnerships.
Reclassifications-
Certain prior year balances have been reclassified to conform with the current
year presentation.
2. INCOME TAXES:
No provision is made in the accounts of the Partnerships for federal and state
income taxes, as such taxes are liabilities of the individual partners. The
Partnerships' income tax returns and the amount of allocable partnership
profits or losses are subject to examination by federal and state taxing
authorities. If such examinations result in changes to the partnership profits
or losses, the income tax liability of the partners may also change.
The accounting records of the Partnerships are maintained on the accrual basis
of accounting in accordance with generally accepted accounting principles. The
combined net income (loss) reflected in the accompanying statements of
operations differs from amounts reported in the Partnerships' federal income
tax returns (if combined) because of differences in accounting policies adopted
for financial and tax reporting purposes.
16
17
2. INCOME TAXES (Continued):
The table below reconciles the combined differences for the years ended
December 31:
1996 1995
----------- -----------
Net income (loss) in the accompanying statements of
operations $ 2,157,853 $(1,074,543)
Financial reporting depreciation greater than amount
deductible for federal income tax purposes 1,132,441 975,827
Timing of deductibility of property tax expense accrued
for financial reporting purposes (417,572) --
Disallowance of loss on involuntary
conversion for tax purposes 360 41,800
Other, net (65,485) 36,140
----------- -----------
Net loss for federal income tax reporting purposes $ 2,807,597 $ (20,776)
=========== ===========
3. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
1996 1995
------------- -------------
Notes payable, secured by a first
mortgage on substantially all property and
equipment of the respective Partnerships $ 115,325,000 $ 113,266,292
Unsecured note payable to Promus,
interest at 10% payable monthly,
balance due July 1, 1996 -- 2,708,011
------------- -------------
Total notes payable 115,325,000 115,974,303
Obligations under capital lease 13,741 29,576
------------- -------------
115,338,741 116,003,879
Less portion due within one year (2,713,741) (115,990,194)
------------- -------------
$ 112,625,000 $ 13,685
============= =============
The notes payable in 1995 to Aetna Life Insurance ("Aetna") matured on July 1,
1996. On July 2, 1996 the Partnerships refinanced the debt with new notes
payable of $116,000,000 with Credit Lyonnais (New York Branch), Societe
Generale (Southwest Agency), the Bank of New York, and Sumitomo Corporation.
The new notes payable mature on July 1, 2001. Under the new loan agreements,
the Partnerships make quarterly principal payments of $675,000. The notes
payable bear interest at a variable rate which averaged 7.95% in 1996.
17
18
3. LONG-TERM DEBT (Continued):
Based on the borrowing rates currently available to the Partnerships for bank
loans with similar terms and average maturities, management believes that the
related liability reflected in the accompanying balance sheet as of December
31, 1996, approximates fair market value.
Interest paid in 1996 and 1995 was $9,652,453 and $11,649,762, respectively.
Total future principal payments are scheduled to occur as follows:
Year Ending
December 31 Amount
----------- ------------
1997 $ 2,713,741
1998 2,700,000
1999 2,700,000
2000 2,700,000
2001 104,525,000
------------
$115,338,741
============
Raleigh Capital Lease-
Raleigh leases equipment under a capital lease which expires on March 31, 1997
with an imputed interest rate of 11.9%. The balance of the capital lease at
December 31 was $13,741. The Partnership, in accordance with the lease
agreement, has guaranteed the residual value of the equipment at the end of the
lease term. Included in the accompanying financial statements at December 31
are the following related to assets acquired under capital lease:
1996
--------
Furniture, fixtures and equipment $ 54,239
Less accumulated depreciation (48,212)
--------
$ 6,027
========
4. RESTAURANT RENTAL REVENUE:
All of the Partnerships, except Omaha and Overland Park, lease their
restaurants to third parties. Omaha's restaurant is operated by the Partnership
and managed by Promus. Overland Park's restaurant is managed by a third party
for which the net profits of the restaurant are paid as a management fee. The
terms of the related lease agreements are as follows:
Atlanta Perimeter - Variable monthly rentals equal 5% of gross restaurant
revenue through $1,000,000 and 10% thereafter, plus an additional 0.5% of
gross restaurant revenue each month, to be deposited to a reserve account
for repairs and supplies. The lease expires in October 2005.
Austin and San Antonio - Variable monthly rentals equal to 3% of manager
gross revenues. The leases expire in March 1999, with two 5 year renewals
at the lessee's option.
Bloomington - Variable monthly rentals equal 7% of gross sales, plus an
additional 1.5% for utilities. The lease expires in January 1998, with a 2
year renewal at the lessee's option.
Covina - Monthly rentals equal to the greater of 8% of annualized
restaurant revenue through $2,000,000, 10% through $2,500,000 and 12%
thereafter, or $12,500. The lease agreement also provides that $25,000
18
19
4. RESTAURANT RENTAL REVENUE (Continued):
in rentals shall be abated in each of the first and second years of the
lease term. The lease expires in September 1999, with two 5 year renewals
at the lessee's option.
Kansas City - Rentals are 8% of restaurant revenue; however, half of this
amount is recorded as revenue while the balance is applied toward
utilities. The lease expires in March 1999, with two 5 year renewals at
the lessee's option.
Raleigh - $5,000 fixed monthly rentals, plus $2,000 monthly for utilities;
the lease expires in March 1998, with a 2 year renewal at the lessee's
option.
5. COMMITMENTS:
Kansas City Land Lease-
The property on which the Hotel is located is subject to an operating lease
that expires on December 14, 2023, with a renewal option for two successive 25
year periods. The lease agreement provides for fixed monthly rentals, adjusted
annually for inflation. The adjusted total fixed rentals were $122,868 and
$119,856 in 1996 and 1995, respectively. The lease agreement also provides for
variable rentals due at the end of each year equal to 4% of new suites
revenues, as defined, less fixed rentals paid during the year. Total fixed and
variable rent expense was $295,952 and $274,530 in 1996 and 1995, respectively,
and is included in other expense.
San Antonio Land Lease-
The property on which the Hotel is located is subject to an operating lease
that expires on December 31, 2030. The lease agreement provides for monthly
variable rentals equal to 4% of the previous month's gross room revenues, as
defined. The related rent expense was $220,846 and $217,001 in 1996 and 1995,
respectively, and is included in other expense.
Atlanta Perimeter-
The Atlanta Perimeter Partnership is a member of the Crown Pointe Property
Owners Association, Inc. (the "Association"), which provides for maintenance of
the common areas shared by the Association members. Each member makes monthly
payments equal to the estimated operating expenses for the year. The related
expense was $138,709 and $151,311 in 1996 and 1995, respectively, and is
included in other expense.
6. RELATED PARTY TRANSACTIONS:
Management Fees-
The Hotels are managed by Promus, pursuant to management agreements with the
Partnerships. The terms of the management agreements provide for base
management fees equal to 5% of adjusted gross revenues, as defined. Incentive
management fees are due when operating levels of the Partnerships exceed a
specified amount. No incentive management fees were incurred in 1996 or 1995.
Marketing and Reservation Assessments-
The Partnerships paid a combined marketing and reservation assessment to Promus
equal to 3.5% of net suites revenue in 1996 and 1995. Total marketing and
reservation assessments incurred were $2,002,331 in 1996 and $1,886,318 in 1995
and are included in administrative and general expense.
19
20
6. RELATED PARTY TRANSACTIONS (Continued):
Operating Services-
Promus provided insurance coverage and various other services to the
Partnerships at a total cost of $1,378,813 and $1,504,430 in 1996 and 1995,
respectively.
Due to PHI-
In addition to the fees and services discussed above, the Partnerships
reimburse Promus for payroll and other operating costs paid by Promus on behalf
of the Partnerships.
7. RESTRICTED ASSETS:
The related debt agreements with Credit Lyonnais (New York Branch), Societe
Generale (Southwest Agency), The Bank of New York, and Sumitomo Corporation
specify that the Partnerships establish a reserve fund for those ordinary
capital replacements which are necessary to maintain and operate the Hotels in
accordance with operational standards of Promus. During 1996, this reserve was
funded through an initial deposit of $335,000 plus monthly deposits of an
amount equal to 4% of gross revenues, as defined. Withdrawals from this fund
are restricted to the purchase of capital replacements, alterations, additions
and improvements. At December 31, 1996, the Partnerships had a surplus in the
capital replacement reserve of $473,052.
8. SUBSEQUENT EVENTS:
On January 24, 1997 EPT Atlanta Perimeter Center Limited Partnership, EPT
Austin Limited Partnership, EPT Covina Limited Partnership, EPT Kansas City
Limited Partnership, EPT Meadowlands Limited Partnership, EPT Overland Park
Limited Partnership, EPT Raleigh Limited Partnership, and EPT San Antonio
Limited Partnership ( the "entities" ), and GE EPT, signed a Partnership
Interest Purchase Agreement with FelCor Suites Limited Partnership ("FelCor")
and FelCor/Eight Hotels, L.L.C.
As of February 1, 1997, EPT transferred to FelCor its entire limited
partnership interests in capital and 99.8% of its interests in profits in each
of the eight partnerships and transferred its entire general partner interest
to FelCor/Eight Hotels, L.L.C.
Promus entered into a ten year management agreement for each of the eight
hotels with DJONT Leasing, L.L.C. an affiliate of FelCor. The agreements call
for a basic management fee of 5% of adjusted gross revenues less 4% of suite
revenues. The agreement also calls for an incentive management fee of 50% of
eight combined hotel incomes before lessee's overhead expenses, up to a maximum
of 3% of the aggregate adjusted gross revenues for all eight of the hotels.
In addition, on February 1, 1997, Promus and EPT sold their interests in EPT
Bloomington Limited Partnership and EPT Omaha Limited Partnership to FelCor.
20
21
Report of Independent Public Accountants
To the Partners of
EPT Meadowlands Limited Partnership:
We have audited the accompanying balance sheets of EPT MEADOWLANDS LIMITED
PARTNERSHIP (a Delaware limited partnership) as of December 31, 1996 and 1995,
and the related statements of income, partners' capital and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EPT Meadowlands Limited
Partnership as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Memphis, Tennessee,
February 27, 1997.
21
22
EPT MEADOWLANDS LIMITED PARTNERSHIP
BALANCE SHEETS
AS OF DECEMBER 31
ASSETS 1996 1995
------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,405,541 $ 347,013
Accounts receivable, less allowance for doubtful
accounts of $5,000 290,253 347,889
Inventories, at cost 11,409 5,182
Prepaids and other 167,785 5,957
------------ ------------
Total current assets 1,874,988 706,041
PROPERTY AND EQUIPMENT:
Building and improvements 24,586,818 24,597,154
Furniture, fixtures and equipment 5,641,751 5,320,591
------------ ------------
30,228,569 29,917,745
Less accumulated depreciation (12,845,477) (10,970,512)
------------ ------------
17,383,092 18,947,233
OTHER ASSETS, net of amortization 48,195 51,700
------------ ------------
$ 19,306,275 $ 19,704,974
============ ============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 533,061 $ 470,589
Due to Promus Hotels, Inc. (Note 5) 48,274 48,804
Current portion of capital lease obligation (Note 3) 410,249 369,526
------------ ------------
Total current liabilities 991,584 888,919
CAPITAL LEASE OBLIGATION (Note 3) 13,157,305 13,567,555
COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 7) 51,113 64,162
PARTNERS' CAPITAL 5,106,273 5,184,338
------------ ------------
$ 19,306,275 $ 19,704,974
============ ============
The accompanying notes are an integral part of these combined balance sheets.
22
23
EPT MEADOWLANDS LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
1996 1995
----------- -----------
REVENUES:
Suites $ 9,815,893 $ 8,608,968
Telephone 387,242 381,359
Other 227,680 171,533
----------- -----------
10,430,815 9,161,860
COSTS AND EXPENSES:
Suites 2,663,312 2,356,332
Administrative and general 2,487,148 2,273,565
Telephone 119,766 139,707
Management fees 519,169 458,214
Taxes and insurance 706,975 632,941
Rent expense 207,416 167,100
Other 407,215 317,651
----------- -----------
Income before depreciation and amortization
and interest expense 3,319,814 2,816,350
Depreciation and amortization 1,874,965 1,912,397
Interest expense, net 1,429,164 1,454,179
----------- -----------
NET INCOME (LOSS) $ 15,685 $ (550,226)
=========== ===========
The accompanying notes are an integral part of these statements.
23
24
EPT MEADOWLANDS LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31
General Limited
Partners Partners Total
--------- ----------- -----------
BALANCE, December 31, 1994 $ 120,971 $ 5,927,477 $ 6,048,448
Contributions 9,848 482,547 492,395
Distributions (16,126) (790,153) (806,279)
Net loss (11,005) (539,221) (550,226)
--------- ----------- -----------
BALANCE, December 31, 1995 103,688 5,080,650 5,184,338
Distributions (1,875) (91,875) (93,750)
Net income 314 15,371 15,685
--------- ----------- -----------
BALANCE, December 31, 1996 $ 102,127 $ 5,004,146 $ 5,106,273
========= =========== ===========
The accompanying notes are an integral part of these statements.
24
25
EPT MEADOWLANDS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,685 $ (550,226)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,874,965 1,912,397
Amortization of deferred financing costs 3,505 3,505
Decrease (increase) in accounts receivable 57,636 (84,242)
Increase in inventories (6,227) (1,872)
(Increase) decrease in prepaids and other (161,828) 1,236
Increase (decrease) in accounts payable and accrued liabilities 62,472 (426,136)
(Decrease) increase in deferred credits (13,049) 64,162
Decrease in due to Promus Hotels, Inc. (530) (22,772)
----------- -----------
Cash flows provided by operating activities 1,832,629 896,052
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (310,824) (670,053)
Proceeds from sale of property and equipment -- 89,230
----------- -----------
Cash flows used in investing activities (310,824) (580,823)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of capital lease obligation (369,527) (329,958)
Cash contributions by partners -- 492,395
Cash distributions to partners (93,750) (806,279)
----------- -----------
Cash flows used in financing activities (463,277) (643,842)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,058,528 (328,613)
Cash and cash equivalents at beginning of year 347,013 675,626
----------- -----------
Cash and cash equivalents at end of year $ 1,405,541 $ 347,013
=========== ===========
The accompanying notes are an integral part of these statements.
25
26
EPT MEADOWLANDS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization-
EPT Meadowlands Limited Partnership (the "Partnership") was organized on
December 3, 1987, to acquire, own and operate an Embassy Suites Hotel (the
"Hotel") in Secaucus, New Jersey. Promus Hotels, Inc. ("PHI") owns a 49%
limited partner interest and Suitelife, Inc., a subsidiary of PHI, owns a 1%
general partner interest while serving as managing general partner. General
Electric Employee Pension Trust ("GE EPT") Hotel Equities, Inc. owns a 49%
limited partner interest and GE EPT Realty Group, an affiliate of GE EPT Hotel
Equities, Inc., owns a 1% general partner interest. PHI and Suitelife, Inc.
are collectively referred to as "Promus".
Cash and Cash Equivalents-
Cash and cash equivalents includes short-term interest bearing accounts with
original maturities of 90 days or less.
Pervasiveness of Estimates-
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property and Equipment-
Property and equipment are stated at cost. Costs of normal repairs and
maintenance are expensed while major expenditures which extend the useful lives
of the assets are capitalized.
Depreciation-
Provisions for depreciation are computed using the straight-line method over
the following average estimated useful lives:
Building and improvements 22 years
Furniture, fixtures and equipment 3-10 years
Other Assets-
Other assets consist primarily of unamortized deferred financing costs, which
are being amortized over the term of the related capital lease obligation (Note
3). The amortization of deferred financing costs has been included in interest
expense.
Deferred Credits-
Deferred credits consist of unamortized deferred income on a long-term contract
with a third party for in-suite movies. This deferred income is being
amortized into other revenues over the term of the related contract period.
26
27
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Partners' Capital-
The Partnership Agreement provides that items of income or loss, with certain
defined exceptions, together with any contributions from or distributions to
partners, are to be allocated on the basis of the partners' percentage
ownership interests.
Revenue Recognition-
Suites revenue represents revenue derived from the rental of suites for the
hotel owned by the Partnership.
Reclassifications-
Certain prior year balances have been reclassified to conform with the current
year presentation.
2. INCOME TAXES:
No provision is made in the accounts of the Partnership for federal and state
income taxes, as such taxes are liabilities of the individual partners. The
Partnership's income tax returns and the amount of allocable partnership
profits or losses are subject to examination by federal and state taxing
authorities. If such examinations result in changes to partnership profits or
losses, the income tax liability of the partners may also change.
The accounting records of the Partnership are maintained on the accrual basis
of accounting in accordance with generally accepted accounting principles. The
net income (loss) reflected in the accompanying statements of operations
differs from amounts reported in the Partnership's federal income tax return
because of differences in accounting policies adopted for financial and tax
reporting purposes.
The table below reconciles these differences for the years ended December 31:
1996 1995
----------- -----------
Net income (loss) in the accompanying statements
of operations $ 15,685 $ (550,226)
Financial reporting depreciation greater than amount
deductible for federal income tax purposes 1,240,888 1,292,370
Financial reporting amortization less than amount
deductible for federal income tax purposes (98,594) (98,594)
Interest expense on capital lease not deductible
for federal income tax purposes 1,431,032 1,467,394
Rent payments deductible for federal income
tax purposes (1,797,352) (1,797,352)
Other, net 134,866 (826)
----------- -----------
Net income for federal income tax reporting purposes $ 926,525 $ 312,766
=========== ===========
27
28
3. CAPITAL LEASE OBLIGATION:
The Partnership purchased its land and building and substantially all of its
furniture, fixtures and equipment pursuant to a capital lease expiring on
October 31, 2011. The lease provides for minimum fixed monthly rent of
$137,279, as well as minimum variable monthly rentals of $12,500. The variable
rent is 4% of gross suites revenue and 1% of food and beverage revenue. PHI
has agreed to pay any variable rent in excess of 3.5% of gross suites revenue.
All variable monthly rentals in excess of $12,500 are recorded as rent expense.
The Partnership recorded rent expense of $207,416 and $167,101 in 1996 and
1995, respectively, which is included in other expense in the accompanying
statements of operations. The interest portion of the minimum lease payments
was $1,427,826 and $1,467,394 in 1996 and 1995, respectively.
Future minimum lease payments under this lease agreement as of December 31,
1996, are as follows:
Year Ending
December 31 Amount
----------- ------------
1997 $ 1,797,352
1998 1,797,352
1999 1,797,352
2000 1,797,352
2001 1,797,352
Thereafter 17,536,682
------------
Total minimum lease payments 26,523,442
Amount representing interest (imputed at 10.5%) (12,955,888)
------------
Total obligations under capital lease 13,567,554
Obligations under capital lease due
within one year (410,249)
------------
Long-term obligations under capital lease $ 13,157,305
============
4. RESTAURANT RENTAL:
On April 1, 1994, the Hotel restaurant was leased to a third party, pursuant to
a ten-year lease agreement with one five-year renewal at the lessee's option.
In accordance with the lease agreement, no rental payments were due during the
first two years of the lease term. During 1996, the agreement was amended to
extend this provision until April 1, 1997. Thereafter, monthly rentals are
equal to 3% of restaurant gross revenues, as defined.
5. RELATED PARTY TRANSACTIONS:
Management Fees-
The Hotel is managed by PHI, pursuant to a management agreement with the
Partnership. The terms of the management agreement provide for a base
management fee equal to 5% of adjusted gross revenues, as defined. Incentive
management fees are due when operating levels of the Partnership exceed a
specified amount. No incentive management fees were earned in 1996 or 1995.
Marketing and Reservation Assessment-
The Partnership paid to Promus a combined marketing and reservation assessment
equal to 3.5% of net suites revenue in 1996 and 1995. Total marketing and
reservation assessments incurred were $343,543 in 1996 and $301,314 in 1995 and
are included in administrative and general expense.
28
29
5. RELATED PARTY TRANSACTIONS (Continued):
Operating Services-
Promus provided insurance coverage and various other services to the
Partnership at a total cost of $174,272 and $199,766 in 1996 and 1995,
respectively.
Due to Promus-
In addition to the fees and services discussed above, the Partnership
reimburses Promus for payroll and other operating costs paid by Promus on
behalf of the Partnership.
Cash Accounts Shared With Affiliates-
Prior to July 2, 1996, the Partnership shared a credit card depository account
and a short-term investment account with nine affiliated partnerships. Each
was accounted for on an individual partnership basis. Cash shortfalls were
funded from capital contributions, which were made through capital
distributions from affiliated partnerships with cash surpluses. During 1995,
the Partnership received $492,395 in contributions and made distributions of
$806,279. During 1996, no such contributions or distributions were made.
After July 1, 1996, the Partnership established a separate credit card
depository account and short-term investment account, and therefore no longer
shares the accounts with the nine affiliated partnerships.
6. RESTRICTED ASSETS:
The management agreement specifies that the Partnership establish a reserve
fund for ordinary capital replacements necessary to maintain and operate the
Hotel in accordance with operational standards of Promus. This reserve is
funded through monthly deposits of an amount equal to 3% of gross revenues, as
defined. Withdrawals from this fund are restricted to the purchase of capital
replacements, alterations, additions and improvements. At December 31, 1996,
the Partnership had made capital expenditures above the required level by
approximately $1,189,000, which was funded from operating cash.
The management agreement also specifies that the Partnership maintain a minimum
cash balance for working capital requirements. At December 31, 1996, the
amount of this required minimum balance was $200,000.
7. SUBSEQUENT EVENT:
On January 24, 1997, the Partnership, along with EPT, signed a Partnership
Interest Purchase Agreement with FelCor Suites Limited Partnership ("FelCor")
and FelCor/Eight Hotels, L.L.C.
As of February 1, 1997, GE EPT transferred its entire limited and general
partnership interest in capital and 99.8% of its interest in profits in the
Partnership, to FelCor. Promus entered into a ten-year management agreement
with the new partnership with DJONT Leasing, L.L.C., an affiliate of FelCor.
The agreement calls for a basic management fee of 5% of adjusted gross revenue
less 4% of suite revenues. The agreement also calls for an incentive
management fee of 50% of the combined partnership and seven affiliated hotel
partnership's hotel income before lessee's overhead expenses, up to a maximum
of 3% of the aggregate adjusted gross revenues to the Partnership and the seven
affiliated hotel partnerships.
29
30
Report of Independent Auditors
The Partners of AEW Doubletree Portfolio
We have audited the accompanying combined balance sheet as of December 31,
1996, of AEW Doubletree Portfolio, and the related combined statements of
operations, partners' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Partnerships' management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of AEW Doubletree
Portfolio at December 31, 1996, and the combined results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
February 7, 1997, except for Note 5
as to which the date is March 20, 1997
30
31
AEW DOUBLETREE PORTFOLIO
COMBINED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current assets
Cash and equivalents $ 2,027,641
Accounts receivable, net of an allowance of ($55,505) 948,121
Inventories 132,807
Prepaid expenses and other assets 259,929
------------
Total current assets 3,368,498
------------
Property and equipment (Note 3)
Land and land improvements 5,787,368
Building and improvements 41,740,011
Furniture, fixtures and equipment 8,994,138
------------
56,521,517
Less accumulated depreciation (4,677,104)
------------
51,844,413
Restricted cash 955,771
Deposits and other non-current assets 5,986
Organizational and deferred financing costs, net 1,187,616
------------
TOTAL ASSETS $ 57,362,284
============
LIABILITIES AND PARTNERS' EQUITY
Current liabilities
Accounts payable $ 1,101,777
Accrued expenses and other liabilities 1,531,541
Advance deposits 24,569
Current portion of long-term debt (Note 3) 750,765
------------
Total current liabilities 3,408,652
Long-term debt, less current portion (Note 3) 31,788,839
Commitments (Note 4)
PARTNERS' EQUITY 22,164,793
------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 57,362,284
============
See notes to financial statements.
31
32
AEW DOUBLETREE PORTFOLIO
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
REVENUES
Rooms $18,273,664
Food and beverage 5,954,564
Other 1,438,707
-----------
25,666,935
-----------
DIRECT DEPARTMENT EXPENSES
Rooms 4,268,135
Food and beverage 4,637,244
Other 662,357
-----------
9,567,736
-----------
GROSS OPERATING PROFIT 16,099,199
UNALLOCATED OPERATING EXPENSES
Administrative and general 2,295,619
Marketing 1,864,638
Energy costs 1,282,283
Property operation and maintenance 1,323,079
-----------
6,765,619
-----------
OPERATING INCOME 9,333,580
-----------
OTHER EXPENSES
Depreciation and amortization 3,521,014
Management fees (Note 4) 807,338
Property taxes and insurance 1,214,086
Owner's expense 82,883
-----------
Interest expense (Note 3) 2,080,571
-----------
7,705,892
-----------
NET INCOME $ 1,627,688
===========
See notes to financial statements.
32
33
AEW DOUBLETREE PORTFOLIO
COMBINED STATEMENT OF PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
Partners' equity, January 1, 1996 $ 46,032,222
Capital contributions 400,000
Distributions (25,895,117)
Net income 1,627,688
------------
Partners' equity, December 31, 1996 $ 22,164,793
============
See notes to financial statements.
33
34
AEW DOUBLETREE PORTFOLIO
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES
Net income $ 1,627,688
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 3,521,014
Changes in operating assets and liabilities:
Inventories 12,927
Accounts receivable 89,194
Prepaid expenses and other assets (59,172)
Deposits and other non-current assets 507,195
Accounts payable (491,031)
Accrued expenses and other liabilities 718,566
Advance deposits (37,028)
------------
Net cash provided by operating activities 5,889,353
------------
INVESTING ACTIVITIES
Decrease in restricted cash 247,317
Additions to property and equipment
Additions to property and equipment (2,755,045)
------------
Net cash used in investing activities (2,507,728)
------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 23,200,000
Additions to deferred financing costs (522,752)
Payments on long-term debt (625,733)
Additional capital contributions 400,000
Distributions (25,895,117)
------------
Net cash used in financing activities (3,443,602)
------------
Net decrease in cash and equivalents (61,977)
Cash and equivalents at beginning of year 2,089,618
------------
Cash and equivalents at end of year $ 2,027,641
============
Supplemental Schedule:
Interest Paid $ 2,013,475
============
See notes to financial statements.
34
35
AEW DOUBLETREE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
1. THE REPORTING ENTITY
The AEW Doubletree Portfolio (the Partnerships) is comprised of three
limited partnerships, each of which own a hotel property operating under a
Doubletree Guest Suites brand. B.D. Eastrich No. 1 Limited Partnership was
formed on December 21, 1994, under the laws of the Commonwealth of
Massachusetts, for the purpose of acquiring and operating the Austin,
Texas Doubletree Guest Suites hotel (Austin). B.D. Eastrich BWI No. 1
Limited Partnership and B.D. Eastrich Troy No. 1 Limited Partnership were
both formed on May 5, 1995, under the laws of the State of Delaware, for
the purpose of acquiring and operating the Baltimore/Washington
International Airport (BWI) and the Troy, Michigan (Troy) Doubletree Guest
Suites hotels.
The limited partner interests of the Partnerships are owned by AEW
Partners, L.P., a Delaware limited partnership. The general partner
interests of the Partnerships are owned by separate limited partnerships
or limited liability companies which are ultimately owned by AEW Partners,
L.P. AEW Partners, L.P. is treating these three partnerships as a separate
portfolio and therefore the reporting entity is the combined financial
statements of the Partnerships. All significant intercompany transactions
have been eliminated upon combination.
The financial statements exclude the results of operations and balances of
beverage sales at Austin. In accordance with Texas state law, the beverage
sales must be performed by an organization chartered domestically.
Austin consists of 189 guest rooms, a restaurant, a fitness center and
5,000 square feet of meeting space. BWI consists of 251 guest rooms, a
restaurant and lounge, a fitness center and 5,800 square feet of meeting
space. Troy consists of 251 guest rooms, a restaurant and lounge, a
fitness center and 5,800 square feet of meeting space.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND EQUIVALENTS
Cash consists of cash in interest bearing checking accounts. The
Partnerships consider all liquid investments with maturities of three
months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of real estate tax escrows as well as cash
reserved for future capital improvements relating to the Partnerships'
property and equipment.
INVENTORIES
Inventories, consisting primarily of food, beverage, and gift shop
merchandise are carried at the lower of cost or market using the first-in,
first-out method.
35
36
AEW DOUBLETREE PORTFOLIO
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
BUILDINGS AND IMPROVEMENTS
Buildings and improvements are stated at cost, and are depreciated using
the straight-line method over their estimated useful lives, generally 30
years.
FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures, and equipment are stated at cost, and depreciated
using the straight-line method over their estimated useful lives,
generally five years.
ORGANIZATIONAL AND DEFERRED FINANCING COST
Organizational and deferred financing costs are amortized using the
straight-line method over three years or the term of the related long-term
debt, respectively. Accumulated amortization at December 31, 1996 was
$951,673.
ADVERTISING
The Partnerships expense advertising cost as incurred. During 1996, the
Partnerships expensed $62,142 relating to advertising.
INCOME TAXES
Under provisions of the Internal Revenue Code, the Partnerships are not
taxable entities; accordingly, taxable income or losses are allocated to
the partners of each partnership for inclusion in their respective income
tax returns. No provision for income taxes has been included in the
accompanying financial statements.
USE OF ESTIMATES
The preparation of the combined financial statements 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.
3. LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of three mortgage notes
payable secured by all three hotel properties with a combined carrying
value of $51,844,413.
36
37
AEW DOUBLETREE PORTFOLIO
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
Mortgage note payable, bearing interest at
7.86%, amortized over 20 years, maturing October
10, 2000 at which time the remaining balance will
be approximately $8,760,000 $ 9,747,581
Mortgage note payable, bearing interest at
7.65%, amortized over 20 years, maturing March 10,
2001 at which time the remaining balance will be
approximately $9,350,000 10,524,851
Mortgage note payable, bearing interest at
LIBOR rate plus 2.08%, 7.53% at December 31, 1996,
amortized over 20 years, maturing April 1, 2001 at
which time the remaining balance will be
approximately $10,830,000 12,267,172
-----------
$32,539,604
===========
Principal payment requirements for the next five years are as follows:
1997 $ 750,765
1998 835,175
1999 903,166
2000 9,658,958
2001 20,391,540
-----------
$32,539,604
===========
4. COMMITMENTS
The hotel operations of each of the Partnerships are managed by Doubletree
Partners (Doubletree). Doubletree is currently managing the hotel
properties under management agreements (the Agreements) which expire
approximately ten years from the date of purchase. The Agreements provide
for a base management fee and an incentive management fee to Doubletree
based on a percentage of the Partnerships' gross revenues, or excess cash
flow, respectively, both as defined in the Agreements. In connection with
the Agreements, the Partnerships incurred management fees of $642,805 and
incentive management fees of $164,533 for the year ended December 31,
1996.
In addition, as defined in the Agreements, a Sale Termination Bonus is
required to be paid to Doubletree in the event that the net proceeds from
the sale, as defined, exceed the preferred return to the partners of the
Partnerships.
37
38
5. SUBSEQUENT EVENTS:
On March 20, 1997, the Partnership sold the three hotels for approximately
$80,100,000.
38
39
INDEPENDENT AUDITORS' REPORT
To the Partners of PSH Master L.P. I:
We have audited the accompanying balance sheets of PSH Master L.P. I (the
"Partnership") as of December 31, 1996 and 1995, and the related statements of
operations, partners' deficit, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our report dated February 14, 1997, we did not express an opinion on the
financial statements of the Partnership for the three years in the period ended
December 31, 1996 because the Partners' capital deficiency and uncertainty
regarding the Partnership's ability to make the final payment on the mortgage
loan on August 1, 1997 or refinance the debt raised substantial doubt about its
ability to continue as a going concern. As discussed in Note 12, on April 22,
1997 the Partnership entered into a purchase and sale agreement to sell all its
hotels. Accordingly, our present opinion on such financial statements, as
expressed herein, is different from our prior report on such financial
statements.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 12 to the
financial statements, on April 22, 1997, the Partnership entered into a purchase
and sale agreement to sell all of its hotels to FelCor Suites Limited
Partnership; the sales transaction, distribution of all net proceeds and
liquidation of the Partnership is contingent upon approval by the unit holders
of a majority of the outstanding units of the Partnership. Additionally, the
consummation of the sale is contingent upon the written approval by the land
lessor of one of the properties. These matters raise substantial doubt about
the Partnership's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 14, 1997
[except for Note 12
as to which the date is May 30, 1997]
39
40
PSH MASTER L.P. I
BALANCE SHEETS
MARCH 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
-------------- ----------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 2,760,593 $ 1,586,070 $ 579,253
Accounts receivable, trade ........................... 1,289,011 1,095,968 986,029
Inventories .......................................... 109,709 119,462 103,444
Prepaid expenses and other ........................... 484,882 401,083 335,179
Cash held in escrow .................................. 464,084 268,907 346,089
------------ ------------ ------------
Total current assets .......................... 5,108,279 3,471,490 2,349,994
------------ ------------ ------------
Property and equipment:
Land ................................................. 3,780,000 3,780,000 3,780,000
Leasehold interest in land ........................... 7,440,000 7,440,000 7,440,000
Hotels ............................................... 36,499,582 36,401,424 36,191,902
Furniture, fixtures and equipment .................... 12,189,070 12,139,268 11,104,168
------------ ------------ ------------
Total ......................................... 59,908,652 59,760,692 58,516,070
Less accumulated depreciation and amortization ....... (24,906,989) (24,367,593) (22,338,504)
------------ ------------ ------------
Total property and equipment, net ............. 35,001,663 35,393,099 36,177,566
------------ ------------ ------------
Other assets:
Replacement reserve fund ............................. 111 49,111 46,524
China, glass, linen and silver ....................... 781,590 781,590 781,590
Deferred financing fees, organization costs
and other, net .................................... 90,485 129,404 319,563
------------ ------------ ------------
Total other assets ............................ 872,186 960,105 1,147,677
------------ ------------ ------------
Total assets ............................................ $ 40,982,128 $ 39,824,694 $ 39,675,237
============ ============ ============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Current portion of mortgage notes payable ............ $ 45,422,230 $ 45,502,185 $ 273,979
Accounts payable ..................................... 963,305 1,542,608 1,739,648
Due to affiliates .................................... 65,859 43,212 37,442
Accrued expense:
Payroll and related taxes .......................... 725,200 524,870 342,265
Real estate and other taxes ........................ 421,378 115,370 95,671
Interest ........................................... 4,271 4,271
Other .............................................. 373,992 172,103 171,966
------------ ------------ ------------
Total current liabilities ..................... 47,976,235 47,904,619 2,660,971
------------ ------------ ------------
Note payable ............................................ 500,000 500,000 500,000
Mortgage notes payable, less current portion ............ 45,528,387
------------ ------------ ------------
Partners' Deficit:
General Partner - 1% interest ........................ (256,551) (263,067) (267,409)
Limited Partners - 99% interest
(3,110,000 units authorized and outstanding) ...... (7,237,556) (8,316,858) (8,746,712)
------------ ------------ ------------
Total partners' deficit .......................... (7,494,107) (8,579,925) (9,014,121)
------------ ------------ ------------
Total liabilities and partners' deficit ....... $ 40,982,128 $ 39,824,694 $ 39,675,237
============ ============ ============
The accompanying notes are an integral part of these financial statements.
40
41
PSH MASTER L.P. I
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ----------- ------------ ------------
(UNAUDITED)
Revenues:
Suites ............................. $5,949,641 $5,127,145 $19,271,365 $ 16,917,194 $ 16,141,594
Other .............................. 1,522,132 1,448,676 5,413,438 4,970,035 4,641,074
---------- ---------- ----------- ------------ ------------
Total revenues .............. 7,471,773 6,575,821 24,684,803 21,887,229 20,782,668
---------- ---------- ----------- ------------ ------------
Operating costs and expenses:
Direct operating:
Suites ........................... 1,108,388 1,005,767 4,105,760 3,686,203 3,356,235
Other ............................ 982,111 966,185 3,842,769 3,534,968 3,367,423
Other operating:
Sales, general and administrative 1,421,402 1,330,259 5,131,917 4,743,202 4,536,546
Energy and maintenance ........... 532,590 493,039 2,140,891 1,995,534 1,910,640
Rents, taxes and other ........... 527,444 528,829 1,971,428 1,809,115 1,920,839
Partnership administrative ....... 68,877 55,852 164,885 160,520 144,180
Depreciation and amortization ... 578,316 552,063 2,219,247 1,977,413 1,888,789
---------- ---------- ----------- ------------ ------------
Total operating costs and
expenses ........ 5,219,128 4,931,994 19,576,897 17,906,955 17,124,652
---------- ---------- ----------- ------------ ------------
Income from operations ................ 2,252,645 1,643,827 5,107,906 3,980,274 3,658,016
Interest income ....................... 13,276 23,813 66,346 18,465 22,376
Interest expense ...................... 1,180,103 1,187,862 4,740,056 4,769,181 4,753,485
---------- ---------- ----------- ------------ ------------
Net income (loss) ..................... $1,085,818 $ 479,778 $ 434,196 $ (770,442) $ (1,073,093)
========== ========== =========== ============ ============
Net income (loss) per unit of
limited partnership interest ..... $ 0.35 $ 0.15 $ 0.14 $ (0.25) $ (0.34)
========== ========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
41
42
PSH MASTER L.P. I
STATEMENTS OF PARTNERS' DEFICIT
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ----------- -----------
Deficit balance, December 31, 1993 ............... $(248,974) $(6,921,612) $(7,170,586)
Net loss ...................................... (10,731) (1,062,362) (1,073,093)
--------- ----------- -----------
Deficit balance, December 31, 1994 ............... (259,705) (7,983,974) (8,243,679)
Net loss ...................................... (7,704) (762,738) (770,442)
--------- ----------- -----------
Deficit balance, December 31, 1995 ............... (267,409) (8,746,712) (9,014,121)
Net income .................................... 4,342 429,854 434,196
--------- ----------- -----------
Deficit balance, December 31, 1996 ............... (263,067) (8,316,858) (8,579,925)
Net income (unaudited) ........................... 6,516 1,079,302 1,085,818
--------- ----------- -----------
Deficit balance, March 31, 1997 (unaudited) ...... $(256,551) $(7,237,556) $(7,494,107)
========= =========== ===========
The accompanying notes are an integral part of these financial statements.
42
43
PSH MASTER L.P. I
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- -----------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Cash provided (used) by operations:
Net income (loss) ................................... $ 1,085,819 $ 479,778 $ 434,196 $ (770,442) $(1,073,093)
Changes not requiring cash:
Depreciation and amortization .................... 578,316 552,063 2,219,247 1,977,413 1,888,789
Working capital changes:
(Increase) decrease in accounts receivable,
trade ........................................... (193,043) (520,965) (109,939) 76,856 (249,664)
Increase in inventories, prepaid expenses
and other ...................................... (74,046) (39,499) (81,922) (146,544) (46,272)
Increase (decrease) in accounts payable
and accrued expenses ........................... 128,924 (155,367) 5,401 417,034 9,980
Increase (decrease) in accrued interest payable .. 4,271 4,271 (403,639) 93,889
Increase (decrease) in due to affiliates ......... 22,647 20,296 5,770 (727) 3,492
----------- ----------- ----------- ----------- -----------
Cash provided by operations ...................... 1,548,617 340,577 2,477,024 1,149,951 627,121
----------- ----------- ----------- ----------- -----------
Financing and capital transactions:
Guaranty payments from General Partner .............. 47,535 41,589 53,475
Proceeds from notes payable ......................... 500,000
Payments of mortgages ............................... (79,955) (72,198) (300,181) (369,512) (223,389)
----------- ----------- ----------- ----------- -----------
Cash (used) provided by financing and
capital transactions .............................. (79,955) (72,198) (252,646) (327,923) 330,086
----------- ----------- ----------- ----------- -----------
Investment and other transactions:
(Increase) decrease in replacement reserve fund ..... 49,000 (164,862) (2,587) 657,766 (331,199)
Increase in china, glass, linen and silver .......... (1,866)
(Increase) decrease in cash escrow
for real estate taxes ............................ (195,177) (197,400) 77,182 (158,950) 13,141
Additions to property and equipment ................. (147,962) (101,479) (1,292,156) (1,046,723) (991,477)
----------- ----------- ----------- ----------- -----------
Cash used by investment and other transactions ...... (294,139) (463,741) (1,217,561) (547,907) (1,311,401)
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ....... $ 1,174,523 $ (195,362) $ 1,006,817 $ 274,121 $ (354,194)
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information --
cash paid for interest .............................. $ 1,180,103 $ 1,189,746 $ 4,735,783 $ 5,172,820 $ 4,659,596
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
43
44
NOTES TO THE FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying financial statements of PSH Master L.P. I (the
Partnership) have been prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Partnership incurred net losses from inception through 1995.
However, in 1996 the Partnership realized net income of $434,196. Net losses
for the years 1995 and 1994 were ($770,442) and ($1,073,093), respectively. The
Partnership had a partners' deficit of ($8,597,925) at December 31, 1996.
The final payment on the Partnership's real estate mortgage notes due on
August 1, 1997 (see Note 7), the accumulated Partners' deficits and the
uncertainty of the Partnership's ability to refinance the first mortgage debt
on maturity, raise substantial doubt about the Partnership's ability to
continue as a going concern for a reasonable period of time. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Partnership be unable to
continue as a going concern. The General Partner is presently in discussion
with potential buyers of all three hotels. The General Partner believes
that the hotels can be sold or refinanced prior to the maturity of the existing
mortgage debt. To sell all three hotels within a twelve-month period, the
General Partner must seek the approval from the holders of a majority of the
Units of Limited Partnership Interest (see Note 12).
(2) BANKRUPTCY OF GENERAL PARTNER
On February 1, 1991, PC Development Limited Partnership, the General
Partner, along with one of its general partners and two affiliated
corporations, filed for protection from creditors under Chapter 11 of the U.S.
Bankruptcy Code. On December 30, 1991, the debtors filed a Joint Plan of
Reorganization and Disclosure Statement and, on April 19, 1992, the court
confirmed the Plan.
An unsecured claim in the amount of $5,038,658 was filed in the bankruptcy
case on behalf of the Partnership due to the General Partner's default under
the Performance and Break-even Guaranty (the Guaranty Agreement). Total
payments received to date by the Partnership against its unsecured claim total
$757,870. The Partnership expects to receive total payments of approximately
$2,000,000, including amounts previously received. This amount includes
operating profits and sale proceeds from a hotel owned by the General Partner.
Due to the remaining variables in the Plan, however, there are no assurances as
to the actual amount to be received. The Plan also provides that PC
Development Limited Partnership will continue as the General Partner of the
Partnership.
(3) ORGANIZATION AND BUSINESS
The Partnership is a Delaware limited partnership formed on April 3, 1987.
The Partnership will continue in existence until the close of Partnership
business on December 31, 2037, or until its earlier termination in accordance
with the provisions of the Amended and Restated Agreement of Limited
Partnership (the Partnership Agreement).
On July 23, 1987, the Partnership received the net proceeds of an initial
public offering of 3,110,000 Units of Limited Partner Interest representing
gross offering proceeds of $31,100,000. On July 30, 1987, the Partnership
purchased from its General Partner the Tampa hotel and the Disney hotel. On
December 15, 1987, the Partnership purchased and opened the Raleigh/Durham
hotel.
The Partnership is a party to a Management Agreement with Doubletree to
operate and manage the hotels. The Management Agreement expires on December
29, 2011 with two consecutive ten year renewal options. The Partnership pays a
base management fee of 4.75% of hotel revenues. Doubletree assessed the
properties three and one-half percent of total departmental revenues for
national advertising during 1994 and four percent of room revenues for national
44
45
advertising and centralized reservation services in 1995. Effective January 1,
1996, Doubletree assessed the properties three and one-half percent of room
revenues for national advertising and centralized reservation services. Other
centralized services such as accounting are provided by Doubletree to the
Partnership's properties based upon each hotel's share of such costs.
(4) SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Partnership's significant accounting policies are as follows:
Inventories:
Inventories, consisting principally of food and beverages, are valued at
the lower of cost (first-in, first-out) or market.
Property and equipment:
The initial purchase price allocation to land, leasehold interest in land,
hotels, and furniture, fixtures and equipment was based upon independent
appraisals obtained in connection with the public offering. Any cash payments
made by the General Partner pursuant to its Guaranty Agreement (see Notes 2, 9,
and 10) are recorded as a reduction in the purchase price originally allocated
to the hotels. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives or lease terms, as
follows:
Leasehold interest in land--initial lease life of 45 years; hotels--45
years; furniture, fixtures and equipment--3, 5, and 10 years.
China, glass, linen and silver:
A portion of the initial purchase price was allocated to china, glass,
linen and silver for the amounts on-hand on the date of acquisition. The base
stock method of accounting is used whereby the cost of maintaining and
replenishing the base stock is expensed as incurred.
Deferred financing fees and organization costs:
Deferred financing fees are amortized over the life of the related loans
and credit agreements using the straight- line method. Organization costs are
amortized over five years using the straight-line method. Such fees and costs
are net of accumulated amortization of $1,570,798 and $1,380,640 at December
31, 1996 and December 31, 1995, respectively.
Self-Insurance Program:
The Partnership uses a retrospective self-insurance plan for workers'
compensation. A provision has been made in the financial statements, based on
information currently available, which represents the expected future payments
based on the estimated ultimate cost for incidents incurred prior to the
balance sheet dates. Encompassed in this provision are refundable workers'
compensation deposits which result from deposit payments made in excess of the
estimated ultimate cost expected to be incurred.
45
46
Cash and cash equivalents:
The Partnership considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash is primarily
held in one bank.
(5) REPLACEMENT RESERVE FUND
As required under current debt agreements the Partnership funded
replacement reserves based upon revenue percentages of 2% for the Tampa and
Raleigh/Durham hotels and 3% for the Disney hotel during 1995, and 1994.
Beginning in 1996 replacement reserves were calculated at 4% of revenues at all
three hotels. During the years ended December 31, 1996, 1995 and 1994,
$990,026, $526,745, and $503,104 respectively, were reserved to fund capital
improvements.
(6) LEASES
The land for the Disney hotel is leased by the Partnership under an
operating lease, the initial term of which expires March 11, 2032, with a
renewal option for an additional period of 25 years. The Partnership pays
annual rent based upon specified percentages of suite, food and beverage, and
other hotel revenues, subject to a $100,000 minimum annual rent. Rent is
computed and paid quarterly. Rent expense under this lease was $726,177 in
1996, $596,269 in 1995, and $592,453 in 1994.
(7) REAL ESTATE MORTGAGE NOTES
The nonrecourse notes in the original aggregate amount of $43,300,000 are
secured by the first mortgages on the hotels, including the ground lease at the
Disney hotel. In February, 1991, the lender applied $2,000,000 of the General
Partner's funds, previously held in escrow, against the principal balance of
the notes. On May 26, 1993, the Partnership modified certain terms of the
mortgage loan documents. Accordingly, during 1993 unpaid interest accruing in
the aggregate amount of $4,876,267 was added to the principal balance of the
mortgage computed at the contract rate of 10.25%. Additionally, the
Partnership borrowed $219,000 during 1993 to pay for closing costs incurred
with the modifications. Beginning in February, 1994 interest was payable at an
annual rate of 10.25% of $41,300,000 (original loan balance). During 1994,
1995 and 1996, the Partnership made monthly payments of principal and interest
on the outstanding principal of $46,395,267 based upon a 30-year amortization
schedule. A final payment, which will include principal of $45,502,185 and
interest, is due on August 1, 1997. The lender will also receive 25% of the
net proceeds, as defined, at the sale of the hotels, or 25% of the net proceeds
based upon market value if the hotels are not sold prior to the maturity of the
loan, as appreciation interest.
The Partnership is subject to prepayment penalties at all times except on
the interest adjustment date and during the last three months of the loan term.
Any future subordinate financing to be secured by all or any of the hotels is
subject to the lender's prior consent.
Due to the Partnership's current financial condition and excessive cost,
assessment of the fair value was determined to be impracticable.
(8) NOTE PAYABLE
On October 26, 1994, the Partnership borrowed $500,000 from Doubletree for
capital improvements. This nonrecourse note is secured by second mortgages on
the hotels and is due at the termination of the management agreement with
Doubletree (see Note 3). Interest is computed at 10.25% payable monthly in
arrears and payment is equal to the lesser of the monthly computed interest due
or monthly available cash flow from the Partnership.
46
47
Due to the Partnership's current financial condition and excessive cost,
assessment of the fair value was determined to be impracticable.
(9) RELATED PARTIES
The General Partner, an affiliate, is generally empowered by the
Partnership Agreement to conduct, direct and exercise full control over all
activities of the Partnership.
Total fees charged by Doubletree to the Partnership for management,
advertising, reservation and accounting services were $2,151,820, $1,793,723
and $1,919,253 during 1996, 1995 and 1994, respectively. Nuho Company, a
successor to PH Management Company (a previous management company) pursuant to
the bankruptcy plan, received residual management fees of $579,078, $515,669,
and $487,783 during 1996, 1995, and 1994, respectively. These fees were used
by Nuho Company to fund required payments to the creditors in the bankruptcy,
including the Partnership.
(10) PARTNERSHIP DISTRIBUTIONS AND ALLOCATIONS
Pursuant to the terms of the renegotiated debt, the Partnership is
precluded from making cash distributions to the partners until such time as the
interest capitalized by the lender (see Note 7) has been repaid. This is not
expected to occur prior to the maturity of the first mortgage loans on August
1, 1997.
Cash flow available for distribution will be distributed 99 percent to the
Unitholders and 1 percent to the General Partner until the Unitholders have
received cash distributions sufficient to provide a 10 percent (11 percent for
the fiscal years 1987 through 1990) non-compounded, cumulative return on the
weighted average balances of the net invested capital (originally $31,100,000
in the aggregate) outstanding during such year. Any remaining cash flow
available for distribution in excess of the foregoing amounts will be
distributed 15 percent to the General Partner and 85 percent to the
Unitholders, until the General Partner has received an amount equal to 10
percent of all cash flow available for distribution which has been distributed
and, thereafter, 90 percent to the Unitholders and 10 percent to the General
Partner.
Sale or refinancing proceeds, net of any appreciation interest due the
lender (see Note 7), will be distributed 99 percent to the Unitholders and 1
percent to the General Partner until the Unitholders have received (from all
prior distributions of cash, regardless of source) a 10 percent non-compounded,
cumulative return on their weighted average net invested capital and a return
of their net invested capital balances. Any remaining sale or refinancing
proceeds will be distributed 70 percent to the Unitholders and 30 percent to
the General Partner.
Distributions resulting from a liquidation of the Partnership will be paid
to the Partners in accordance with their positive capital account balances
after such balances have been adjusted to reflect allocations of taxable income
and taxable loss.
For federal income tax purposes, taxable income, whether from operations or
the sale of a hotel, is allocated first to restore any deficit balances of the
General Partner and Unitholders on a proportionate basis. Unitholders and the
General Partner are then allocated taxable income 99 percent and 1 percent,
respectively, (to the extent of cash distributions in this ratio) until the
Unitholders have been allocated an amount equal to their net invested capital
plus a 10 percent (11 percent for fiscal years 1987 through 1990)
non-compounded, cumulative return on the weighted average balances of the net
invested capital outstanding plus all prior distributions to the Unitholders of
sale or refinancing proceeds. Thereafter, taxable income is allocated in the
same proportions as and to the extent of distributions of cash.
For federal income tax purposes, taxable loss, whether from operations or
the sale of a hotel, is allocated first to the extent of previously allocated
taxable income in excess of distributions of cash and, thereafter, 99 percent
to the Unitholders and one percent to the General Partner, except that the
General Partner shall receive a special loss allocation
47
48
to the extent of its cash payments pursuant to the Guaranty Agreement.
Unitholders of record on the last day of each month will be allocated the
proportionate share of income or loss for that entire month.
Cash payments made by the General Partner pursuant to its Guaranty
Agreement have been recorded as a reduction of the purchase price of the
hotels. Accordingly, net property and equipment has been reduced by
$10,469,829, reflecting $12,477,870 in payments by the General Partner net of
accumulated depreciation of $2,008,041, through December 31, 1996. The equity
accounts of the Limited Partners and the General Partner reflect a 99 percent
and 1 percent allocation, respectively, of cumulative losses through December
31, 1996.
(11) INCOME TAXES
Partnership taxable income or loss is allocated to the Partners according
to the Partnership Agreement for inclusion in the determination of their
taxable income. Accordingly, the accompanying financial statements include no
provision for income taxes. The Partnership has considered statement of
Financial Accounting Standard Number 109 "Accounting for Income Taxes" and,
given the cumulative operating losses, has concluded that this standard has no
impact on the Partnership's current financial statements.
The net income for 1996, as reported on the Partnership's federal tax
return was $535,339. The net losses for 1995 and 1994, as reported on the
Partnership's federal tax return were ($701,970) and ($1,934,790),
respectively, and differ from the net losses as reported in the accompanying
financial statements primarily due to the difference between tax and book
depreciation charges. This difference is due principally to cash payments made
by the General Partner pursuant to its Guaranty Agreement (See Note 2) being
recorded as a capital contribution for tax purposes versus a reduction in net
property and equipment for financial reporting purposes and different
depreciation lives for tax and book purposes. The net income/(losses) for tax
purposes allocable to the Unitholders during 1996, 1995, and 1994 were $331,167
or $.11 per unit, ($653,778) or ($.21) per unit, and ($1,862,502) or ($.60)
per unit, respectively.
Under the Revenue Act of 1987, the Partnership's interest income is taxable
to its Partners in the current year as portfolio income while the loss from
operations for tax purposes is suspended. This suspended loss can only be used
to offset future taxable income of the Partnership or can be recognized by a
partner upon a complete disposition of his interest in the Partnership. The
provision of the Revenue Act of 1987 which taxes publicly traded partnerships
as corporations does not apply to PSH Master L.P. I until 1998.
The Revenue Act of 1987 included a provision which will treat
publicly-traded partnerships, such as the Partnership, as corporations for
Federal income tax purposes beginning January 1, 1998. The effect of treating
publicly-traded partnerships as corporations will be to tax the income of the
partnership at the entity level and reflect distributions to partners as
dividends. Additional costs to the Partnership for such taxes would reduce the
amount available for distribution to the partners.
(12) SUBSEQUENT EVENTS
On April 22, 1997 the Partnership entered into a purchase and sale
agreement to sell all its hotels to FelCor Suites Limited Partnership, an
affiliate of FelCor Suite Hotels, Inc. for $64,800,000. FelCor Suite Hotels,
Inc., located in Irving, Texas, is one of the largest publicly-traded hotel
REITs.
The sale, which is expected to occur before the end of July, will
result in the liquidation of PSH Master L.P. I and a distribution to unit
holders of all net proceeds. The sales transaction, distribution of all net
proceeds and liquidation of the Partnership is contingent upon approval by the
unit holders of a majority of the outstanding units of the Partnership.
Additionally the consummation of the sale is contingent upon the written
approval by the land lessor of the property at Lake Buena Vista, Florida.
FelCor's board of directors has already approved the transaction.
48
49
(13) INTERIM INFORMATION (UNAUDITED)
The interim condensed combined financial statements are unaudited but, in
the opinion of management, reflect all adjustments necessary for a fair
presentation of the results of operations and financial position for such
periods. All such adjustments reflected in the interim condensed financial
statements are considered to be of a normal recurring nature. The results of
operations for any interim period are not necessarily indicative of results for
the full year. These financial statements should be read in conjunction with
the financial statements and notes thereto for the year ended December 31,
1996.
49
50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
FelCor Suite Hotels, Inc.
We have audited the accompanying combined balance sheet of the DS Hotels
(described in Note 1) as of December 31, 1996 and the related combined
statements of revenues over expenses, equity, and cash flows for the year then
ended. These combined financial statements are the responsibility of the
management of the DS Hotels. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the DS Hotels.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial position of
the DS Hotels as of December 31, 1996 and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
June 2, 1997
50
51
DS HOTELS
COMBINED BALANCE SHEETS
December 31, 1996 and March 31, 1997 (unaudited)
ASSETS December 31, March 31,
1996 1997
------------ ------------
(unaudited)
Investments in hotel properties, at cost:
Land $ 2,871,387 $ 2,871,387
Buildings and improvements 28,902,645 28,918,213
Furniture and equipment 15,010,788 15,323,609
------------ ------------
46,784,820 47,113,209
Less accumulated depreciation (15,308,559) (16,078,049)
------------ ------------
Net investment in hotel properties 31,476,261 31,035,160
Cash and cash equivalents 145,186 93,224
Accounts receivable, net 382,241 466,984
Inventories 54,694 50,518
Prepaid expenses 94,664 158,789
Other assets 96,990 96,052
------------ ------------
Total assets $ 32,250,036 $ 31,900,727
------------ ------------
LIABILITIES AND EQUITY
Accounts payable, trade, accrued expenses and other liabilities 1,159,083 802,501
------------ ------------
Commitments and contingencies (Note 3)
Equity 31,090,953 31,098,226
------------ ------------
Total liabilities and equity $ 32,250,036 $ 31,900,727
------------ ------------
The accompanying notes are an integral part of these combined financial
statements.
51
52
DS HOTELS
COMBINED STATEMENTS OF REVENUES OVER EXPENSES
for the year ended December 31, 1996 and the three-month periods ended March
31, 1997 and 1996 (unaudited)
Year Ended Three Months Ended
December 31, March 31,
1996 1997 1996
------------ ---------- ----------
(unaudited) (unaudited)
Revenues:
Suite revenue $ 13,287,778 $3,343,079 $3,270,182
Restaurant rent 42,099 10,572 15,826
Other revenue 735,410 184,368 186,039
------------ ---------- ----------
Total revenue 14,065,287 3,538,019 3,472,047
------------ ---------- ----------
Expenses:
Property and operating costs and expenses 3,447,437 850,045 834,778
General and administrative 1,016,047 229,218 247,002
Franchise fees 222,888 53,431 48,257
Advertising and promotion 1,119,819 265,905 293,367
Repairs and maintenance 746,984 194,053 186,963
Utilities 769,858 204,503 206,109
Management fee 701,785 176,250 173,179
Net food and beverage loss (profit) (60,725) 30,956 4,215
Depreciation 3,014,474 769,490 731,255
Real estate and personal property taxes,
and insurance 987,406 267,321 244,303
Other expense 114,033 27,356 25,202
------------ ---------- ----------
Total expenses 12,080,006 3,068,528 2,994,630
------------ ---------- ----------
Revenues over expenses $ 1,985,281 $ 469,491 $ 477,417
------------ ---------- ----------
The accompanying notes are an integral part of these
combined financial statements.
52
53
DS HOTELS
COMBINED STATEMENTS OF EQUITY
for the year ended December 31, 1996
Balance, December 31, 1995 $ 32,435,255
Revenues over expenses 1,985,281
Net distributions (3,329,583)
------------
Balance, December 31, 1996 31,090,953
Revenues over expenses (unaudited) 469,491
Net distributions (unaudited) (462,218)
------------
Balance, March 31, 1997 (unaudited) $ 31,098,226
------------
The accompanying notes are an integral part of these
combined financial statements.
53
54
DS HOTELS
COMBINED STATEMENTS OF CASH FLOWS
for the year ended December 31, 1996 and the three-month periods ended March
31, 1997 and 1996 (unaudited)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1997 1996
----------- --------- ---------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Revenues over expenses $ 1,985,281 $ 469,491 $ 477,417
Adjustments to reconcile revenues over expenses to
net cash provided by operating activities:
Depreciation and amortization 3,014,474 769,490 731,255
Changes in assets and liabilities:
Accounts receivable (101,102) (84,743) (223,803)
Inventories (798) 4,176 (310)
Prepaid expenses (5,439) (64,125) (66,083)
Other assets 382 938 (1,871)
Accounts payable, trade, accrued expenses and
other liabilities (200,598) (356,582) (387,553)
----------- --------- ---------
Net cash provided by operating activities 4,692,200 738,645 529,052
----------- --------- ---------
Cash flows used in investing activities:
Additions to property, plant and equipment (1,359,771) (328,389) (478,221)
----------- --------- ---------
Cash flows used in financing activities:
Net distributions paid (3,329,583) (462,218) (33,401)
----------- --------- ---------
Net increase (decrease) in cash 2,846 (51,962) 17,430
Cash and cash equivalents at beginning of periods 142,340 145,186 142,340
----------- --------- ---------
Cash and cash equivalents at end of periods $ 145,186 $ 93,224 $ 159,770
----------- --------- ---------
The accompanying notes are an integral part of these
combined financial statements.
54
55
DS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements of the Embassy Suites hotel
in Dallas, TX and the Embassy Suites hotel in Syracuse, NY (collectively
the "DS Hotels" or the "Hotels") have been presented on a combined basis
because the hotels are expected to be the subject of a business combination
with FelCor Suite Hotels, Inc. (the "Company"), a Maryland corporation
established to acquire equity interests in existing hotel properties. The
Hotels are owned by Promus Hotel Corporation or its wholly-owned
subsidiaries (collectively "Promus"). All significant intercompany
balances and transactions have been eliminated.
These financial statements have been prepared to show the operations and
financial position of the Hotels, substantially all of whose assets and
operations will be acquired by the Company. The Hotels are included in
Promus' consolidated Federal tax return. Taxes are allocated to
subsidiaries by Promus based upon the separate company accrual method,
however, any benefits from losses are retained by Promus and not passed
down to its subsidiaries. The Company has qualified as a REIT and does not
pay any federal income taxes. Accordingly, the combined financial
statements have been presented on a pretax basis.
The accompanying unaudited interim combined financial statements as of
March 31, 1997 and 1996 have been prepared pursuant to the rules and
regulations of the S.E.C. These financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation of
the interim combined financial statements. All such adjustments are of a
normal and recurring nature.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS IN HOTEL PROPERTIES
The hotel properties are stated at cost. Depreciation is computed using
the straight-line method based upon the following estimated useful lives:
Years
Buildings and improvements 25-40
Furniture and equipment 3-15
The owner of the DS Hotels reviews the carrying value of each property to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel property or that depreciation periods should be
modified. If facts or circumstances support the possibility of impairment, the
owner of the Hotels will prepare a projection of the undiscounted future cash
flows, without interest charges, of the specific hotel property and determine
if the investment in hotel property is recoverable based on the undiscounted
future cash flows. The owner of the Hotels does not believe that there are any
factors or circumstances indicating impairment of any of its investment in
hotel properties.
55
56
DS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INVESTMENT IN HOTEL PROPERTIES, CONTINUED
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of
a fixed asset, the asset and related accumulated depreciation are removed
from the accounts, and the gain or loss is included in operations.
CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
INVENTORIES
Inventories, consisting predominately of room linens and foods and
beverages, are stated at the lower of cost (generally, first-in, first-out)
or market.
REVENUE RECOGNITION
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the
portion of accounts receivable which is estimated to be uncollectible.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, trade receivables, other
assets, accounts payable and amounts included in accruals meeting the
definition of a financial instrument approximate fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. COMMITMENTS AND CONTINGENCIES
Promus does not typically obtain franchise agreements or charge franchise
fees for its owned and managed properties. However, due to a past
ownership arrangment, no longer in place, the Syracuse hotel is operating
under the terms of a hotel franchise agreement expiring in 1999. As the
hotel is owned by the franchisor, Promus, fees are only paid for
reservation and advertising services and are computed as 4% of gross room
revenue.
56
57
DS HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
3. COMMITMENTS AND CONTINGENCIES, CONTINUED
Certain equipment is leased under noncancelable operating lease agreements
expiring at varying intervals through March 2002. Minimum future rental
payments required under these leases as of December 31, 1996 are as
follows:
1997 $ 39,605
1998 47,388
1999 37,757
2000 35,999
2001 35,999
Thereafter 9,000
----------
$ 205,748
----------
Rent expense was approximately $84,000 for the year ended December 31,
1996.
4. RELATED PARTY TRANSACTIONS
As discussed in Note 3, the Hotels are owned and operated by the owner of
the franchise under which they operate. All franchise fees are paid to an
affiliate of the owner.
Management fees are paid to Embassy Suites, Inc., an affiliated Company,
and are generally computed as 5% of total revenue for the periods
presented.
In 1996, Promus provided insurance coverage and other services to the Hotels
at a cost of $366,544, which is included in the Statement of Revenues
Over Expenses.
57
58
Report of Independent Public Accountants
To the Partners of
Barshop - HII Joint Venture:
We have audited the accompanying balance sheets of BARSHOP - HII JOINT VENTURE
(a Texas joint venture) as of December 31, 1996 and 1995, and the related
statements of income, partners' deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Joint
Venture's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Barshop - HII Joint Venture as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Memphis, Tennessee,
May 16, 1997.
58
59
BARSHOP - HII JOINT VENTURE
BALANCE SHEETS
AS OF
(UNAUDITED)
MARCH 31, 1997 DECEMBER 31,
-------------- ------------------------------
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 882,830 $ 616,550 $ 319,938
Accounts receivable, less allowance for
doubtful accounts of $2,000 144,449 167,346 173,143
Inventories, at cost 12,008 12,008 11,787
Prepaids and other 2,335 1,885 1,835
Restricted cash (Note 7) 358,530 266,611 114,464
------------ ------------ ------------
Total current assets 1,400,152 1,064,400 621,167
Property and equipment, at cost:
Land 2,107,275 2,107,275 2,107,275
Building and improvements 11,059,204 11,064,078 11,117,923
Furniture, fixtures and equipment 8,158,859 8,035,252 7,393,192
------------ ------------ ------------
21,325,338 21,206,605 20,618,390
Less accumulated depreciation (10,008,890) (9,789,254) (8,838,718)
------------ ------------ ------------
11,316,448 11,417,351 11,779,672
Other assets, net of amortization 252,770 257,285 162,069
------------ ------------ ------------
$ 12,969,370 $ 12,739,036 $ 12,562,908
============ ============ ============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 480,683 $ 363,742 $ 471,119
Due to Promus Hotels, Inc. (Note 6) 198,933 180,901 153,813
Current portion of long-term debt (Note 3) 478,570 478,570 585,041
------------ ------------ ------------
Total current liabilities 1,158,186 1,023,213 1,209,973
Long-term debt (Note 3) 12,007,695 12,123,657 11,884,843
Deferred credits 102,660 109,837 51,113
Commitments and Contingencies (Notes 6 and 9)
Partners' deficit (299,171) (517,671) (583,021)
------------ ------------ ------------
$ 12,969,370 $ 12,739,036 $ 12,562,908
============ ============ ============
The accompanying notes are an integral part of these statements.
59
60
BARSHOP - HII JOINT VENTURE
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, DECEMBER 31,
------------------------- -------------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
Revenues:
Suite $1,881,630 $1,812,326 $7,234,741 $6,990,450
Telephone 71,080 63,064 245,261 247,951
Other 54,887 36,456 190,867 165,935
---------- ---------- ---------- ----------
2,007,597 1,911,846 7,670,869 7,404,336
Costs and expenses:
Suites 433,615 427,852 1,797,701 1,790,352
Administrative and general 466,037 462,067 1,885,155 1,687,321
Telephone 25,150 19,552 78,627 79,786
Management fees 114,676 111,900 430,767 365,534
Taxes and insurance 132,881 140,032 483,599 508,431
Other 52,234 107,003 196,810 275,116
---------- ---------- ---------- ----------
Income before depreciation and
amortization and interest expense 783,004 643,440 2,798,210 2,697,796
Depreciation and amortization 219,636 238,445 950,536 1,094,289
Interest expense, net 256,519 275,892 1,106,788 1,050,026
---------- ---------- ---------- ----------
Net Income $ 306,849 $ 129,103 $ 740,886 $ 553,481
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
60
61
BARSHOP - HII JOINT VENTURE
STATEMENTS OF PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31
PMB PROMUS
ASSOCIATES HOTELS, INC. TOTAL
---------- ------------ -----------
Balance, December 31, 1994 $(564,002) $(564,002) $(1,128,004)
Net income 276,740 276,741 553,481
Contributions 195,751 195,751 391,502
Distributions (200,000) (200,000) (400,000)
--------- --------- -----------
Balance, December 31, 1995 (291,511) (291,510) (583,021)
Net income 370,443 370,443 740,886
Contributions 225,066 225,066 450,132
Distributions (562,834) (562,834) (1,125,668)
--------- --------- -----------
Balance, December 31, 1996 $(258,836) $(258,835) $ (517,671)
========= ========= ===========
The accompanying notes are an integral part of these statements.
61
62
BARSHOP - HII JOINT VENTURE
STATEMENTS OF CASH FLOWS
UNAUDITED
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, DECEMBER 31,
--------------------------- -----------------------------
1997 1996 1996 1995
--------- ------------ ------------ -----------
Cash flows from operating activities:
Net income $ 306,849 $ 129,103 $ 740,886 $ 553,481
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 219,636 238,445 950,536 1,094,289
Amortization of deferred financing costs 4,515 25,752 39,291 38,628
Increase in restricted cash (91,919) (136,031) (152,147) (109,404)
Decrease (increase) in accounts receivable 22,897 (148,067) 5,797 (6,771)
Increase in inventories -- -- (221) (1,103)
(Increase) decrease in prepaids and other (450) (29,706) (50) 999
Financing costs -- (111,156) (134,507) (136,319)
Increase (decrease) in accounts payable
and accrued liabilities 116,941 (19,166) (107,377) (126,567)
Increase (decrease) in due to Promus
Hotels, Inc. 18,032 114,991 27,088 (92,221)
Increase (decrease) in deferred credits (7,177) (3,263) 58,724 (13,050)
--------- ------------ ------------ -----------
Cash flows provided by operating
activities 589,324 60,902 1,428,020 1,201,962
--------- ------------ ------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (118,733) (161,735) (588,215) (540,971)
--------- ------------ ------------ -----------
Cash flows from financing activities:
Principal payments on long-term debt (115,962) (12,469,884) (12,767,657) (947,357)
Principal proceeds -- 12,900,000 12,900,000 --
Distributions to partners (88,349) -- (1,125,668) (400,000)
Contributions from partners -- -- 450,132 391,502
--------- ------------ ------------ -----------
Cash flows provided by (used in)
financing activities (204,311) 430,116 (543,193) (955,855)
--------- ------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents 266,280 329,283 296,612 (294,864)
Cash and cash equivalents at beginning of period 616,550 319,938 319,938 614,802
--------- ------------ ------------ -----------
Cash and cash equivalents at end of period $ 882,830 $ 649,221 $ 616,550 $ 319,938
========= ============ ============ ===========
The accompanying notes are an integral part of these statements.
62
63
BARSHOP - HII JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization-
Barshop - HII Joint Venture (the "Joint Venture") was formed on January 17,
1984, in the state of Texas, for the purpose of constructing, owning and
operating an Embassy Suites Hotel (the "Hotel") in San Antonio, Texas.
The venture partners are Promus Hotels, Inc. ("PHI") and PMB Associates
("PMB"), each owning a 50% interest in the Joint Venture. The Hotel is managed
by PHI, in accordance with the terms of the joint venture and management
agreements.
Cash and Cash Equivalents-
Cash and cash equivalents includes short-term interest bearing accounts with
original maturities of 90 days or less.
Pervasiveness of Estimates-
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property and Equipment-
Property and equipment are stated at cost. Costs of normal repairs and
maintenance are expensed while major expenditures which extend the useful lives
of the assets are capitalized.
Depreciation-
Provisions for depreciation are computed using the straight-line method over
the following average estimated useful lives:
Building and improvements 40 years
Furniture, fixtures and equipment 3-10 years
Other Assets-
Other assets consist of deferred financing costs and a loan commitment fee. The
deferred financing costs are being amortized over the term of the related debt.
The loan commitment fee is a deposit with a financial institution to secure the
loan for refinancing the Joint Venture's debt (Note 3). The amortization of
deferred financing costs has been included in interest expense.
63
64
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Deferred Credits-
Deferred credits consist of unamortized deferred income on a long-term contract
with a third party for in-suite movies. This deferred income is being
amortized into other revenues over the term of the related contract period.
Revenue Recognition-
Suites revenue represents revenue derived from the rental of suites for the
hotel owned by the Joint Venture.
Reclassifications-
Certain prior year balances have been reclassified to conform with the current
year presentation.
2. INCOME TAXES:
No provision has been made in the accounts of the Joint Venture for federal and
state income taxes, as such taxes are liabilities of the individual partners.
The Joint Venture's income tax returns and the amount of allocable profits or
losses are subject to examination by federal and state taxing authorities. If
such examinations result in changes to joint venture profits or losses, the
income tax liability of the partners may also change.
The accounting records of the Joint Venture are maintained on the accrual basis
of accounting in accordance with generally accepted accounting principles. The
net income reflected in the accompanying statements of income differs from
amounts reported in the Joint Venture's federal income tax returns because of
differences in accounting policies adopted for financial and tax reporting
purposes.
The table below reconciles the differences for the years ended December 31:
1996 1995
---------- -----------
Net income in the accompanying statements
of income $ 740,886 $ 553,481
Financial reporting depreciation greater than
amount deductible for federal income tax reporting 195,378 671,417
Other, net 68,579 (2,489)
---------- -----------
Net income for federal income tax reporting
purposes $1,004,843 $ 1,222,409
========== ===========
3. LONG-TERM DEBT:
The mortgage loan payable is secured by substantially all of the Joint
Venture's property and equipment. On March 20, 1996, the mortgage loan
payable, scheduled to mature on September 1, 1996, was refinanced. The new
maturity date is April 11, 2011. Under the new agreement, the Joint Venture
makes monthly principal and interest payments of $125,448. The interest rate
on the loan is 8.29% per annum.
64
65
Total future principal payments on long-term debt are scheduled to occur as
follows:
Year Ending
December 31 Amount
----------- ----------
1997 $ 478,570
1998 519,786
1999 564,551
2000 613,173
2001 665,981
Thereafter 9,760,166
-----------
$12,602,227
===========
Interest paid in 1996 and 1995 was $1,072,485 and $1,039,142, respectively.
4. PARTNERS' DEFICIT:
The Joint Venture Agreement provides that the allocation of profits or losses
and cash distributions of the Joint Venture shall be made in proportion to the
Joint Venture partners' respective ownership interests.
5. RESTAURANT OPERATIONS:
An affiliate of PHI operates the Hotel's restaurant. No rent is required under
this agreement.
The restaurant operator provides services for the Hotel's complimentary
breakfast and bar and is reimbursed by the Joint Venture for such costs.
Complimentary breakfast and bar costs are included in suites expense. The
affiliate is also paid a surcharge equal to 50% of complimentary bar costs.
The surcharge totaled $50,252 and $55,846 in 1996 and 1995, respectively, and
is included in other expenses.
6. RELATED PARTY TRANSACTIONS:
Management Fees-
The Joint Venture entered into a management agreement with PHI to manage the
operations of the Hotel. The Joint Venture pays PHI a base management fee
equal to 4% of adjusted gross suites revenue, as defined, and an incentive
management fee equal to 25% of annual distributable cash flow, as defined.
Base management fees of $294,824 and $279,613 were incurred in 1996 and 1995,
respectively. Incentive management fees of $135,943 and $85,921 were incurred
in 1996 and 1995, respectively.
Marketing and Reservation Assessment-
The Joint Venture paid a combined marketing and reservation assessment to PHI
equal to 3.5% of net suites revenue in 1996 and 1995. Total marketing and
reservation assessments incurred were $253,212 in 1996 and $244,662 in 1995 and
are included in administrative and general expense.
Operating Services-
PHI provided insurance coverage and various other services to the Joint Venture
at a total cost of $210,643 and $222,914 in 1996 and 1995, respectively.
65
66
6. RELATED PARTY TRANSACTIONS (Continued):
Due to PHI-
In addition to the fees and services discussed above, the Joint Venture
reimburses PHI for payroll and other operating costs paid by PHI on behalf of
the Joint Venture.
7. RESTRICTED ASSETS:
The management agreement specifies that the Joint Venture establish a cash
reserve for those ordinary capital replacements which are necessary to maintain
and operate the Hotel in accordance with the operational standards of PHI.
This reserve is funded through monthly deposits of an amount equal to 5% of
adjusted gross revenues as defined in the management agreement. Withdrawals
from this fund are restricted to the purchase of capital replacements,
alterations, additions and improvements. At December 31, 1996, the Joint
Venture had made capital expenditures above the required level by approximately
$183,000, which were funded by partner contributions.
The management agreement specifies that the Joint Venture maintain a minimum
cash balance for working capital requirements. At December 31, 1996, the
amount of this required minimum balance was approximately $250,000.
Under the mortgage loan agreement, the Joint Venture is required to make
monthly deposits into an escrow account of an amount sufficient to permit the
payment of property taxes on the property. Disbursements can only be made from
this account to pay property taxes. At December 31, 1996, the amount in the
escrow account was $266,611.
8. UNAUDITED INTERIM FINANCIAL INFORMATION:
The interim financial information presented in the accompanying financial
statements do not include all information and notes necessary for complete
financial statements in conformity with generally accepted accounting
principles. The results for the periods presented are unaudited, but in
management's opinion, reflect all adjustments (consisting only of normal
recurring adjustments) deemed necessary for a fair presentation of operating
results. Results of operations for interim periods are not necessarily
indicative of a full year of operations.
9. SUBSEQUENT EVENT:
On May 16, 1997 PMB sold its interest in the Joint Venture to FelCor Suites
Limited Partnership.
66
67
FELCOR SUITE HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The following unaudited Pro Forma Consolidated Statements of Operations of
FelCor Suite Hotels, Inc. (the "Company") are presented as if the acquisitions
of all hotels owned by the Company at December 31, 1996, those hotels acquired
or expected to be acquired in 1997 (collectively the "Hotels"), the equity
offerings consummated during 1996 and 1997, including the proposed June 1997
equity offering and related transactions had occurred as of January 1, 1996 and
the Hotels had all been leased to DJONT Operations, L.L.C. or consolidated
subsidiaries (the "Lessee") pursuant to Percentage Leases. Such pro forma
information is based in part upon the Consolidated Statements of Operations of
the Company, Pro Forma Statements of Operations of DJONT Operations, L.L.C.
(the "Lessee") and the historical Statements of Operations of the Proposed
Acquisitions. In management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.
The following unaudited Pro Forma Consolidated Statements of Operations
for the periods presented are not necessarily indicative of what actual results
of operations of the Company would have been assuming such transactions had
been completed on January 1, 1996, nor does it purport to represent the results
of operations for future periods.
YEAR ENDED DECEMBER 31, 1996
----------------------------
PRO FORMA ADJUSTMENTS
------------------------------------
1996 ACQUISITIONS 1997 ACQUISITIONS
HISTORICAL AND PREFERRED AND EQUITY
COMPANY STOCK OFFERING(A) OFFERINGS(B) TOTAL
-------- ----------------- ----------------- --------
Statement of Operations Data:
Revenues:
Percentage lease revenue (C) ..................... $ 97,950 $ 12,127 $59,636 $169,713
Income from unconsolidated partnerships (D) ...... 2,010 805 308 3,123
Other income (E) ................................. 984 (984)
-------- -------- ------- --------
Total revenues ................................. 100,944 11,948 59,944 172,836
-------- -------- ------- --------
Expenses:
General and administrative (F) ................... 1,819 76 1,408 3,303
Depreciation (G) ................................. 26,544 4,559 13,604 44,707
Taxes, insurance and other (H) ................... 13,897 1,292 8,767 23,956
Interest expense (I) ............................. 9,803 6,100 8,287 24,190
Minority interest in Operating Partnership (J) ... 5,590 (417) 1,135 6,308
Minority interest in other partnerships (K) ...... 236 236
-------- -------- ------- --------
Total expenses ................................. 57,653 11,610 33,437 102,700
-------- -------- ------- --------
Net income ............................................ 43,291 338 26,507 70,136
Preferred dividends (L) ............................... 7,734 4,064 11,798
-------- -------- ------- --------
Net income applicable to common shareholders (M) ...... $ 35,557 $ (3,726) $26,507 $ 58,338
======== ======== ======= ========
Net income per common share (M) ....................... $ 1.54 $ 1.66
======== ========
Weighted average number of common shares
outstanding ...................................... 23,076 35,237
======== ========
67
68
FELCOR SUITE HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------
PRO FORMA 1997
HISTORICAL ACQUISITIONS AND
COMPANY EQUITY OFFERINGS TOTAL
------- --------------- -------
Statement of Operations Data:
Revenues:
Percentage lease revenue (C) ....................... $35,370 $ 14,259 $49,629
Income from unconsolidated partnerships (D) ........ 1,127 (285) 842
Other income (E) ................................... 95 (95)
------- -------- -------
Total revenues ................................... 36,592 13,879 50,471
------- -------- -------
Expenses:
General and administrative (F) ..................... 972 100 1,072
Depreciation (G) ................................... 10,417 2,755 13,172
Taxes, insurance and other (H) ..................... 5,207 2,188 7,395
Interest expense (I) ............................... 5,601 1,696 7,297
Minority interest in Operating Partnership (J) ..... 1,417 211 1,628
Minority interest in other partnerships (K) ........ 21 88 109
------- -------- -------
Total expenses ................................... 23,635 7,038 30,673
------- -------- -------
Net income .............................................. 12,957 6,841 19,798
Preferred dividends (L) ................................. 2,949 2,949
------- -------- -------
Net income applicable to common shareholders (M) ........ $10,008 $ 6,841 $16,849
======= ======== =======
Net income per common share (M) ......................... $ 0.39 $ 0.47
======= =======
Weighted average number of common shares outstanding .... 25,459 35,526
======= =======
68
69
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents pro forma adjustments to reflect the historical results of
operations prior to the acquisition by the Company for those hotels
acquired by the Company in 1996 as adjusted to give effect to the
provisions of the Percentage Leases; the effect of the preferred stock
offering prior to the date issued in May 1996; and other pro forma
adjustments reflecting additional overhead expenses and interest expenses.
Those hotels acquired during 1996 and the dates of acquisition are as
follows:
Anaheim, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Baton Rouge, Louisiana, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Birmingham, Alabama, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Deerfield Beach, Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Ft. Lauderdale, Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Miami (Airport), Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Milpitas, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Phoenix (Camelback), Arizona, Embassy Suites . . . . . . . . . . . . . . . . . . . . . January 3, 1996
South San Francisco, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . January 3, 1996
Lexington, Kentucky, Hilton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 10, 1996
Piscataway, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . January 10, 1996
Beaver Creek (Avon-Vail), Colorado, Embassy Suites . . . . . . . . . . . . . . . . . . February 20, 1996
Boca Raton, Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . February 28, 1996
LAX (El Segundo), California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . March 27, 1996
Mandalay, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . May 8, 1996
Napa, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . . May 8, 1996
Deerfield, Illinois, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . June 20, 1996
San Rafael (Marin County), California, Embassy Suites . . . . . . . . . . . . . . . . . July 18, 1996
Parsippany, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . August 1, 1996
Charlotte, North Carolina, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . August 1, 1996
Indianapolis, Indiana, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . August 1, 1996
Atlanta-Buckhead, Georgia, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . October 17, 1996
Kingston Plantation (Myrtle Beach), South Carolina, Embassy Suites . . . . . . . . . . December 5, 1996
(B) Represents pro forma adjustments to reflect the historical results of
operations prior to the acquisition by the Company for those hotels
acquired by the Company in 1997 and the historical results of operations of
those hotels that the Company proposes to acquire ("Proposed Acquisitions")
prior to the acquisition by the Company as adjusted to give effect to the
provisions of the Percentage Leases; the effect of the Company's common
stock offering in the first quarter of 1997; the proposed common stock
offering in June 1997; and other pro forma adjustments reflecting
additional overhead expenses and interest expense. Those hotels acquired
during 1997 and date acquired and the Proposed Acquisitions are as follows:
Omaha, Nebraska, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Bloomington, Minnesota, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Los Angeles (LAX Airport North), California, Embassy Suites . . . . . . . . . . . . . . . February 18, 1997
Dana Point, California, Hilton Inn . . . . . . . . . . . . . . . . . . . . . . . . . . . February 21, 1997
Troy, Michigan, Doubletree Guest Suites . . . . . . . . . . . . . . . . . . . . . . . . . March 20, 1997
Austin (Downtown), Texas, Doubletree Guest Suites . . . . . . . . . . . . . . . . . . . . March 20, 1997
Baltimore Washington International Airport (BWI), Maryland, Doubletree Guest Suites . . . March 20, 1997
Atlanta (Perimeter Center), Georgia, Embassy Suites . . . . . . . . . . . . . . . . . . . February 1, 1997
Kansas City (Country Club Plaza), Missouri, Embassy Suites . . . . . . . . . . . . . . . February 1, 1997
Overland Park, Kansas, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Raleigh, North Carolina, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
San Antonio (Northwest), Texas, Embassy Suites . . . . . . . . . . . . . . . . . . . . . February 1, 1997
69
70
Austin (Airport North), Texas, Embassy Suites . . . . . . . . . . . . . . . . . . . . February 1, 1997
Covina, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Secaucus, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
San Antonio (Airport), Texas, Embassy Suites . . . . . . . . . . . . . . . . . . . . May 16, 1997
PROPOSED ACQUISITIONS
Atlanta (Gateway), Georgia
Atlanta (Galleria), Georgia
Chicago (O'Hare), Illinois
Dallas (Park Central), Texas
Phoenix (Crescent), Arizona
Lake Buena Vista (Disney World), Florida
Raleigh/Durham, North Carolina
Tampa (Rocky Point), Florida
Nashville (Airport), Tennessee
Dallas (Market Center), Texas
Syracuse, New York
The proposed common stock offering, as further detailed in the Pro Forma
Consolidated Balance Sheet, is for 9 million shares of common stock the
proceeds of which are to partially finance the Proposed Acquisitions. The
proposed offering also includes an offering of 1.2 million shares of common
stock to repurchase 1.2 million shares of common stock from Promus at the same
price.
(C) Represents historical or pro forma lease revenue from the Lessee to the
Company calculated by applying the contractual or anticipated rent
provisions of the Percentage Leases to the historical suite revenues, food
and beverage rents and food and beverage revenues of all the Hotels which
are consolidated for financial reporting purposes. The income from
unconsolidated partnerships is included as a separate line item in the
accompanying Pro Forma Statement of Operations as described in Note D.
Historical suite revenues for the time period prior to the acquisition by
the Company, the date of acquisition, the contractual or anticipated pro
forma Percentage Lease revenue for the time period prior to acquisition by
the Company and a summary of contractual or anticipated Percentage Lease
terms follows (in thousands):
70
71
SUITE REVENUE FOR THE PERIOD
PRIOR TO ACQUISITION
BY THE COMPANY
--------------
DATE OF THREE MONTHS THE YEAR ENDED
DESCRIPTION OF PROPERTY ACQUISITION 3-31-97 12-31-96
----------------------- ----------- ------- --------
Consolidated Hotels:
Bloomington, MN, Doubletree Guest Suites February 1, 1997 $ 372 $ 6,342
Omaha, NE, Doubletree Guest Suites February 1, 1997 332 4,754
Los Angeles (LAX North), Doubletree Guest Suites February 18, 1997 830 6,263
Dana Point, CA, Doubletree Guest Suites February 21, 1997 832 3,716
Troy, MI, Doubletree Guest Suites March 20, 1997 1,489 6,342
Austin, TX, Doubletree Guests March 20, 1997 1,366 5,696
Baltimore (BWI), MD, Doubletree Guest Suites March 20, 1997 1,167 6,236
Lake Buena Vista, FL, Doubletree Guest Suites (1) 2,688 8,446
Raleigh, NC, Doubletree Guest Suites (1) 1,398 5,327
Tampa (Rocky Point), FL, Doubletree Guest Suites (1) 1,864 5,499
Nashville, TN, Doubletree Guest Suites (1) 691 3,164
Dallas Market Center, TX, Doubletree Guest Suites (1) 2,007 7,716
Syracuse, NY, Embassy Suites (1) 1,336 5,572
Dallas (Park Central), TX, Sheraton (1) 3,289 13,520
Phoenix (Crescent), AZ, Sheraton (1) 3,338 9,581
Chicago (O'Hare), IL, Sheraton Gateway Suites (1) 2,155 8,973
Atlanta (Airport), GA, Sheraton Gateway Hotel (1) 2,196 9,841
Atlanta (Galleria), GA, Sheraton Suites (1) 1,759 8,091
------- --------
Total consolidated hotels $29,109 $125,079
======= ========
Unconsolidated Partnership Hotels:
Atlanta (Perimeter Center), GA, Embassy Suites February 1, 1997 $ 600 $ 8,085
Austin (Airport North), TX, Embassy Suites February 1, 1997 528 7,542
Covina, CA, Embassy Suites February 1, 1997 417 4,053
Overland Park, KS, Embassy Suites February 1, 1997 403 5,624
Kansas City (Plaza), MO, Embassy Suites February 1, 1997 547 7,604
Raleigh, NC, Embassy Suites February 1, 1997 624 7,592
San Antonio (NW I-10), TX, Embassy Suites February 1, 1997 337 5,614
Secaucus, NJ, Embassy Suites February 1, 1997 722 9,816
San Antonio (Airport), TX, Embassy Suites May 16, 1997 1,882 7,235
------- --------
Total unconsolidated hotel partnerships $ 6,060 $ 63,165
======= ========
PERCENTAGE LEASE REVENUE
FOR THE PERIOD
PRIOR TO ACQUISITION ANNUAL PERCENTAGE
BY THE COMPANY LEASE TERMS
----------------------- ---------------------------
THE YEAR SUITE
THREE MONTHS ENDED FIRST SECOND REVENUE
DESCRIPTION OF PROPERTY 3-31-97 12-31-96 TIER TIER BREAKPOINT
----------------------- ------------ -------- ---- ---- ----------
Consolidated Hotels:
Bloomington, MN, Doubletree Guest Suites $ 146 $ 3,049 17% 65% $2,468
Omaha, NE, Doubletree Guest Suites 145 2,285 17% 65% $1,703
Los Angeles (LAX North), Doubletree Guest Suites 341 2,591 17% 65% $3,176
Dana Point, CA, Doubletree Guest Suites 400 1,395 17% 65% $2,211
Troy, MI, Doubletree Guest Suites 791 3,316 17% 65% $1,935
Austin, TX, Doubletree Guests 710 2,828 17% 65% $1,961
Baltimore (BWI), MD, Doubletree Guest Suites 516 2,943 17% 65% $2,536
Lake Buena Vista, FL, Doubletree Guest Suites 1,499 4,467 17% 65% $2,272
Raleigh, NC, Doubletree Guest Suites 704 2,623 17% 65% $1,900
Tampa (Rocky Point), FL, Doubletree Guest Suites 999 2,703 17% 65% $1,939
Nashville, TN, Doubletree Guest Suites 267 1,320 17% 65% $1,585
Dallas Market Center, TX, Doubletree Guest Suites 952 3,583 17% 65% $3,069
Syracuse, NY, Embassy Suites 499 2,130 17% 65% $3,227
Dallas (Park Central), TX, Sheraton 1,631 6,748 17% 65% $4,997
Phoenix (Crescent), AZ, Sheraton 1,634 4,025 17% 65% $5,175
Chicago (O'Hare), IL, Sheraton Gateway Suites 1,263 5,265 17% 65% $1,602
Atlanta (Airport), GA, Sheraton Gateway Hotel 979 4,548 17% 65% $4,215
Atlanta (Galleria), GA, Sheraton Suites 783 3,817 17% 65% $3,185
------- -------
Total consolidated hotels $14,259 $59,636
======= =======
Unconsolidated Partnership Hotels:
Atlanta (Perimeter Center), GA, Embassy Suites $ 271 $ 3,889 17% 65% $2,949
Austin (Airport North), TX, Embassy Suites 245 3,792 17% 65% $2,378
Covina, CA, Embassy Suites 154 1,293 17% 65% $3,066
Overland Park, KS, Embassy Suites 173 2,641 17% 65% $2,114
Kansas City (Plaza), MO, Embassy Suites 236 3,594 17% 65% $2,976
Raleigh, NC, Embassy Suites 296 3,693 17% 65% $2,711
San Antonio (NW I-10), TX, Embassy Suites 117 2,487 17% 65% $2,474
Secaucus, NJ, Embassy Suites 268 4,082 17% 65% $4,788
San Antonio (Airport), TX, Embassy Suites 831 3,113 17% 65% $3,311
------- -------
Total unconsolidated hotel partnerships $ 2,591 $28,584
======= =======
(1) Proposed Acquisitions
71
72
(D) Represents historical or pro forma income from unconsolidated partnerships
to the Company calculated by applying the Company's pro rata ownership
percentage to the net income of the unconsolidated partnerships, computed
using the contractual or anticipated rent provisions of the Percentage
Leases to the historical suite revenues, food and beverage rents and food
and beverage revenues of all the hotels; historical taxes, insurance and
other; historical depreciation expense; and historical interest expenses.
The Company's cost in excess of net book value of the partnership assets
deducted to arrive at income from unconsolidated partnerships. This
computation is as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
------------------ -----------------
Statements of operations information:
Percentage lease revenue ...................................... $ 2,591 $ 28,584
Depreciation .................................................. 1,190 12,536
Taxes, insurance and other .................................... 448 3,166
Interest expense .............................................. 986 9,725
---------- ----------
Net income (loss) ............................................. (33) 3,157
50 % of income (loss) attributable to the Company ............ (17) 1,579
Amortization of cost in excess of book value (See Note G) ..... (268) (1,271)
---------- ----------
Income (loss) from unconsolidated partnerships ................ $ (285) $ 308
========== ==========
(E) Represents elimination of historical interest income earned on excess cash.
(F) Pro forma general and administrative expenses represent executive
compensation, legal, audit and other expenses. These amounts are based on
historical general and administrative expenses as well as probable 1997
expenses.
(G) Represents depreciation on the Hotels. Depreciation is computed based on
estimated useful lives of 40 years for buildings and improvements and five
years for furniture, fixtures and equipment. These estimated useful lives
are based on management's knowledge of the properties and the hotel
industry in general.
72
73
The pro forma depreciation adjustment for the hotels acquired in 1997 and
the Proposed Acquisitions for the year ended December 31, 1996 is as
follows:
FELCOR SUITE HOTELS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF MARCH 31, 1997
(IN THOUSANDS)
ASSET COST
--------------------------------------------------
DATE OF BUILDING AND FURNITURE
DESCRIPTION OF PROPERTY ACQUISITION LAND IMPROVEMENTS AND FIXTURES TOTAL
----------------------- ----------- ------- ------------ ------------ -----
Consolidated Hotels:
Bloomington, MN, Doubletree Guest Suites February 1, 1997 $ 2,038 $ 17,731 $ 612 $ 20,381
Omaha, NE, Doubletree Guest Suites February 1, 1997 1,876 16,328 563 18,767
Los Angeles (LAX North), Doubletree Guest Suites February 18, 1997 2,208 19,205 662 22,075
Dana Point, CA, Doubletree Guest Suites February 21, 1997 1,787 15,545 536 17,868
Troy, MI, Doubletree Guest Suites March 20, 1997 2,957 25,794 887 29,638
Austin, TX, Doubletree Guests March 20, 1997 2,506 21,858 752 25,116
Baltimore (BWI), MD, Doubletree Guest Suites March 20, 1997 2,566 22,381 770 25,717
3 - Doubletree Proposed Acquisitions (1) 7,230 62,901 2,169 72,300
Nashville, TN, Doubletree Guest Suites (1) 1,080 9,396 324 10,800
2 - Embassy Suite Proposed Acquisitions (1) 4,670 40,629 1,401 46,700
5 - Sheraton Proposed Acquisitions (1) 20,000 174,000 6,000 200,000
-------- -------- ------- --------
Total consolidated hotels $ 48,918 $425,768 $14,676 $490,362
======== ======== ======= ========
FELCOR SUITE HOTELS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF MARCH 31, 1997
(IN THOUSANDS)
ANNUAL DEPRECIATION EXPENSE
--------------------------------------
BUILDING AND FURNITURE
DESCRIPTION OF PROPERTY IMPROVEMENTS AND FIXTURES TOTAL
----------------------- ------------ ------------ ------
Consolidated Hotels:
Bloomington, MN, Doubletree Guest Suites $ 443 $ 122 $ 565
Omaha, NE, Doubletree Guest Suites 408 113 521
Los Angeles (LAX North), Doubletree Guest Suites 480 132 612
Dana Point, CA, Doubletree Guest Suites 389 107 496
Troy, MI, Doubletree Guest Suites 645 177 822
Austin, TX, Doubletree Guests 546 150 696
Baltimore (BWI), MD, Doubletree Guest Suites 560 154 714
3 - Doubletree Proposed Acquisitions 1,573 434 2,007
Nashville, TN, Doubletree Guest Suites 235 65 300
2 - Embassy Suite Proposed Acquisitions 1,015 306 1,321
5 - Sheraton Proposed Acquisitions 4,350 1,200 5,550
------- ------ -------
Total consolidated hotels $10,644 $2,960 $13,604
======= ====== =======
ACQUISITION COST ANNUAL
ACQUISITION ACQUISITION IN EXCESS OF NET AMORTIZATION
DATE COST BOOK VALUE OF EXCESS COST
----------- ----------- ---------------- --------------
Unconsolidated Partnership Hotels:
Atlanta (Perimeter Center), GA, Embassy Suites February 1, 1997 $ 9,620 $ 9,199 $ 230
Austin (Airport North), TX, Embassy Suites February 1, 1997 8,965 6,486 162
Covina, CA, Embassy Suites February 1, 1997 2,229 (3,329) (83)
Overland Park, KS, Embassy Suites February 1, 1997 5,673 4,928 123
Kansas City (Plaza), MO, Embassy Suites February 1, 1997 8,224 7,161 179
Raleigh, NC, Embassy Suites February 1, 1997 9,739 8,764 219
San Antonio (NW I-10), TX, Embassy Suites February 1, 1997 4,768 3,445 86
Secaucus, NJ, Embassy Suites February 1, 1997 9,001 7,103 178
San Antonio (Airport), TX, Embassy Suites May 16, 1997 6,500 7,085 177
------- ------- ------
Total unconsolidated hotel partnerships $64,719 $50,842 $1,271
======= ======= ======
(1) Proposed Acquisitions
73
74
(H) Pro forma real estate, personal property tax, franchise taxes, property
insurance, ground lease and other expenses for the year ended December 31,
1996 represent expenses to be paid by the Partnership. Such amounts were
primarily derived from historical amounts paid with respect to the Hotels.
The three months ended March 31, 1997 real estate, personal property and
franchise taxes, property insurance, and ground lease expenses are computed
in a similar manner as the year ended December 31, 1996 pro forma
adjustments.
A schedule of property taxes and insurance derived from the historical
amounts paid for the hotels acquired in 1997 and the Proposed Acquisitions
follows:
PROPERTY TAXES PROPERTY INSURANCE
----------------------- -----------------------
3/31/97 12/31/96 3/31/97 12/31/96
---------- ---------- ---------- ----------
(IN THOUSANDS)
DESCRIPTION OF PROPERTY
-----------------------
Consolidated Hotels:
Bloomington, MN, Doubletree Guest Suites $ 59 $ 707 $ 1 $ 17
Omaha, NE, Doubletree Guest Suites 14 170 1 13
Los Angeles (LAX North), Doubletree Guest Suites 44 320 20 91
Dana Point, CA, Doubletree Guest Suites 16 62 25 13
Troy, MI, Doubletree Guest Suites 91 354 5 21
Austin, TX, Doubletree Guests 97 466 3 13
Baltimore (BWI), MD, Doubletree Guest Suites 38 223 2 7
Lake Buena Vista, FL, Doubletree Guest Suites 99 399 4 16
Raleigh, NC, Doubletree Guest Suites 40 149 4 14
Tampa (Rocky Point), FL, Doubletree Guest Suites 59 237 10 39
Nashville, TN, Doubletree Guest Suites 21 75 2 8
Dallas Market Center, TX, Doubletree Guest Suites 139 505 5 19
Syracuse, NY, Embassy Suites 84 329 5 16
Dallas (Park Central), TX Sheraton 169 595 15 70
Phoenix, AZ, Sheraton Crescent 206 748 7 24
Chicago (O'Hare), IL, Sheraton Gateway Suites 323 1,366 5 20
Atlanta (Airport), GA, Sheraton Gateway Hotel 123 443 6 25
Atlanta (Galleria), GA, Sheraton Suites 96 369 4 16
---------- ---------- ---------- ----------
Total consolidated hotels $ 1,718 $ 7,517 $ 124 $ 442
========== ========== ========== ==========
Unconsolidated Partnership Hotels:
Atlanta (Perimeter Center), GA, Embassy Suites $ 22 $ 172 $ 2 $ 17
Austin (Airport North), TX, Embassy Suites 41 435 2 17
Covina, CA, Embassy Suites 14 (810) 8 96
Overland Park, KS, Embassy Suites 34 370 1 14
Kansas City (Plaza), MO, Embassy Suites 35 359 3 29
Raleigh, NC, Embassy Suites 17 171 1 16
San Antonio (NW I-10), TX, Embassy Suites 35 385 1 15
Secaucus, NJ, Embassy Suites 47 560 2 22
San Antonio (Airport), TX, Embassy Suites 116 418 5 18
---------- ---------- ---------- ----------
Total unconsolidated hotel partnerships $ 361 $ 2,060 $ 25 $ 244
========== ========== ========== ==========
74
75
(I) Represents both historical and pro forma interest expense computed based on
borrowings outstanding for the respective periods multiplied by the
applicable fixed or variable interest rate as stated in the applicable debt
instruments. The pro forma adjustment assumes additional borrowings
against the Chase Line of Credit in the amount of $120.4 million were
required in order to finance the 1997 Acquisition Hotel purchases and
includes additional interest expense incurred prior to the acquisition
date by the Company. The increase in the pro forma debt balance from
December 31, 1996 to March 31, 1997 primarily relates to borrowings
associated with the renovation of the Company's hotels. The variable
interest rates used to calculate the pro forma adjustment to interest
expense were the same as the historical rates used to calculate the
outstanding borrowings on the Line of Credit for the same respective
periods ended December 31, 1996 and March 31, 1997. The period end pro
forma debt balances, average interest rates and pro forma interest expense
for the year end December 31, 1996 and March 31, 1997 follow:
DECEMBER 31, 1996
(IN THOUSANDS)
-------------------------------------------
DEBT INTEREST INTEREST
BALANCE RATE EXPENSE(1)
------------ ----------- ------------
Line of Credit .................................................. $ 235,396 7.30% $ 16,419
Term Loan ....................................................... 85,000 7.41% 1,693
Renovation loan ................................................. 25,000 7.27% 852
Other debt payable .............................................. 1,550 6.75% 3,520
Capital leases .................................................. 12,875 12.50% 1,706
------------ ------------
$ 359,821 $ 24,190
============ ============
MARCH 31, 1997
(IN THOUSANDS)
--------------------------------
DEBT INTEREST INTEREST
BALANCE RATE EXPENSE(1)
---------- -------- --------
Line of Credit . . . . . . . . . . . . . . . . . . . . . . . . . $ 253,588 7.30% $ 4,507
Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 7.97% 1,693
Renovation loan . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 6.24% 390
Other debt payable . . . . . . . . . . . . . . . . . . . . . . . 650 6.00% 320
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . 12,577 12.50% 387
---------- --------
$ 376,815 $ 7,297
========== ========
(1) Pro forma interest expense represents interest expense applicable to the
pro forma weighted average borrowings outstanding during the periods
presented which at times exceeds the pro forma borrowings outstanding at
the end of the periods.
(J) Calculated as approximately 7.60% and 8.25% of income before minority
interest for pro forma results of operations for the three months ended
March 31, 1997 and the year ended December 31, 1996, respectively.
(K) Represents historical and pro forma minority interest expense related to 3
hotels in which Doubletree has a 10% limited partnership interest.
Minority interest is calculated as 10% of net income computed using the
rent provisions of the Percentage Leases to the historical suite revenues;
historical taxes, insurance and other; historical depreciation expense; and
historical interest expenses. This computation is as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
Statement of operations information:
Percentage lease revenue . . . . . . . . . . . . . . . . $ 2,017 $ 9,087
Depreciation . . . . . . . . . . . . . . . . . . . . . . 671 3,521
Taxes, insurance and other . . . . . . . . . . . . . . . 251 1,123
Interest expense . . . . . . . . . . . . . . . . . . . . 217 2,081
------- -------
Net income (loss) before minority interest . . . . . . . $ 878 $ 2,362
======= =======
Minority interest expense - 10% of Net income . . . . . $ 88 $ 236
======= =======
75
76
(L) The 1996 pro forma adjustment to preferred dividends assumes the Series A
Preferred Stock was issued on January 1, 1996. The adjustment reflects the
additional dividends that would have been paid in 1996 and prior to May 6,
1996, the actual date of issuance.
(M) Pro forma income applicable to common shareholders excludes the
extraordinary charge from write off of deferred financing fees in the
amount of approximately $2,354,000 from the "Historical Company" for the
year ended December 31, 1996.
76
77
FELCOR SUITE HOTELS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED, AMOUNTS IN THOUSANDS)
The following unaudited Pro Forma Consolidated Balance Sheet of FelCor
Suite Hotels, Inc. (the "Company") is presented as if the acquisition of the
hotels acquired subsequent to March 31, 1997 or proposed to be acquired
("Proposed Acquisitions"), and the consummation of the proposed June 1997
equity offering and related transactions had occurred on March 31, 1997. Such
pro forma information is based in part upon the consolidated balance sheet of
the Company. In management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.
The following unaudited Pro Forma Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position of the Company
would have been assuming such transactions had been completed as of March 31,
1997, nor does it purport to represent the future financial position of the
Company.
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- -----------
ASSETS
Investment in hotels . . . . . . . . . . . . . . . . . . . . . $1,061,340 $329,800 (A) $1,391,140
Investment in unconsolidated partnerships . . . . . . . . . . . 118,320 6,500 (B) 124,820
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . 10,957 (1,625)(C) 9,332
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,616 1,616
Due from Lessee . . . . . . . . . . . . . . . . . . . . . . . . 15,630 15,630
Deferred expenses . . . . . . . . . . . . . . . . . . . . . . . 3,702 3,702
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 793 793
---------- -------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . $1,212,358 $334,675 $1,547,033
========== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Distributions payable . . . . . . . . . . . . . . . . . . . . . $ 17,610 $ 17,610
Accrued expenses and other liabilities . . . . . . . . . . . . 4,740 4,740
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353,650 $ 10,588 (D) 364,238
Capital lease obligations . . . . . . . . . . . . . . . . . . . 12,577 12,577
Minority interest in Operating Partnership . . . . . . . . . . 62,661 11,878 (E) 74,539
Minority interest in other partnerships . . . . . . . . . . . . 8,043 8,043
---------- -------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . 459,281 22,466 481,747
---------- -------- ----------
Shareholders' Equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . 151,250 151,250
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . 266 90 (F) 356
Additional paid in capital . . . . . . . . . . . . . . . . . . 620,465 312,119 (G) 932,584
Unearned officers' and directors' compensation . . . . . . . . (2,448) (2,448)
Distributions in excess of earnings . . . . . . . . . . . . . . (16,456) (16,456)
---------- -------- ----------
Total shareholders' equity . . . . . . . . . . . . . . 753,077 312,209 1,065,286
---------- -------- ----------
Total liabilities and shareholders' equity . . . . . . $1,212,358 $334,675 $1,547,033
========== ======== ==========
77
78
FELCOR SUITE HOTELS, INC.
NOTES TO PRO FORMA BALANCE SHEET
(A) Increase represents the following probable hotel purchase
transactions:
Five Sheraton hotels $200,000
Four Doubletree Guest Suites hotels 83,100
Two Embassy Suites hotels 46,700
--------
$329,800
========
(B) Increase represents the unconsolidated 50% hotel partnership interest in
the San Antonio (Airport) Embassy Suites hotel purchased for $6.5 million
on May 16, 1997.
(C) Decrease represents cash portion of purchase price of San Antonio (Airport)
Embassy Suites Hotel.
(D) Increase represents borrowing under the Company's line of credit for the
Proposed Acquisitions.
(E) Increase represents $4.9 million in Partnership Units issued for
acquisition of 50% partnership interest in the San Antonio (Airport)
Embassy Suites hotel and the adjustment necessary to reflect a pro forma
7.5% minority interest in the Operating Partnership at March 31, 1997.
(F) Increase reflects the par value of common stock in the proposed equity
offering.
(G) Net increase reflects the proceeds from the proposed offering less the par
value of the common stock issued and estimated offering expenses less an
allocation to minority interest as follows (in thousands):
Gross proceeds from proposed offering(1). . . . . . . . . . . $336,375
(9 million shares at $37.375 per share)
Estimated offering expenses including underwriters' discount. (17,163)
Par value of common stock . . . . . . . . . . . . . . . . . . (90)
Allocation to minority interest . . . . . . . . . . . . . . . (7,003)
--------
Net change in additional paid in capital . . . . . . . . . . $312,119
========
(1) The proposed offering also includes an offering of 1.2 million shares of
common stock to repurchase 1.2 million shares of common stock from Promus
at the same price.
78
79
DJONT OPERATIONS, L.L.C.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The following unaudited Pro Forma Consolidated Statements of Operations of
DJONT Operations, L.L.C. (the "Lessee") are presented as if the acquisitions
of all hotels owned by FelCor Suite Hotels, Inc. (the "Company") at December
31, 1996 and those hotels acquired or expected to be acquired in 1997 and
related transactions had occurred as of January 1, 1996 and the Hotels had all
been leased to the Lessee pursuant to Percentage Leases. Such pro forma
information is based in part upon the Pro Forma Consolidated Statements of
Operations of the Company, and the historical Statements of Operations of the
Proposed Acquisitions. In management's opinion, all adjustments necessary to
reflect the effects of these transactions have been made.
The following unaudited Pro Forma Consolidated Statements of Operations for
the periods presented are not necessarily indicative of what actual results of
operations of the Lessee would have been assuming such transactions had been
completed on January 1, 1996, nor does it purport to represent the results of
operations for future periods.
YEAR ENDED DECEMBER 31, 1996
----------------------------
1996 ACQUISITIONS 1997 ACQUISITIONS
HISTORICAL AND PREFERRED AND EQUITY PRO FORMA
COMPANY STOCK OFFERING (A) OFFERINGS (B) ADJUSTMENTS TOTAL
---------- ------------------ --------------- ----------- ----------
Revenues:
Suite revenue ........................... $ 234,451 $ 46,393 $ 188,243 $ 469,087
Food and beverage revenue ............... 15,119 8,194 35,569 58,882
Food and beverage rent .................. 2,334 408 538 3,280
Other revenue ........................... 17,340 2,802 12,652 $ (316)(c) 32,478
---------- ---------- ---------- ---------- ----------
Total revenues ..................... 269,244 57,797 237,002 (316) 563,727
---------- ---------- ---------- ---------- ----------
Expenses:
Property operating costs and expenses ... 66,236 12,417 53,616 132,269
Other operating expenses ................ 81,045 20,182 84,206 185,433
Management and franchise fees ........... 11,770 5,491 10,754 (3,604)(D) 24,411
Taxes, insurance and other .............. 5,912 (862) 17,663 (12,690)(E) 10,023
Interest expense ........................ 30,779 (30,779)(F)
Depreciation and amortization ........... 32,969 (32,969)(G)
Percentage lease payments ............... 107,935 20,248 88,220 (H) 216,403
Lessee overhead expenses ................ 1,776 (236) 1,540
---------- ---------- ---------- ---------- ----------
Income before minority interest ............. (5,430) 557 7,015 (8,494) (6,352)
Minority interest ....................... (92)(I) (92)
---------- ---------- ---------- ---------- ----------
Net loss .................................... $ (5,430) $ 557 $ 7,015 $ 8,402 $ (6,260)
========== ========== ========== ========== ==========
79
80
DJONT OPERATIONS, L.L.C.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------
1997
HISTORICAL ACQUISITIONS AND PRO FORMA
COMPANY EQUITY OFFERING(B) ADJUSTMENTS TOTAL
---------- ------------------ ----------- ----------
Revenues:
Suite revenue ............................ $ 93,153 $ 35,169 $ 128,322
Food and beverage revenue ................ 4,028 8,881 12,909
Food and beverage rent ................... 965 51 1,016
Other revenue ............................ 7,069 2,631 $ (73)(C) 9,627
---------- ---------- ---------- ----------
Total revenues ......................... 105,215 46,732 (73) 151,874
---------- ---------- ---------- ----------
Expenses:
Property operating costs and expenses .... 25,182 10,105 35,287
Other operating costs .................... 26,911 17,792 44,703
Management and franchise fees ............ 4,987 2,728 (1,196)(D) 6,519
Taxes, insurance and other ............... 1,588 3,563 (2,554)(E) 2,597
Interest expense ......................... 4,357 (4,357)(F)
Depreciation and amortization ............ 5,616 (5,616)(G)
Percentage lease expenses ................ 44,615 16,850 (H) 61,465
Lessee overhead expenses ................. 518 518
---------- ---------- ---------- ----------
Income before minority interest ............... 1,414 2,571 (3,200) 785
Minority interest ........................ 300 (213)(I) 87
---------- ---------- ---------- ----------
Net income .................................... $ 1,114 $ 2,571 $ (2,987) $ 698
========== ========== ========== ==========
80
81
DJONT OPERATIONS, L.L.C.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents the historical results of operations and pro forma adjustments,
for the period prior to the acquisition by the Company, of the hotels
acquired by the Company in 1996. Those hotels acquired in 1996 and dates
of acquisition are as follows:
Anaheim, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Baton Rouge, Louisiana, Embassy Suites . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Birmingham, Alabama, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Deerfield Beach, Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . January 3, 1996
Ft. Lauderdale, Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . January 3, 1996
Miami (Airport), Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . January 3, 1996
Milpitas, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . January 3, 1996
Phoenix (Camelback), Arizona, Embassy Suites . . . . . . . . . . . . . . . . . . January 3, 1996
South San Francisco, California, Embassy Suites . . . . . . . . . . . . . . . . . January 3, 1996
Lexington, Kentucky, Hilton . . . . . . . . . . . . . . . . . . . . . . . . . . . January 10, 1996
Piscataway, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . January 10, 1996
Beaver Creek (Avon-Vail), Colorado, Embassy Suites . . . . . . . . . . . . . . . February 20, 1996
Boca Raton, Florida, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . February 28, 1996
LAX (El Segundo), California, Embassy Suites . . . . . . . . . . . . . . . . . . March 27, 1996
Mandalay, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . May 8, 1996
Napa, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . May 8, 1996
Deerfield, Illinois, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . June 20, 1996
San Rafael (Marin County), California, Embassy Suites . . . . . . . . . . . . . . July 18, 1996
Parsippany, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . August 1, 1996
Charlotte, North Carolina, Embassy Suites . . . . . . . . . . . . . . . . . . . . August 1, 1996
Indianapolis, Indiana, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . August 1, 1996
Atlanta-Buckhead, Georgia, Embassy Suites . . . . . . . . . . . . . . . . . . . . October 17, 1996
Kingston (Myrtle Beach), South Carolina, Embassy Suites . . . . . . . . . . . . . December 5, 1996
(B) Represents the historical results of operations for the period prior to the
acquisition by the Company, for those hotels acquired by the Company in
1997 and the Proposed Acquisitions. Those hotels acquired during 1997 and
date acquired and the Proposed Acquisitions are as follows:
Omaha, Nebraska, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Bloomington, Minnesota, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Los Angeles (LAX Airport North), California, Embassy Suites . . . . . . . . . . . . . February 18, 1997
Dana Point, California, Hilton Inn . . . . . . . . . . . . . . . . . . . . . . . . . February 21, 1997
Troy, Michigan, Doubletree Guest Suites . . . . . . . . . . . . . . . . . . . . . . . March 20, 1997
Austin, Texas, Doubletree Guest Suites . . . . . . . . . . . . . . . . . . . . . . . March 20, 1997
Baltimore (Washington International Airport), Maryland, Doubletree Guest Suites . . . March 20, 1997
Atlanta (Perimeter Center), Georgia, Embassy Suites . . . . . . . . . . . . . . . . . February 1, 1997
Kansas City (Country Club Plaza), Missouri, Embassy Suites . . . . . . . . . . . . . February 1, 1997
Overland Park, Kansas, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Raleigh, North Carolina, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
San Antonio (I-10), Texas, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Austin (Downtown), Texas, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Covina, California, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
Secaucus, New Jersey, Embassy Suites . . . . . . . . . . . . . . . . . . . . . . . . February 1, 1997
San Antonio (Airport), Texas, Embassy Suites . . . . . . . . . . . . . . . . . . . . May 16, 1997
81
82
PROPOSED ACQUISITIONS:
Atlanta (Gateway), Georgia
Atlanta (Galleria), Georgia
Chicago (O'Hare), Illinois
Dallas (Park Central), Texas
Phoenix (Crescent), Arizona
Lake Buena Vista (Disney World, Florida
Raleigh/Durham, North Carolina
Tampa (Rocky Point), Florida
Nashville (Airport), Tennessee
Dallas (Market Center), Texas
Syracuse, New York
(C) Reflects the elimination of historical interest income earned on excess
cash.
(D) Represents the elimination of historical management and franchise fees,
and the addition of management and franchise fees to be incurred under the
new management agreements for the 1997 Acquisitions. The management fees
were calculated based on the terms of the management agreements. Also
included in the pro forma adjustment are computations for the incentive
management fee which varies according to the management agreement.
(E) Reflects the elimination of historical real estate and personal property
taxes and property insurance which is to be paid by the Partnership for
the 1997 Acquisitions.
(F) Reflects the elimination of historical interest expense for the 1997
Acquisitions. Any future interest expense related to debt will be paid by
the Partnership.
(G) Reflects the elimination of historical depreciation and amortization for
the 1997 Acquisitions.
(H) Represents lease expenses calculated on a pro forma basis by applying the
contractual or anticipated rent provisions of the Percentage Leases to
the historical suite revenues, pro forma restaurant rent and historical
food and beverage revenues of the Hotels.
(I) Represents minority interest from preferred equity positions in
subsidiaries of DJONT.
82
83
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
1 Underwriting Agreement dated January 28, 1997, between the
Company and the Underwriters named therein.
23.1 Consent of Coopers & Lybrand, L.L.P.
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of Deloitte & Touche LLP