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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Form 10-Q (Mark One) /X/
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004
 OR /  /
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission file number 333-3959-01 FelCor Lodging Limited Partnership  Delaware
    
    75-2544994(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)545 E. John Carpenter Freeway, Suite 1300, Irving, Texas
(Address of principal executive offices)
    
    75062
(Zip Code)
 (972) 444-4900
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/
   No
/  / Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /  /     
No /X/




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FELCOR LODGING LIMITED PARTNERSHIP INDEX PagePART I.  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets September 30, 2004
and December 31, 2003 (unaudited)
    
    
    3Consolidated Statements of Operations  For the Three and Nine Months
Ended September 30, 2004 and 2003 (unaudited)
    
    
    4Consolidated Statements of Comprehensive Loss  For the Three and Nine Months
Ended September 30, 2004 and 2003 (unaudited)
    
    
    5Consolidated Statements of Cash Flows  For the Nine Months
Ended September 30, 2004 and 2003 (unaudited)
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
    
    
    26Financial Comparison
    
    
    26Results of Operations
    
    
    27Non-GAAP Financial Measures
    
    
    28Hotel Portfolio Composition
    
    
    33Hotel Operating Statistics
    
    
    35Liquidity and Capital Resources
    
    
    37Inflation
    
    
    40Seasonality
    
    
    40Disclosure Regarding Forward Looking Statements
    
    
    40Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    41PART II.  OTHER INFORMATIONItem 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    42SIGNATURE
    
    
    43Certification of the CEO Pursuant to Section 302Certification of the Principal Financial Officer Pursuant to Section 302Certification of the CEO Pursuant to Section 906Certification of the Principal Financial Officer Pursuant to Section 906
  2




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PART I.  FINANCIAL INFORMATION 
 Item 1. Financial Statements FELCOR LODGING LIMITED
PARTNERSHIP 
 CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 September 30,
    
    December 31,2004
    
    2003ASSETSInvestment in hotels, net of accumulated depreciation of $917,682
at September 30, 2004 and $886,168 at December 31, 2003
    
    $
    2,957,849
    
    
    $
    3,103,796Investment in unconsolidated entities
    
    
    117,387
    
    
    
    116,553Hotels held for sale
    
    
    66,505
    
    
    
    21,838Cash and cash equivalents
    
    
    154,109
    
    
    
    231,885Restricted cash
    
    
    37,064
    
    
    
    19,424Accounts receivable, net of allowance for doubtful accounts of $1,100
at September 30, 2004 and $1,104 at December 31, 2003
    
    
    57,301
    
    
    
    45,385Deferred expenses, net of accumulated amortization of $19,310
at September 30, 2004 and $16,080 at December 31, 2003
    
    
    19,365
    
    
    
    24,278Other assets
    
    
    21,611
    
    
    
    27,734Total assets
    
    $
    3,431,191
    
    
    $
    3,590,893LIABILITIES AND PARTNERS CAPITALDebt, net of discount of $5,264 at September 30, 2004 and
$4,253 at December 31, 2003
    
    $
    1,828,261
    
    
    $
    2,037,355Distributions payable
    
    
    8,867
    
    
    
    5,504Accrued expenses and other liabilities
    
    
    160,038
    
    
    
    151,423Minority interest in other partnerships
    
    
    46,328
    
    
    
    50,197Total liabilities
    
    
    2,043,494
    
    
    
    2,244,479Commitments and contingenciesRedeemable units at redemption value, 2,789 and 3,034 units issued and
outstanding at September 30, 2004 and December 31, 2003, respectively
    
    
    31,548
    
    
    
    33,612Preferred units, $.01 par value, 20,000 units authorized:Series A Cumulative Convertible Preferred Units, 12,880 and 5,980 units
issued and outstanding at September 30, 2004 and December 31, 2003,
respectively
    
    
    309,362
    
    
    
    149,512Series B Cumulative Redeemable Preferred Units, 68 units issued
and outstanding at September 30, 2004 and December 31, 2003
    
    
    169,395
    
    
    
    169,395Common units 59,666 and 59,120 units issued and outstanding
at September 30, 2004 and December 31, 2003, respectively
    
    
    864,396
    
    
    
    984,417Accumulated other comprehensive income
    
    
    12,996
    
    
    
    9,478Total partners capital
    
    
    1,356,149
    
    
    
    1,312,802Total liabilities, redeemable units and partners capital
    
    $
    3,431,191
    
    
    $
    3,590,893
 The accompanying notes are an integral part of these consolidated financial statements. 3




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FELCOR LODGING LIMITED PARTNERSHIP 
 CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2004 and 2003
(unaudited, in thousands, except for per unit data) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Hotel operating revenue
    
    $
    302,809
    
    
    $
    285,396
    
    
    $
    904,373
    
    
    $
    840,953Retail space rental and other revenue
    
    
    2,166
    
    
    
    221
    
    
    
    2,590
    
    
    
    838Total revenues
    
    
    304,975
    
    
    
    285,617
    
    
    
    906,963
    
    
    
    841,791Expenses:Hotel departmental expenses
    
    
    109,331
    
    
    
    101,293
    
    
    
    323,978
    
    
    
    291,940Other property related costs
    
    
    88,247
    
    
    
    83,245
    
    
    
    261,636
    
    
    
    241,738Management and franchise fees
    
    
    16,270
    
    
    
    15,375
    
    
    
    47,490
    
    
    
    44,488Taxes, insurance and lease expense
    
    
    29,216
    
    
    
    30,905
    
    
    
    89,750
    
    
    
    90,792Corporate expenses
    
    
    3,791
    
    
    
    3,299
    
    
    
    11,569
    
    
    
    10,459Depreciation
    
    
    30,074
    
    
    
    31,476
    
    
    
    88,445
    
    
    
    95,009Total operating expenses
    
    
    276,929
    
    
    
    265,593
    
    
    
    822,868
    
    
    
    774,426Operating income
    
    
    28,046
    
    
    
    20,024
    
    
    
    84,095
    
    
    
    67,365Interest expense, net
    
    
    (35,348
    )
    
    
    (42,303
    )
    
    
    (116,210
    )
    
    
    (123,150
    )Impairment loss
    
    
    (28,498
    )
    
    
    (53,204
    )
    
    
    (28,498
    )
    
    
    (53,204
    )Hurricane loss
    
    
    (2,125
    )
    
    
    
    
    
    
    (2,125
    )
    
    
    Charge-off of deferred financing costs
    
    
    (1,920
    )
    
    
    
    
    
    
    (6,094
    )
    
    
    (2,834
    )Loss on early extinguishment of debt
    
    
    (10,987
    )
    
    
    
    
    
    
    (39,233
    )
    
    
    Gain on swap termination
    
    
    
    
    
    
    
    
    
    
    1,005
    
    
    
    Loss before equity in income from
unconsolidated entities, minority interests and
gain on sale of assets
    
    
    (50,832
    )
    
    
    (75,483
    )
    
    
    (107,060
    )
    
    
    (111,823
    )Equity in income from unconsolidated entities
    
    
    12,019
    
    
    
    1,674
    
    
    
    15,692
    
    
    
    2,252Gain (loss) on sale of assets
    
    
    1,094
    
    
    
    (47
    )
    
    
    1,094
    
    
    
    106Minority interests
    
    
    78
    
    
    
    560
    
    
    
    321
    
    
    
    422Loss from continuing operations
    
    
    (37,641
    )
    
    
    (73,296
    )
    
    
    (89,953
    )
    
    
    (109,043
    )Discontinued operations
    
    
    (1,566
    )
    
    
    (59,636
    )
    
    
    (5,111
    )
    
    
    (68,233
    )Net loss
    
    
    (39,207
    )
    
    
    (132,932
    )
    
    
    (95,064
    )
    
    
    (177,276
    )Preferred distributions
    
    
    (9,343
    )
    
    
    (6,727
    )
    
    
    (25,039
    )
    
    
    (20,181
    )Net loss applicable to common unitholders
    
    $
    (48,550
    )
    
    $
    (139,659
    )
    
    $
    (120,103
    )
    
    $
    (197,457
    )Basic and diluted per common unit data:Net loss from continuing operations
    
    $
    (0.76
    )
    
    $
    (1.29
    )
    
    $
    (1.86
    )
    
    $
    (2.09
    )Net loss
    
    $
    (0.78
    )
    
    $
    (2.26
    )
    
    $
    (1.94
    )
    
    $
    (3.20
    )Weighted average common units outstanding
    
    
    61,978
    
    
    
    61,851
    
    
    
    61,982
    
    
    
    61,843
 The accompanying notes are an integral part of these consolidated financial statements. 4




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FELCOR LODGING LIMITED PARTNERSHIP 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three and Nine Months Ended September 30, 2004 and 2003
(unaudited, in thousands) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (39,207
    )
    
    $
    (132,932
    )
    
    $
    (95,064
    )
    
    $
    (177,276
    )Foreign currency translation adjustment
    
    
    4,489
    
    
    
    (181
    )
    
    
    3,519
    
    
    
    10,755Comprehensive loss
    
    $
    (34,718
    )
    
    $
    (133,113
    )
    
    $
    (91,545
    )
    
    $
    (166,521
    )
 The accompanying notes are an integral part of these consolidated financial statements. 5




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FELCOR LODGING LIMITED PARTNERSHIP 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2004 and 2003
(unaudited, in thousands) Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (95,064
    )
    
    $
    (177,276
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation
    
    
    92,242
    
    
    
    109,113Loss (gain) on sale of assets
    
    
    (3,210
    )
    
    
    776Amortization of deferred financing fees
    
    
    3,231
    
    
    
    3,660Accretion of debt, net of discount
    
    
    200
    
    
    
    399Amortization of unearned compensation
    
    
    1,750
    
    
    
    1,645Equity in income from unconsolidated entities
    
    
    (15,692
    )
    
    
    (2,252
    )Distributions of income from unconsolidated entities
    
    
    11,339
    
    
    
    1,052Loss (gain) on early extinguishment of debt
    
    
    39,233
    
    
    
    (1,611
    )Impairment loss
    
    
    33,027
    
    
    
    120,526Charge-off of deferred financing costs
    
    
    6,094
    
    
    
    2,834Minority interests
    
    
    (321
    )
    
    
    (422
    )Changes in assets and liabilities:Accounts receivable
    
    
    (12,341
    )
    
    
    (4,359
    )Restricted cash
    
    
    (19,698
    )
    
    
    (3,746
    )Other assets
    
    
    4,916
    
    
    
    (6,050
    )Accrued expenses and other liabilities
    
    
    8,413
    
    
    
    2,736Net cash flow provided by operating activities
    
    
    54,119
    
    
    
    47,025Cash flows (used in) provided by investing activities:Acquisition of hotel
    
    
    (27,759
    )
    
    
    Improvements and additions to hotels
    
    
    (58,597
    )
    
    
    (52,040
    )Proceeds from sale of assets
    
    
    66,866
    
    
    
    12,185Restricted cash
    
    
    2,058
    
    
    
    1,260Cash from purchase of percentage interest in Interstate Joint Venture
    
    
    
    
    
    
    2,705Distributions of capital from unconsolidated entities
    
    
    4,602
    
    
    
    3,332Net cash flow used in investing activities
    
    
    (12,830
    )
    
    
    (32,558
    )Cash flows (used in) provided by financing activities:Proceeds from borrowings
    
    
    483,802
    
    
    
    321,119Repayment of borrowings
    
    
    (732,458
    )
    
    
    (194,308
    )Payment of deferred financing fees
    
    
    (4,283
    )
    
    
    (5,001
    )Net proceeds from sale of preferred units
    
    
    156,094
    
    
    
    Distributions paid to minority interest holders
    
    
    (4,000
    )
    
    
    (493
    )Contributions from minority interest holders
    
    
    2,436
    
    
    
    Distributions paid to preferred unitholders
    
    
    (21,676
    )
    
    
    (20,181
    )Distributions paid to common unitholders
    
    
    
    
    
    
    (8,814
    )Net cash flow provided by (used in) financing activities
    
    
    (120,085
    )
    
    
    92,322Effect of exchange rate changes on cash
    
    
    1,020
    
    
    
    175Net change in cash and cash equivalents
    
    
    (77,776
    )
    
    
    106,964Cash and cash equivalents at beginning of periods
    
    
    231,885
    
    
    
    50,163Cash and cash equivalents at end of periods
    
    $
    154,109
    
    
    $
    157,127Supplemental cash flow information 
Interest paid
    
    $
    118,427
    
    
    $
    126,141
 The accompanying notes are an integral part of these consolidated financial statements. 6




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FELCOR LODGING LIMITED PARTNERSHIP 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization In
1994, FelCor Lodging Limited Partnership, or FelCor LP, was
established with six hotels and a market
capitalization of $120 million. We are the owner of the largest number of
Embassy Suites Hotels® in North America and our portfolio of 154 hotels
includes 70 hotels in the upscale and full service segments. Out sole general
partner is FelCor Lodging Trust Incorporated, or FelCor, the second largest
lodging real estate investment trust, or REIT. At September 30, 2004, FelCor
owned an approximately 95% equity interest in our operations. At September 30, 2004, we owned a 100% real estate interest in 117 hotels,
a 90% or greater interest in entities owning seven hotels, a 60% interest in an
entity owning two hotels, a 51% interest in an entity owning eight hotels and
50% interests in unconsolidated entities that own 20 hotels. As a result of
our ownership interests in the operating lessees of 149 of these hotels, we
reflect their operating revenues and expenses in our consolidated statements of
operations. Effective July 1, 2004, we transferred a 49% interest in the
lessee of 12 jointly-owned hotels to our joint venture partner, which will
share proportionately in the income or loss of the lessee with respect to these
hotels. As of September 30, 2004, we own 100% of the consolidated operating
lessees of 129 hotels and 51% of the consolidated operating lessees of 20
hotels. The operations of 143 of the 149 hotels were included in continuing
operations at September 30, 2004. The remaining six hotels were held for sale
as of September 30, 2004, and their operations are included in discontinued
operations. The operating revenues and expenses of the remaining five hotels
are unconsolidated. At September 30, 2004, we had an aggregate of 62,455,439 redeemable and
common units of FelCor LP limited partnership interest outstanding. The following table reflects the distribution, by brand, of the 143 hotels
included in our consolidated hotel continuing operations at September 30, 2004: Brand
    
    Hotels
    
    RoomsEmbassy Suites Hotels
    
    
    56
    
    
    
    14,279Doubletree and Doubletree Guest Suites®
    
    
    10
    
    
    
    2,206Holiday Inn®  branded
    
    
    39
    
    
    
    12,769Crowne Plaza® and Crowne Plaza Suites®
    
    
    12
    
    
    
    4,025Sheraton® and Sheraton Suites®
    
    
    10
    
    
    
    3,269Other brands
    
    
    16
    
    
    
    3,432Total hotels
    
    
    143
 The hotels shown in the above table are located in the United States (32
states) and Canada (two hotels), with concentrations in Texas (35 hotels),
California (19 hotels), Florida (16 hotels) and Georgia (14 hotels).
Approximately 57% of our hotel room revenues were generated from hotels in
these four states during the nine months ended September 30, 2004. At September 30, 2004, of the 143 consolidated hotels included in
continuing operations, (i) subsidiaries of InterContinental Hotels Group, or
IHG, managed 55, (ii) subsidiaries of Hilton Hotels Corporation, or Hilton,
managed 66, (iii) subsidiaries of Starwood Hotels & Resorts Worldwide, Inc., or
Starwood, managed 11, (iv) subsidiaries of Interstate Hotels & Resorts, or
Interstate, managed 10, and (v) one hotel was managed by an independent
management company. Certain reclassifications have been made to prior period financial
information to conform to the current periods presentation with no effect to
previously reported net loss or partners capital. 7




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization  (continued) The financial information for the three and nine months ended September
30, 2004, and 2003, is unaudited. The preparation of the financial statements
in conformity with accounting principles generally accepted in the United
States of America, or GAAP, requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
accompanying financial statements for the three and nine months ended September
30, 2004, and 2003, include adjustments based on managements estimates
(consisting of normal and recurring accruals), which we consider necessary for
a fair presentation of the results for the periods. The financial information
should be read in conjunction with the consolidated financial statements for
the year ended December 31, 2003, included in our Annual Report on Form 10-K
for the year ended December 31, 2003 (Form 10-K). Operating results for
the three and nine months ended September 30, 2004, are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2004. 2. Foreign Currency Translation Results of operations for our Canadian hotels are maintained in Canadian
dollars and translated using the average exchange rates during the period.
Assets and liabilities are translated to U.S. dollars using the exchange rates
in effect at the balance sheet date. Resulting translation adjustments are
reflected in accumulated other comprehensive income included in partners
capital. 3. Investment in Unconsolidated Entities We owned 50% interests in joint venture entities that owned 20 hotels at
September 30, 2004, and December 31, 2003. We also owned a 50% interest in
entities that own real estate in Myrtle Beach, South Carolina, provide
condominium management services, and lease four hotels. We account for our
investments in these unconsolidated entities under the equity method. We do
not have any majority-owned subsidiaries that are not consolidated in our
financial statements. We make adjustments to our equity in income from
unconsolidated entities related to the difference between our basis in
investment in unconsolidated entities compared to the historical basis of the
assets recorded by the joint ventures. Summarized unaudited combined financial information for 100% of these
unconsolidated entities is as follows (in thousands): September 30,
    
    December 31,2004
    
    2003Balance sheet information:Investment in hotels, net of accumulated depreciation
    
    $
    271,214
    
    
    $
    326,835Total assets
    
    $
    302,248
    
    
    $
    366,046Debt
    
    $
    208,649
    
    
    $
    275,209Total liabilities
    
    $
    212,682
    
    
    $
    276,773Equity
    
    $
    89,566
    
    
    $
    89,273
 Debt of our unconsolidated entities at September 30, 2004, included $208.6
million of non-recourse mortgage debt, of which our pro rata share is $104.3
million. 8




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Investment in Unconsolidated Entities  (continued) Summarized combined statement of operations information for 100% of our
unconsolidated entities is as follows (in thousands): Three Months Ended

    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total revenues
    
    $
    17,212
    
    
    $
    17,745
    
    
    $
    49,623
    
    
    $
    60,613Net income
    
    $
    20,828
    (a)
    
    $
    4,444
    
    
    $
    29,610
    (a)
    
    $
    8,161
  (a)
    
    Includes $15.9 million from the gain on the sale of residential
condominium development in Myrtle Beach, South Carolina, which was
realized in September 2004. Our share of the gain was approximately
$7.9 million. We included additional gains of approximately $1.9
million in our equity in income from unconsolidated entities to
reflect the differences between our historical basis in the assets
sold and the basis recorded by the condominium joint venture. 4. Debt Debt at September 30, 2004 and December 31, 2003, consists of the
following (in thousands): Balance OutstandingEncumbered
    
    Interest Rate at
    
    Maturity
    
    September 30,
    
    December 31,Hotels
    
    September 30, 2004
    
    Date
    
    2004
    
    2003Promissory note
    
    
    none
    
    
    
    3.67
    %(a)
    
    June 2016
    
    $
    650
    
    
    $
    650Senior unsecured term
notes
    
    
    none
    
    
    
    
    
    
    Oct. 2004
    
    
    
    
    
    
    174,888Senior unsecured term
notes
    
    
    none
    
    
    
    5.84
    (a)
    
    June 2011
    
    
    290,000
    
    
    
    Senior unsecured term
notes
    
    
    none
    
    
    
    7.63
    
    
    Oct. 2007
    
    
    122,193
    
    
    
    124,617Senior unsecured term
notes
    
    
    none
    
    
    
    10.00
    
    
    Sept. 2008
    
    
    95,533
    
    
    
    596,865Senior unsecured term
notes
    
    
    none
    
    
    
    9.00
    
    
    June 2011
    
    
    298,346
    
    
    
    298,158Total unsecured debt(d)
    
    
    
    
    
    
    7.77
    
    
    
    
    
    
    
    806,722
    
    
    
    1,195,178Mortgage debt
    
    1 hotel
    
    
    7.23
    
    
    Sept. 2005
    
    
    10,753
    
    
    
    11,286Mortgage debt
    
    
    15 hotels
    
    
    
    5.27
    (b)
    
    July 2009  2014
    
    
    193,378
    
    
    
    Mortgage debt
    
    
    10 hotels
    
    
    
    4.13
    (c)
    
    May 2006
    
    
    145,536
    
    
    
    148,080Mortgage debt
    
    
    15 hotels
    
    
    
    7.24
    
    
    Nov. 2007
    
    
    128,055
    
    
    
    131,721Mortgage debt
    
    
    1 hotel
    
    
    
    4.84
    (a)
    
    August 2008
    
    
    15,500
    
    
    
    15,500Mortgage debt
    
    
    7 hotels
    
    
    
    7.54
    
    
    April 2009
    
    
    90,969
    
    
    
    92,445Mortgage debt
    
    
    6 hotels
    
    
    
    7.55
    
    
    June 2009
    
    
    68,468
    
    
    
    69,566Mortgage debt
    
    
    8 hotels
    
    
    
    8.70
    
    
    May 2010
    
    
    176,200
    
    
    
    178,118Mortgage debt
    
    
    7 hotels
    
    
    
    8.73
    
    
    May 2010
    
    
    136,488
    
    
    
    138,200Mortgage debt
    
    
    8 hotels
    
    
    
    7.48
    
    
    April 2011
    
    
    49,898
    
    
    
    50,305Other
    
    
    1 hotel
    
    
    
    9.17
    
    
    August 2011
    
    
    6,294
    
    
    
    6,956Total secured debt(d)
    
    
    79 hotels
    
    
    
    6.91
    
    
    
    
    
    
    

    1,021,539
    
    
    
    842,177Total(d)
    
    
    
    
    
    
    7.29
    %
    
    
    
    
    
    $
    1,828,261
    
    
    $
    2,037,355
  (a)
    
    Variable interest rate based on LIBOR, which was 1.8% at September 30,
2004.(b)
    
    $87 million of this debt had a variable interest rate based on LIBOR,
which was 1.8% at September 30, 2004.(c)
    
    Variable interest rate based on LIBOR. This debt may be extended at our
option for up to two, one-year periods.(d)
    
    Interest rates are calculated based on the weighted average outstanding
debt at September 30, 2004. 9




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Debt  (continued) We reported interest expense of $35.3 million (net of interest income of
$0.5 million and capitalized interest of $0.4 million), and $42.3 million (net
of interest income of $0.5 million and capitalized interest of $0.1 million)
for the three months ended September 30, 2004 and 2003, respectively. For the
nine months ended September 30, 2004 and 2003, respectively, we reported
interest expense of $116.2 million (net of interest income of $1.9 million and
capitalized interest of $0.6 million) and $123.8 million (net of interest
income of $1.4 million and capitalized interest of $0.6 million). Rating
agency downgrades of our senior unsecured debt in 2003 resulted in a 50 basis
point step-up in interest rates of our senior unsecured debt due in September
2008 ($95.5 million outstanding principal amount at September 30, 2004) and our
fixed interest rate senior unsecured debt due in June 2011 ($300 million
outstanding principal amount at September 30, 2004). In March 2004, we elected to terminate our line of credit, which resulted
in the first quarter charge-off of unamortized loan costs of $0.2 million. In May 2004, we completed the private placement of $175 million in
aggregate principal amount of Senior Floating Notes due June 1, 2011, or the
2011 Notes, and we received net proceeds of $174.1 million. The 2011 Notes
bear interest, adjusted semi annually, at the six-month LIBOR plus 4.25% and
rank equally with our other existing senior unsecured debt. The 2011 Notes are
callable on or after December 1, 2006, at an initial redemption price of 102%.
In July 2004, we completed an additional private placement of $115 million of
the 2011 Notes with identical terms and conditions as the $175 million issued
in May 2004. In October 2004, we commenced an offer to exchange these
privately placed notes for new notes with identical terms that have been
registered under the Securities Act of 1933. On June 9, 2004, we redeemed all $175 million in principal amount of our
outstanding 7.375% Senior Notes due 2004. The redemption price was $1,018 per
$1,000 of the principal amount, plus accrued interest. With the retirement of
this debt, we recorded a loss on redemption of $3.2 million and wrote off $0.3
million of debt issue costs. We also recorded a $1 million gain on the
unwinding of the interest rate swaps tied to this debt. During the second quarter of 2004, we purchased $325.3 million principal
amount of our 9.5% Senior Notes due 2008 (which currently bear interest at 10%
as a result of the 2003 downgrades of the credit ratings on our senior notes)
through tender offers and by purchases in the open market at an average price
of $1,072.10 per $1,000 in principal amount. In connection with the partial
retirement of this debt, we recorded a loss on early extinguishment of debt of
$25 million ($23.4 million related to the premium paid in excess of par and
$1.6 million related to the unamortized discount) and wrote off debt issue
costs of $3.7 million. In the third quarter of 2004, we purchased or redeemed
an additional $179 million of these notes and recorded an $11.0 million loss on
early extinguishment of debt and wrote off debt issue costs of $1.9 million.
At September 30, 2004, $95.5 million aggregate principal amount of these notes
remained outstanding. In June 2003, we entered into a new secured delayed draw facility with
JPMorgan Chase Bank for up to $200 million. At June 30, 2004, we had drawn
down $169 million on this facility (collateralized by 14 hotels). In July
2004, an additional $25 million was funded under the facility and an additional
hotel was added to the collateral. The amount drawn under the facility has
been converted into: (i) $107 million of nine separate fixed rate CMBS loans
secured by nine hotels with a weighted average interest rate of 6.5% and with
maturity dates ranging from 2009 to 2014, and (ii) $87 million of a
cross-collateralized floating rate CMBS loan secured by six hotels with an
interest rate of LIBOR plus 2.11% and with a maturity date of 2014. On July
28, 2004, we cancelled the balance of the $200 million facility. At September 30, 2004, we had aggregate mortgage indebtedness of
approximately $1.0 billion that was secured by 79 of our consolidated hotels
with an aggregate book value of approximately $1.8 billion. Substantially all
of this debt is recourse solely to the specific assets securing the debt,
except in the case of fraud, misapplication of funds and other customary
recourse provisions. Loans secured by 41 hotels provide for lock- box
arrangements. With respect to loans secured by 23 of these hotels, if the debt
service coverage ratios fall 10




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Debt  (continued) below certain levels, the lender is entitled to apply the revenues from the
hotels securing the loan to satisfy current requirements for debt service,
taxes, insurance and other reserves, before the balance of the revenues, if
any, would be available to the owner to pay the expenses of hotel operations
and provide a return to the owner. Eight of these 23 hotels, which accounted
for 2% of our total revenues in 2003, are currently below the prescribed debt
service coverage ratios and are subject to these lock-box requirements. With respect to loans secured by the remaining 18 hotels, the owner is
permitted to retain 115% of budgeted hotel operating expenses before the
remaining revenues would become subject to a similar lock-box arrangement if a
specified debt service coverage ratio was not met. The mortgage loans secured
by 16 of these 18 hotels also provide that, so long as the debt service
coverage ratios remain below a second, even lower minimum level, the lender may
retain any excess cash (after deduction for the 115% of budgeted operating
expenses, debt service, tax, insurance and other reserve requirements) and, if
the debt service coverage ratio remains below this lower minimum level for 12
consecutive months, apply any accumulated excess cash to the prepayment of the
principal amount of the debt. If the debt service coverage ratio exceeds the
lower minimum level for three consecutive months, any then accumulated excess
cash will be returned to the owner. Ten of these 18 hotels, which accounted
for 6% of our total revenues in 2003, are currently below the applicable debt
service coverage ratio and are subject to the lock-box provisions. None of the
hotels are currently below the second, even lower minimum debt service coverage
ratio that would permit the lender to retain excess cash after deduction for
the 115% of budgeted operating expenses, debt service, tax, insurance and other
reserve requirements. Our publicly-traded senior unsecured notes require that we satisfy total
leverage, secured leverage and interest coverage tests in order to: incur
additional indebtedness, except to refinance maturing debt with replacement
debt, as defined under our indentures; pay distributions in excess of the
minimum distribution required to meet FelCors REIT qualification test;
repurchase units; or merge. As of the date of this filing, we have satisfied
all such tests; however, under the terms of two of our indentures, we are
prohibited from repurchasing any of our units, whether common or preferred,
subject to certain exceptions, so long as our debt-to-EBITDA ratio, as defined
in the indentures, exceeds 4.85 to 1. Our current debt-to-EBITDA ratio exceeds
that ratio and is expected to do so for the foreseeable future. Accordingly,
we are prohibited from purchasing any of our units, except as permitted under
limited exceptions, such as from the proceeds of a substantially concurrent
issuance of other partnership units. If actual operating results fail to meet our current expectations or if
interest rates increase unexpectedly, we may be unable to continue to satisfy
the incurrence test under the indentures governing our senior unsecured notes
and may be prohibited from, among other things, incurring any additional
indebtedness or paying distributions on our preferred or common units, except
to the extent necessary to satisfy FelCors REIT qualification requirement that
it distribute currently at least 90% of its taxable income. In the event of
our failure of this incurrence test, based upon our current estimates of
taxable income for 2004, we would be unable to distribute the full amount of
distributions accruing under our outstanding preferred units in 2004 and,
accordingly, could pay no distributions on our common units. However, based on
our operating results to date and our current estimates for the remainder of
2004, we do not anticipate a violation of this incurrence test. 5. Derivatives In the normal course of business, we are exposed to the effect of interest
rate changes. We limit these risks by following established risk management
policies and procedures, including the use of derivatives. It is our objective
to use interest rate hedges to manage our fixed and floating interest rate
position and not to engage in speculation on interest rates. We manage
interest rate risk based on the varying circumstances of anticipated borrowings
and existing floating and fixed rate debt. We will generally seek to pursue
interest rate risk mitigation strategies that will result in the least amount
of reported earnings volatility under GAAP while still meeting strategic
economic objectives and maintaining adequate liquidity and flexibility.
Instruments that meet these hedging criteria are formally designated as hedges
at the inception of the derivative contract. 11




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Derivatives  (continued) In June 2004, we unwound six interest rate swap agreements with an
aggregate notional amount of $175 million that were matched with the $175
million in senior unsecured notes due 2004 that we redeemed. A $1 million gain
was recorded, offsetting the loss on the redemption of the debt. Also during
June 2004, five additional swaps with an aggregate amount of $125 million that
were matched to the $125 million senior unsecured notes due 2007 were unwound
at a cost of $2.3 million. The $2.3 million was applied to the principal
balance of these notes and will be amortized to interest expense over the
remaining life of the debt. During July 2004, four interest rate swap
agreements with a notional value of $100 million, that were matched to mortgage
debt maturing in November 2007, were unwound at a cost of $1.3 million. The
$1.3 million was applied to the principal balance of this debt and will be
amortized to interest expense over the remaining life of this debt. We have no
interest rate swap agreements in effect at September 30, 2004. To determine the fair values of our derivative instruments, we use a
variety of methods and assumptions that are based on market conditions and
risks existing at each balance sheet date. All methods of assessing fair value
result in a general approximation of value, and such value may never actually
be realized. The amounts paid or received by us under the terms of interest rate swap
agreements are accrued as interest rates change, and we recognize them as an
adjustment to interest expense, which has a corresponding effect on our future
cash flows. Our interest rate swap agreements decreased interest expense $4.2
million and $5.2 million during the nine months ended September 30, 2004 and
2003, respectively. Agreements such as these contain a credit risk in that the
counterparties may be unable to fulfill the terms of the agreement. We
minimize that risk by evaluating the creditworthiness of our counterparties,
who are limited to major banks and financial institutions, and we do not
anticipate nonperformance by the counterparties. To fulfill requirements under a $150 million secured loan facility
executed in April 2003, we purchased 6% interest rate caps on LIBOR with a
notional amount of $145.5 million. We concurrently sold interest rate caps
with identical terms. In July 2004, we purchased 6.5% interest rate caps on
LIBOR with a notional amount of $86.9 million to fulfill requirements under an
$87 million cross-collateralized floating rate CMBS loan and concurrently sold
interest rate caps with identical terms. These interest rate cap agreements
have not been designated as hedges. The fair value of both the purchased and
sold interest rate caps was $0.03 million at September 30, 2004, resulting in
no net earnings impact. 6. Preferred Stock In April 2004, FelCor completed the sale of 4.6 million shares of its
$1.95 Series A Cumulative Convertible Preferred Stock. The shares were sold at
a price of $23.79 per share, which included accrued dividends of $0.51 per
share through April 5, 2004, resulting in net proceeds of approximately $104.5
million. The proceeds from the Series A preferred stock were contributed to us
in exchange for a like number of Series A preferred units. The preference on
these units is the same as FelCors Series A preferred stock. The proceeds
were used for the retirement of debt. In August 2004, FelCor completed the sale of an additional 2.3 million
shares of its $1.95 Series A Cumulative Convertible Preferred Stock. The
shares were sold at a price of $23.22 per share, which included accrued
dividends of $0.28 per share through August 22, 2004, resulting in net proceeds
of approximately $52 million. The proceeds from the Series A preferred stock
were contributed to us in exchange for a like number of Series A preferred
units. The preference on these units is the same as FelCors Series A
preferred stock. The proceeds were used for the retirement of debt. 12




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Hotel Operating Revenue, Departmental Expenses and Other Property
Operating Costs Hotel operating revenue from continuing operations was comprised of the
following (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Room revenue
    
    $
    244,281
    
    
    $
    231,579
    
    
    $
    724,974
    
    
    $
    674,542Food and beverage revenue
    
    
    42,418
    
    
    
    38,843
    
    
    
    131,510
    
    
    
    121,348Other operating departments
    
    
    16,110
    
    
    
    14,974
    
    
    
    47,889
    
    
    
    45,063Total hotel operating revenues
    
    $
    302,809
    
    
    $
    285,396
    
    
    $
    904,373
    
    
    $
    840,953
 Over 99% of our revenue in 2003 and 2004 was comprised of hotel operating
revenues, which included room revenue, food and beverage revenue, and revenue
from other hotel operating departments (such as telephone, parking and business
centers). These revenues are recorded net of any sales or occupancy taxes
collected from our guests. All rebates or discounts are recorded, when allowed,
as a reduction in revenue, and there are no material contingent obligations
with respect to rebates or discounts offered by us. All revenues are recorded
on an accrual basis, as earned. Appropriate allowances are made for doubtful
accounts and are recorded as a bad debt expense. The remaining 1% of our
revenue was from retail space rental revenue and other sources in 2004 and
2003. During the three months ended September 30, 2004, we recorded $1 million
of other revenue that we received in development fees from the successful
completion of a condominium project. We do not have any time-share arrangements and do not sponsor any guest
frequency programs for which we would have any contingent liability. We
participate in guest frequency programs sponsored by the brand owners of our
hotels, and we expense the charges associated with those programs (typically
consisting of a percentage of the total guest charges incurred by a
participating guest), as incurred. When a guest redeems accumulated guest
frequency points at one of our hotels, the hotel bills the sponsor for the
services provided in redemption of such points and records revenue in the
amount of the charges billed to the sponsor. Associated with the guest
frequency programs, we have no loss contingencies or ongoing obligation beyond
what is paid to the brand owner at the time of the guests stay. Included in total hotel operating revenue was $18.6 million and $7.8
million for the nine months ended September 30, 2004 and 2003, respectively,
related to the consolidation of our joint venture with Interstate. This joint
venture became consolidated on June 1, 2003 and it was accounted for by the
equity method prior to June 2003. Hotel departmental expenses from continuing operations were comprised of
the following (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Room
    
    $
    66,787
    
    
    $
    62,142
    
    
    $
    194,478
    
    
    $
    174,788Food and beverage
    
    
    34,551
    
    
    
    32,258
    
    
    
    105,455
    
    
    
    96,737Other operating departments
    
    
    7,993
    
    
    
    6,893
    
    
    
    24,045
    
    
    
    20,415Total hotel departmental expenses
    
    $
    109,331
    
    
    $
    101,293
    
    
    $
    323,978
    
    
    $
    291,940
 13




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Hotel Operating Revenue, Departmental Expenses and Other Property
Operating Costs  (continued) Other property operating costs from continuing operations were comprised
of the following (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Hotel general and administrative expense
    
    $
    28,534
    
    
    $
    26,325
    
    
    $
    85,562
    
    
    $
    79,517Marketing
    
    
    25,452
    
    
    
    24,616
    
    
    
    77,854
    
    
    
    71,894Repair and maintenance
    
    
    16,739
    
    
    
    16,106
    
    
    
    50,716
    
    
    
    46,743Utilities
    
    
    17,522
    
    
    
    16,198
    
    
    
    47,504
    
    
    
    43,584Total other property operating costs
    
    $
    88,247
    
    
    $
    83,245
    
    
    $
    261,636
    
    
    $
    241,738
 Included in hotel departmental expenses and other property operating costs
are hotel employee compensation and benefit expenses of $100.0 million and
$93.4 million for the three months ended September 30, 2004 and 2003,
respectively, and $296.6 million and $271.7 million for the nine months ended
September 30, 2004 and 2003, respectively. Included in total hotel departmental expenses and other property operating
costs are $14.4 million and $6.1 million for the nine months ended September
30, 2004 and 2003, respectively, related to the consolidation of our joint
venture with Interstate which became effective June 1, 2003. 8. Taxes, Insurance and Lease Expense Taxes, insurance and lease expense from continuing operations is comprised
of the following (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Operating lease expense (a)
    
    $
    15,260
    
    
    $
    15,651
    
    
    $
    46,188
    
    
    $
    43,503Real estate and other taxes
    
    
    10,139
    
    
    
    10,882
    
    
    
    32,853
    
    
    
    34,451Property, general liability insurance and other
    
    
    3,817
    
    
    
    4,372
    
    
    
    10,709
    
    
    
    12,838Total taxes, insurance and lease expense
    
    $
    29,216
    
    
    $
    30,905
    
    
    $
    89,750
    
    
    $
    90,792
  (a)
    
    Includes lease expense associated with 15 hotels owned by
unconsolidated entities. Included in lease expense with respect to
these hotels are $6.5 million and $5.5 million in percentage rent for
the three months ended September 30, 2004 and 2003, respectively, and
$18.6 million and $14.6 million in percentage rent for the nine months
ended September 30, 2004 and 2003, respectively. 9. Impairment Charges Our hotels are comprised of operations and cash flows that can clearly be
distinguished, operationally and for financial reporting purposes.
Accordingly, we consider our hotels to be components as defined by Statement of
Financial Accounting Standards, or SFAS, 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), for purposes of determining
impairment charges and reporting discontinued operations. We recorded
impairment charges under the provisions of the SFAS 144, of $33.0 million and
$112.7 million ($28.5 million and $53.2 million in continuing operations and
$4.5 million and $59.5 million in discontinued operations) for the three months
ended September 30, 2004 and 2003, respectively. For the nine months ended
September 30, 2004 and 2003, we recorded impairment charges of $33.0 million
and $120.5 million ($28.5 million and $53.2 million in continuing operations
and $4.5 million and $67.3 million in discontinued operations), respectively. 14




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Impairment Charges  (continued) Impairment of Assets Held for Sale- In accordance with SFAS 144, we do
not consider hotels as held for sale until it is probable that the sale will
be completed within one year. Once a hotel is held for sale the operations
related to the hotel are included in discontinued operations. We consider a
hotel as held for sale once we have executed a contract for sale, received a
substantial non-refundable deposit and allowed the buyer to complete its due
diligence review. Until a buyer has completed its due diligence review of the
asset, necessary approvals have been received and substantive conditions to the
buyers obligation to perform have been satisfied, we do not consider a sale to
be probable. Our previous experience selling hotels supports this policy.
Held for sale assets are carried at the lower of depreciated historical cost or
fair value, less selling costs. At September 30, 2004, we had six assets that were classified as held for
sale. An impairment charge of $4.5 million was recorded for three of these
assets to reduce their carrying value to fair value, less selling costs. Impairment of Assets Held for Investment- When testing for recoverability
we generally use historical and projected cash flows over the expected hold
period. When determining fair value for purposes of determining impairment we
use a combination of historical and projected cash flows and other available
market information, such as recent sales prices for similar assets in specific
markets. The estimated cash flows used to test for recoverability are
undiscounted cash flow while the cash flows used for determining fair values
are discounted using a reasonable capitalization rate or as earlier noted based
on the local market conditions using recent sales of similar assets. Those
hotels that fail the impairment test described in SFAS 144 are written down to
their current estimated fair value, before any selling expenses. These hotels
continue to be depreciated over their remaining useful lives. The third quarter 2004 impairment charges included $28.5 million related
to ten assets that were held for investment at the date of impairment. Two of
these assets met the criteria of being held for sale following the end of the
quarter. These two assets were written down to their fair value because the
projected undiscounted cash flows for the remaining hold period, including the
contract sales price, did not exceed their carrying value. With respect to one
hotel, we entered into an option in the third quarter 2004 that would permit
the option holder to purchase the hotel for substantially less than its
carrying value. The remaining seven hotels experienced lower than expected
operating results, compared to prior year and budget, and recently forecasted
2005 hotel operating margins continue to be depressed for these hotels. These
seven hotels, among others, are currently being reviewed for possible
disposition. The impairment charges recorded in 2003 related entirely to assets held
for investment at the time of impairment. These impairment charges were
primarily related to the third quarter decision to sell 11 IHG-managed hotels,
following an amendment to the management agreements on these hotels. We may be subject to additional impairment charges in the event that
operating results of individual hotels are materially different from our
forecasts or if we shorten our contemplated holding period for certain of our
hotels. 15




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Discontinued Operations Included in discontinued operations are the results of operations of the
13 hotels sold or otherwise disposed of in 2004, six hotels designated as held
for sale at September 30, 2004, and 16 hotels disposed in 2003. Condensed
financial information for the hotels included in discontinued operations is as
follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Hotel operating revenue
    
    $
    14,558
    
    
    $
    39,972
    
    
    $
    63,621
    
    
    $
    119,700Hotel operating expenses
    
    
    14,660
    
    
    
    40,082
    
    
    
    61,431
    
    
    
    120,703Operating income (loss)
    
    
    (102
    )
    
    
    (110
    )
    
    
    2,190
    
    
    
    (1,003
    )Direct interest costs
    
    
    7
    
    
    
    20
    
    
    
    12
    
    
    
    (637
    )Gain on the early extinguishment of debt
    
    
    
    
    
    
    351
    
    
    
    
    
    
    
    1,611Impairment loss
    
    
    (4,529
    )
    
    
    (59,498
    )
    
    
    (4,529
    )
    
    
    (67,322
    )Lease termination expense
    
    
    
    
    
    
    
    
    
    
    (4,900
    )
    
    
    Gain (loss) on sale of assets
    
    
    3,058
    
    
    
    (399
    )
    
    
    2,116
    
    
    
    (882
    )Loss from discontinued operations
    
    $
    (1,566
    )
    
    $
    (59,636
    )
    
    $
    (5,111
    )
    
    $
    (68,233
    )
 In the first quarter of 2004, we sold four hotels for net proceeds of
$28.8 million. In the second quarter of 2004, we sold three hotels for net
proceeds of $12.0 million and transferred our interest in one hotel to the
ground lessor. In the third quarter, we sold five hotels for net proceeds of
$26.0 million. From the disposition of these hotels, we recognized a net gain
of $2.1 million and recorded a lease termination expense of $4.9 million. We leased the San Francisco Holiday Inn Select Downtown & Spa hotel under
a lease that was scheduled to expire in December 2004. In May 2003, the lessor
asserted that we were in default of our obligations for maintenance, repair and
replacement under the lease, and asserted that the cost of correcting the
alleged deficiencies was approximately $13.9 million. The lessor subsequently
asserted that we were also in default of our capital expenditure obligations
under the lease in the approximate amount of $3 million. In October 2003, we
reached a partial settlement with the lessor, pursuant to which we paid the
lessor $296,000 in full satisfaction and discharge of certain maintenance
obligations that the lessor had valued in its original claim at $470,300. On
May 3, 2004, we executed a settlement agreement. Under the terms of the
settlement, we paid the lessor $5 million which has been recorded as lease
termination expense in the accompanying financial statements. We transferred
our interest in the hotel to the lessor as of June 30, 2004, and have been
relieved of the obligation to make any additional capital improvements to the
hotel and have received a full release of all known and unknown claims and
further obligations under the lease. We have also received a release of
termination liability to IHG under its management agreement with respect to
this hotel upon its termination in connection with the above settlement. The
operations of this hotel were included in discontinued operations for the three
and nine months ended September 30, 2004 and 2003. 16




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Loss Per Unit The following table sets forth the computation of basic and diluted loss
per unit (in thousands, except per unit data): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Numerator:Loss from continuing operations
    
    $
    (37,641
    )
    
    $
    (73,296
    )
    
    $
    (89,953
    )
    
    $
    (109,043
    )Less: Preferred distributions
    
    
    (9,343
    )
    
    
    (6,727
    )
    
    
    (25,039
    )
    
    
    (20,181
    )Loss from continuing operations applicable
to common unitholders
    
    
    (46,984
    )
    
    
    (80,023
    )
    
    
    (114,992
    )
    
    
    (129,224
    )Discontinued operations
    
    
    (1,566
    )
    
    
    (59,636
    )
    
    
    (5,111
    )
    
    
    (68,233
    )Net loss applicable to common unitholders
    
    $
    (48,550
    )
    
    $
    (139,659
    )
    
    $
    (120,103
    )
    
    $
    (197,457
    )Denominator:Denominator for basic earnings per unit
    
    
    61,978
    
    
    
    61,851
    
    
    
    61,982
    
    
    
    61,843Denominator for diluted earnings per unit 
adjusted
weighted average units and assumed conversions
    
    
    61,978
    
    
    
    61,851
    
    
    
    61,982
    
    
    
    61,843Earnings (loss) per unit data:Basic:Loss from continuing operations
    
    $
    (0.76
    )
    
    $
    (1.29
    )
    
    $
    (1.86
    )
    
    $
    (2.09
    )Discontinued operations
    
    
    (0.02
    )
    
    
    (0.97
    )
    
    
    (0.08
    )
    
    
    (1.11
    )Net loss
    
    $
    (0.78
    )
    
    $
    (2.26
    )
    
    $
    (1.94
    )
    
    $
    (3.20
    )Diluted:Loss from continuing operations
    
    $
    (0.76
    )
    
    $
    (1.29
    )
    
    $
    (1.86
    )
    
    $
    (2.09
    )Discontinued operations
    
    
    (0.02
    )
    
    
    (0.97
    )
    
    
    (0.08
    )
    
    
    (1.11
    )Net loss
    
    $
    (0.78
    )
    
    $
    (2.26
    )
    
    $
    (1.94
    )
    
    $
    (3.20
    )
 Securities that could potentially dilute basic earnings per unit in the
future and that were not included in the computation of diluted earnings per
unit, because they would have been antidilutive for the periods presented, are
as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003FelCors restricted shares granted but not vested
    
    
    405
    
    
    
    303
    
    
    
    305
    
    
    
    303Series A convertible preferred units
    
    
    9,985
    
    
    
    4,636
    
    
    
    9,985
    
    
    
    4,636
 Series A preferred distributions that would be excluded from net loss
applicable to common unitholders, if these Series A preferred units were
dilutive, were $5.5 million and $2.9 million for the three months and $13.6
million and $8.7 million for the nine months ended September 30, 2004 and 2003,
respectively. 17




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FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. FelCors Stock Based Compensation Plans FelCor applies Accounting Principles Board, or APB, Opinion 25 and related
interpretations in accounting for its stock based compensation plans for stock
based compensation issued prior to January 1, 2003. In 1995, SFAS 123,
Accounting for Stock-Based Compensation, was issued, which, if fully adopted
by FelCor, would have changed the methods it applies in recognizing the cost of
the plans. As permitted under the transition provisions of SFAS 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, FelCor
began recognizing compensation expense in accordance with SFAS 123 for all new
awards issued after December 31, 2002. Had the compensation cost for its
stock-based compensation plans been determined in accordance with SFAS 123
prior to January 1, 2003, our net income or loss and net income or loss per
common unit for the periods presented would approximate the pro forma amounts
below (in thousands, except per unit data): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Loss from continuing operations, as reported
    
    $
    (37,641
    )
    
    $
    (73,296
    )
    
    $
    (89,953
    )
    
    $
    (109,043
    )Add stock based compensation included in
the net loss, as reported
    
    
    484
    
    
    
    565
    
    
    
    1,615
    
    
    
    1,645Less stock based compensation expense that
would have been included in the
determination of net loss if the fair
value method had been applied to all
awards
    
    
    (638
    )
    
    
    (589
    )
    
    
    (1,685
    )
    
    
    (1,766
    )Loss from continuing operations, pro forma
    
    $
    (37,795
    )
    
    $
    (73,320
    )
    
    $
    (90,023
    )
    
    $
    (109,164
    )Basic and diluted net loss per common unit:As reported
    
    $
    (0.76
    )
    
    $
    (1.29
    )
    
    $
    (1.86
    )
    
    $
    (2.09
    )Pro forma
    
    $
    (0.76
    )
    
    $
    (1.30
    )
    
    $
    (1.86
    )
    
    $
    (2.09
    )
 The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. 13. Consolidating Financial Information Certain of the Companys wholly-owned subsidiaries (FelCor/CSS Holdings,
L.P.; FelCor/CSS Hotels, L.L.C.; FelCor/LAX Hotels L.L.C.; FelCor Eight Hotels,
L.L.C.; FelCor/St. Paul Holdings, L.P.; FelCor/LAX Holdings, L.P.; FHAC Nevada
Holdings, L.L.C.; FelCor TRS Holdings, L.P.; Kingston Plantation Development
Corp.; FHAC Texas Holdings, L.P.; FelCor Omaha Hotel Company, L.L.C.; FelCor
Country Villa Hotel, L.L.C.; FelCor Moline Hotel, L.L.C.; FelCor Canada Co. and
FelCor Hotel Asset Company, L.L.C., collectively, Subsidiary Guarantors),
together with FelCor and two of its wholly-owned subsidiaries (FelCor Holdings
Trust and FelCor Nevada Holdings, L.L.C.), are guarantors of senior debt. The
following tables present consolidating information for the Subsidiary
Guarantors. 18




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##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Consolidating Financial Information  (continued) CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2004
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSNet investment in hotel properties
    
    $
    193,346
    
    
    $
    1,018,130
    
    
    $
    1,746,373
    
    
    $
    
    
    
    $
    2,957,849Equity investment in consolidated entities
    
    
    1,912,888
    
    
    
    
    
    
    
    
    
    
    
    (1,912,888
    )
    
    
    Investment in unconsolidated entities
    
    
    82,631
    
    
    
    34,756
    
    
    
    
    
    
    
    
    
    
    
    117,387Assets held for sale
    
    
    
    
    
    
    66,505
    
    
    
    
    
    
    
    
    
    
    
    66,505Cash and cash equivalents
    
    
    74,872
    
    
    
    78,076
    
    
    
    1,161
    
    
    
    
    
    
    
    154,109Restricted cash
    
    
    9,726
    
    
    
    2,301
    
    
    
    25,037
    
    
    
    
    
    
    
    37,064Accounts receivable
    
    
    (949
    )
    
    
    57,783
    
    
    
    467
    
    
    
    
    
    
    
    57,301Deferred assets
    
    
    9,741
    
    
    
    671
    
    
    
    8,953
    
    
    
    
    
    
    
    19,365Other assets
    
    
    4,287
    
    
    
    17,288
    
    
    
    36
    
    
    
    
    
    
    
    21,611Total assets
    
    $
    2,286,542
    
    
    $
    1,275,510
    
    
    $
    1,782,027
    
    
    $
    (1,912,888
    )
    
    $
    3,431,191LIABILITIES AND PARTNERS CAPITALDebt
    
    $
    872,402
    
    
    $
    121,154
    
    
    $
    834,705
    
    
    $
    
    
    
    $
    1,828,261Distributions payable
    
    
    8,867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,867Accrued expenses and other liabilities
    
    
    16,381
    
    
    
    119,912
    
    
    
    23,745
    
    
    
    
    
    
    
    160,038Minority interest   other partnerships
    
    
    1,195
    
    
    
    (5,723
    )
    
    
    50,856
    
    
    
    
    
    
    
    46,328Total liabilities
    
    
    898,845
    
    
    
    235,343
    
    
    
    909,306
    
    
    
    
    
    
    
    2,043,494Redeemable units, at redemption value
    
    
    31,548
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,548Preferred units
    
    
    478,757
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    478,757Common units
    
    
    877,392
    
    
    
    1,027,171
    
    
    
    872,721
    
    
    
    (1,912,888
    )
    
    
    864,396Accumulated other comprehensive income
    
    
    
    
    
    
    12,996
    
    
    
    
    
    
    
    
    
    
    
    12,996Total partners capital
    
    
    1,356,149
    
    
    
    1,040,167
    
    
    
    872,721
    
    
    
    (1,912,888
    )
    
    
    1,356,149Total liabilities, redeemable units
and partners capital
    
    $
    2,286,542
    
    
    $
    1,275,510
    
    
    $
    1,782,027
    
    
    $
    (1,912,888
    )
    
    $
    3,431,191
 19




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##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Consolidating Financial Information  (continued) CONSOLIDATING BALANCE SHEET
December 31, 2003
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSNet investment in hotel properties
    
    $
    276,342
    
    
    $
    1,080,594
    
    
    $
    1,746,860
    
    
    $
    
    
    
    $
    3,103,796Equity investment in consolidated entities
    
    
    2,079,399
    
    
    
    
    
    
    
    
    
    
    
    (2,079,399
    )
    
    
    Investment in unconsolidated entities
    
    
    93,337
    
    
    
    23,216
    
    
    
    
    
    
    
    
    
    
    
    116,553Assets held for sale
    
    
    
    
    
    
    6,238
    
    
    
    15,600
    
    
    
    
    
    
    
    21,838Cash and cash equivalents
    
    
    168,224
    
    
    
    59,241
    
    
    
    4,420
    
    
    
    
    
    
    
    231,885Restricted cash
    
    
    1,833
    
    
    
    1,991
    
    
    
    15,600
    
    
    
    
    
    
    
    19,424Accounts receivable
    
    
    2,214
    
    
    
    40,568
    
    
    
    2,603
    
    
    
    
    
    
    
    45,385Deferred assets
    
    
    15,133
    
    
    
    783
    
    
    
    8,362
    
    
    
    
    
    
    
    24,278Other assets
    
    
    10,467
    
    
    
    14,992
    
    
    
    2,275
    
    
    
    
    
    
    
    27,734Total assets
    
    $
    2,646,949
    
    
    $
    1,227,623
    
    
    $
    1,795,720
    
    
    $
    (2,079,399
    )
    
    $
    3,590,893LIABILITIES AND PARTNERS CAPITALDebt
    
    $
    1,261,460
    
    
    $
    123,519
    
    
    $
    652,376
    
    
    $
    
    
    
    $
    2,037,355Distributions payable
    
    
    5,504
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,504Accrued expenses and other liabilities
    
    
    25,009
    
    
    
    (217,023
    )
    
    
    343,437
    
    
    
    
    
    
    
    151,423Minority interest  other partnerships
    
    
    8,562
    
    
    
    (3,797
    )
    
    
    45,432
    
    
    
    
    
    
    
    50,197Total liabilities
    
    
    1,300,535
    
    
    
    (97,301
    )
    
    
    1,041,245
    
    
    
    
    
    
    
    2,244,479Redeemable units, at redemption value
    
    
    33,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,612Preferred units
    
    
    318,907
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318,907Common units
    
    
    993,895
    
    
    
    1,315,446
    
    
    
    754,475
    
    
    
    (2,079,399
    )
    
    
    984,417Accumulated other comprehensive income
    
    
    
    
    
    
    9,478
    
    
    
    
    
    
    
    
    
    
    
    9,478Total partners capital
    
    
    1,312,802
    
    
    
    1,324,924
    
    
    
    754,475
    
    
    
    (2,079,399
    )
    
    
    1,312,802Total liabilities, redeemable units
and partners capital
    
    $
    2,646,949
    
    
    $
    1,227,623
    
    
    $
    1,795,720
    
    
    $
    (2,079,399
    )
    
    $
    3,590,893
 20




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##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Consolidating Financial Information  (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2004
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Hotel operating revenue
    
    $
    
    
    
    $
    302,809
    
    
    $
    
    
    
    $
    
    
    
    $
    302,809Percentage lease revenue
    
    
    9,467
    
    
    
    41,979
    
    
    
    50,196
    
    
    
    (101,642
    )
    
    
    Other revenue
    
    
    1,166
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    2,166Total revenue
    
    
    10,633
    
    
    
    345,788
    
    
    
    50,196
    
    
    
    (101,642
    )
    
    
    304,975Expenses:Hotel operating expense
    
    
    
    
    
    
    213,848
    
    
    
    
    
    
    
    
    
    
    
    213,848Taxes, insurance and lease expense
    
    
    104
    
    
    
    123,335
    
    
    
    7,419
    
    
    
    (101,642
    )
    
    
    29,216Corporate expenses
    
    
    197
    
    
    
    2,235
    
    
    
    1,359
    
    
    
    
    
    
    
    3,791Depreciation
    
    
    2,848
    
    
    
    10,987
    
    
    
    16,239
    
    
    
    
    
    
    
    30,074Total operating expenses
    
    
    3,149
    
    
    
    350,405
    
    
    
    25,017
    
    
    
    (101,642
    )
    
    
    276,929Operating income
    
    
    7,484
    
    
    
    (4,617
    )
    
    
    25,179
    
    
    
    
    
    
    
    28,046Interest expense, net
    
    
    (18,047
    )
    
    
    (2,538
    )
    
    
    (14,763
    )
    
    
    
    
    
    
    (35,348
    )Impairment loss
    
    
    (23,623
    )
    
    
    (4,875
    )
    
    
    
    
    
    
    
    
    
    
    (28,498
    )Hurricane loss
    
    
    (1,750
    )
    
    
    (375
    )
    
    
    
    
    
    
    
    
    
    
    (2,125
    )Charge-off of deferred financing cost
    
    
    (1,920
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,920
    )Loss on early extinguishment of debt
    
    
    (10,987
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,987
    )Income (loss) before equity in income
from unconsolidated entities, minority
interests and gain on sale of assets
    
    
    (48,843
    )
    
    
    (12,405
    )
    
    
    10,416
    
    
    
    
    
    
    
    (50,832
    )Equity in income from consolidated
entities
    
    
    8,885
    
    
    
    
    
    
    
    
    
    
    
    (8,885
    )
    
    
    Equity in income from unconsolidated
entities
    
    
    551
    
    
    
    11,468
    
    
    
    
    
    
    
    
    
    
    
    12,019Gain (loss) on sale of assets
    
    
    
    
    
    
    (11
    )
    
    
    1,105
    
    
    
    
    
    
    
    1,094Minority interests in other partnerships
    
    
    200
    
    
    
    1,050
    
    
    
    (1,172
    )
    
    
    
    
    
    
    78Income (loss) from continuing operations
    
    
    (39,207
    )
    
    
    102
    
    
    
    10,349
    
    
    
    (8,885
    )
    
    
    (37,641
    )Discontinued operations from
consolidated entities
    
    
    
    
    
    
    (1,566
    )
    
    
    
    
    
    
    
    
    
    
    (1,566
    )Net income (loss)
    
    
    (39,207
    )
    
    
    (1,464
    )
    
    
    10,349
    
    
    
    (8,885
    )
    
    
    (39,207
    )Preferred distributions
    
    
    (9,343
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,343
    )Net income (loss) applicable to
unitholders
    
    $
    (48,550
    )
    
    $
    (1,464
    )
    
    $
    10,349
    
    
    $
    (8,885
    )
    
    $
    (48,550
    )
 21




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##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Consolidating Financial Information  (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2003
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Hotel operating revenue
    
    $
    23
    
    
    $
    285,373
    
    
    $
    
    
    
    $
    
    
    
    $
    285,396Percentage lease revenue
    
    
    9,701
    
    
    
    47,039
    
    
    
    42,077
    
    
    
    (98,817
    )
    
    
    Other revenue
    
    
    (3,146
    )
    
    
    3,367
    
    
    
    
    
    
    
    
    
    
    
    221Total revenue
    
    
    6,578
    
    
    
    335,779
    
    
    
    42,077
    
    
    
    (98,817
    )
    
    
    285,617Expenses:Hotel operating expense
    
    
    30
    
    
    
    199,883
    
    
    
    
    
    
    
    
    
    
    
    199,913Taxes, insurance and other
    
    
    24
    
    
    
    124,720
    
    
    
    4,978
    
    
    
    (98,817
    )
    
    
    30,905Corporate expenses
    
    
    236
    
    
    
    2,087
    
    
    
    976
    
    
    
    
    
    
    
    3,299Depreciation
    
    
    3,286
    
    
    
    10,820
    
    
    
    17,370
    
    
    
    
    
    
    
    31,476Total operating expenses
    
    
    3,576
    
    
    
    337,510
    
    
    
    23,324
    
    
    
    (98,817
    )
    
    
    265,593Operating income
    
    
    3,002
    
    
    
    (1,731
    )
    
    
    18,753
    
    
    
    
    
    
    
    20,024Interest expense, net
    
    
    (27,002
    )
    
    
    (2,549
    )
    
    
    (12,752
    )
    
    
    
    
    
    
    (42,303
    )Impairment loss
    
    
    
    
    
    
    (45,207
    )
    
    
    (7,997
    )
    
    
    
    
    
    
    (53,204
    )Charge-off of deferred financing costs
    
    
    Income (loss) before equity in income
from unconsolidated entities, minority
interests, and gain on sale of assets
    
    
    (24,000
    )
    
    
    (49,487
    )
    
    
    (1,996
    )
    
    
    
    
    
    
    (75,483
    )Equity in loss from consolidated entities
    
    
    (110,817
    )
    
    
    
    
    
    
    
    
    
    
    110,817
    
    
    
    Equity in income from unconsolidated
entities
    
    
    1,460
    
    
    
    214
    
    
    
    
    
    
    
    
    
    
    
    1,674Gain on sale of assets
    
    
    (47
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47
    )Minority interests in other partnerships
    
    
    160
    
    
    
    734
    
    
    
    (334
    )
    
    
    
    
    
    
    560Income (loss) from continuing operations
    
    
    (133,244
    )
    
    
    (48,539
    )
    
    
    (2,330
    )
    
    
    110,817
    
    
    
    (73,296
    )Discontinued operations from
consolidated entities
    
    
    312
    
    
    
    (53,084
    )
    
    
    (6,864
    )
    
    
    
    
    
    
    (59,636
    )Net income (loss)
    
    
    (132,932
    )
    
    
    (101,623
    )
    
    
    (9,194
    )
    
    
    110,817
    
    
    
    (132,932
    )Preferred distributions
    
    
    (6,727
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,727
    )Net income (loss) applicable to
unitholders
    
    $
    (139,659
    )
    
    $
    (101,623
    )
    
    $
    (9,194
    )
    
    $
    110,817
    
    
    $
    (139,659
    )
 22




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##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Consolidating Financial Information  (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2004
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Hotel operating revenue
    
    $
    
    
    
    $
    904,373
    
    
    $
    
    
    
    $
    
    
    
    $
    904,373Percentage lease revenue
    
    
    28,006
    
    
    
    126,676
    
    
    
    157,502
    
    
    
    (312,184
    )
    
    
    Other revenue
    
    
    1,590
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    2,590Total revenue
    
    
    29,596
    
    
    
    1,032,049
    
    
    
    157,502
    
    
    
    (312,184
    )
    
    
    906,963Expenses:Hotel operating expense
    
    
    
    
    
    
    633,104
    
    
    
    
    
    
    
    
    
    
    
    633,104Taxes, insurance and lease expense
    
    
    1,391
    
    
    
    378,539
    
    
    
    22,004
    
    
    
    (312,184
    )
    
    
    89,750Corporate expenses
    
    
    1,233
    
    
    
    6,109
    
    
    
    4,227
    
    
    
    
    
    
    
    11,569Depreciation
    
    
    8,911
    
    
    
    31,231
    
    
    
    48,303
    
    
    
    
    
    
    
    88,445Total operating expenses
    
    
    11,535
    
    
    
    1,048,983
    
    
    
    74,534
    
    
    
    (312,184
    )
    
    
    822,868Operating income (loss)
    
    
    18,061
    
    
    
    (16,934
    )
    
    
    82,968
    
    
    
    
    
    
    
    84,095Interest expense, net
    
    
    (68,043
    )
    
    
    (7,984
    )
    
    
    (40,183
    )
    
    
    
    
    
    
    (116,210
    )Impairment loss
    
    
    (23,623
    )
    
    
    (4,875
    )
    
    
    
    
    
    
    
    
    
    
    (28,498
    )Hurricane loss
    
    
    (1,750
    )
    
    
    (375
    )
    
    
    
    
    
    
    
    
    
    
    (2,125
    )Charge-off of deferred financing cost
    
    
    (6,094
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,094
    )Loss on early extinguishment of debt
    
    
    (39,233
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,233
    )Gain on swap termination
    
    
    1,005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,005Income (loss) before equity in income
from unconsolidated entities, minority
interests and gain on sale of assets
    
    
    (119,677
    )
    
    
    (30,168
    )
    
    
    42,785
    
    
    
    
    
    
    
    (107,060
    )Equity in income from consolidated
entities
    
    
    20,083
    
    
    
    
    
    
    
    
    
    
    
    (20,083
    )
    
    
    Equity in income from unconsolidated
entities
    
    
    4,647
    
    
    
    11,045
    
    
    
    
    
    
    
    
    
    
    
    15,692Gain (loss) on sale of assets
    
    
    
    
    
    
    (22
    )
    
    
    1,116
    
    
    
    
    
    
    
    1,094Minority interests in other partnerships
    
    
    (117
    )
    
    
    1,926
    
    
    
    (1,488
    )
    
    
    
    
    
    
    321Income (loss) from continuing operations
    
    
    (95,064
    )
    
    
    (17,219
    )
    
    
    42,413
    
    
    
    (20,083
    )
    
    
    (89,953
    )Discontinued operations from
consolidated entities
    
    
    
    
    
    
    (5,118
    )
    
    
    7
    
    
    
    
    
    
    
    (5,111
    )Net income (loss)
    
    
    (95,064
    )
    
    
    (22,337
    )
    
    
    42,420
    
    
    
    (20,083
    )
    
    
    (95,064
    )Preferred distributions
    
    
    (25,039
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,039
    )Net income (loss) applicable to
unitholders
    
    $
    (120,103
    )
    
    $
    (22,337
    )
    
    $
    42,420
    
    
    $
    (20,083
    )
    
    $
    (120,103
    )
 23




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##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Consolidating Financial Information  (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2003
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Hotel operating revenue
    
    $
    23
    
    
    $
    839,470
    
    
    $
    1,460
    
    
    $
    
    
    
    $
    840,953Percentage lease revenue
    
    
    34,052
    
    
    
    138,124
    
    
    
    118,681
    
    
    
    (290,857
    )
    
    
    Other revenue
    
    
    (2,814
    )
    
    
    3,593
    
    
    
    59
    
    
    
    
    
    
    
    838Total revenue
    
    
    31,261
    
    
    
    981,187
    
    
    
    120,200
    
    
    
    (290,857
    )
    
    
    841,791Expenses:Hotel operating expense
    
    
    151
    
    
    
    577,146
    
    
    
    869
    
    
    
    
    
    
    
    578,166Taxes, insurance and lease expense
    
    
    4,993
    
    
    
    359,327
    
    
    
    17,329
    
    
    
    (290,857
    )
    
    
    90,792Corporate expenses
    
    
    1,064
    
    
    
    6,134
    
    
    
    3,261
    
    
    
    
    
    
    
    10,459Depreciation
    
    
    12,499
    
    
    
    39,052
    
    
    
    43,458
    
    
    
    
    
    
    
    95,009Total operating expenses
    
    
    18,707
    
    
    
    981,659
    
    
    
    64,917
    
    
    
    (290,857
    )
    
    
    774,426Operating income (loss)
    
    
    12,554
    
    
    
    (472
    )
    
    
    55,283
    
    
    
    
    
    
    
    67,365Interest expense, net
    
    
    (78,211
    )
    
    
    (8,912
    )
    
    
    (36,027
    )
    
    
    
    
    
    
    (123,150
    )Charge-off of deferred financing cost
    
    
    (2,830
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (2,834
    )Impairment loss
    
    
    
    
    
    
    (45,207
    )
    
    
    (7,997
    )
    
    
    
    
    
    
    (53,204
    )Income (loss) before equity in income
from unconsolidated entities, minority
interests and gain on sale of assets
    
    
    (68,487
    )
    
    
    (54,595
    )
    
    
    11,259
    
    
    
    
    
    
    
    (111,823
    )Equity in income from unconsolidated
entities
    
    
    2,547
    
    
    
    (295
    )
    
    
    
    
    
    
    
    
    
    
    2,252Gain on sale of assets
    
    
    (47
    )
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    106Equity in loss from consolidated entities
    
    
    (116,056
    )
    
    
    
    
    
    
    
    
    
    
    116,056
    
    
    
    Minority interests in other partnerships
    
    
    146
    
    
    
    645
    
    
    
    (369
    )
    
    
    
    
    
    
    422Income (loss) from continuing operations
    
    
    (181,897
    )
    
    
    (54,092
    )
    
    
    10,890
    
    
    
    116,056
    
    
    
    (109,043
    )Discontinued operations from
consolidated entities
    
    
    4,621
    
    
    
    (61,950
    )
    
    
    (10,904
    )
    
    
    
    
    
    
    (68,233
    )Net income (loss)
    
    
    (177,276
    )
    
    
    (116,042
    )
    
    
    (14
    )
    
    
    116,056
    
    
    
    (177,276
    )Preferred distributions
    
    
    (20,181
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,181
    )Net loss applicable to unitholders
    
    $
    (197,457
    )
    
    $
    (116,042
    )
    
    $
    (14
    )
    
    $
    116,056
    
    
    $
    (197,457
    )
 24




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##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Consolidating Financial Information  (continued) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2004
(in thousands) Subsidiary
    
    Non-Guarantor
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    ConsolidatedCash flows from (used in) operating activities
    
    $
    (42,886
    )
    
    $
    16,362
    
    
    $
    80,643
    
    
    $
    54,119Cash flows from (used in) investing activities
    
    
    448
    
    
    
    696
    
    
    
    (13,974
    )
    
    
    (12,830
    )Cash flows from (used in) financing activities
    
    
    (52,747
    )
    
    
    681
    
    
    
    (68,019
    )
    
    
    (120,085
    )Effect of exchange rates changes on cash
    
    
    
    
    
    
    1,020
    
    
    
    
    
    
    
    1,020Change in cash and cash equivalents
    
    
    (95,185
    )
    
    
    18,759
    
    
    
    (1,350
    )
    
    
    (77,776
    )Cash and cash equivalents at beginning of period
    
    
    170,057
    
    
    
    59,317
    
    
    
    2,511
    
    
    
    231,885Cash and equivalents at end of period
    
    $
    74,872
    
    
    $
    78,076
    
    
    $
    1,161
    
    
    $
    154,109
 CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2003
(in thousands) Subsidiary
    
    Non-Guarantor
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    ConsolidatedCash flows from (used in) operating activities
    
    $
    (38,295
    )
    
    $
    22,685
    
    
    $
    62,635
    
    
    $
    47,025Cash flows used in investing activities
    
    
    (7,474
    )
    
    
    (6,488
    )
    
    
    (18,596
    )
    
    
    (32,558
    )Cash flows from (used in) financing activities
    
    
    147,522
    
    
    
    (9,614
    )
    
    
    (45,586
    )
    
    
    92,322Effect of exchange rates changes on cash
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    175Change in cash and cash equivalents
    
    
    101,753
    
    
    
    6,758
    
    
    
    (1,547
    )
    
    
    106,964Cash and cash equivalents at beginning of period
    
    
    24,325
    
    
    
    23,323
    
    
    
    2,515
    
    
    
    50,163Cash and equivalents at end of period
    
    $
    126,078
    
    
    $
    30,081
    
    
    $
    968
    
    
    $
    157,127
 25




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations General In the third quarter of 2004, revenue per available room, or RevPAR, for
our consolidated hotel portfolio in continuing operations increased 4.6%
compared to the same period last year, which was consistent with our previously
disclosed guidance of a 4% to 6% increase. Through September 30, 2004, we had
ten consecutive months with year-over-year RevPAR increases and our second
quarterly year-over-year increase in average daily rates, or ADR, since the
first quarter of 2001. The ADR of our hotel portfolio increased 2.7% and
occupied rooms at our hotels, or occupancy, increased 1.9% for the quarter,
compared to the same quarter last year. Hotel demand continues to
strengthen
and, similar to past lodging cycles, as demand increases, ADR improves. In the
third quarter 2004, we experienced our first improvement in hotel operating
margins since we acquired our hotel leases in 2001. We continue to invest in our core hotels to maintain their competitive
position and to take advantage of the current recovery phase of the lodging
cycle. During the first nine months of 2004, we incurred $64 million for
capital improvements and replacements, and anticipate capital spending of
approximately $100 million for the full year. The completion and sale of the 251-unit Margate condominium tower at the
Kingston Plantation in Myrtle Beach, South Carolina, during the quarter
concluded FelCors third successful condominium development project. This
project resulted in an $11 million profit during the quarter. A fourth
condominium project in Myrtle Beach is in the planning stages, with a
completion date currently expected in the fall of 2006. At September 30, 2004, we had 22 remaining non-strategic hotels identified
for sale (including six hotels held for sale), with expected proceeds of
approximately $134 million, substantially all of which are expected to be sold
over the next 15 months. Through November 1, 2004, we have completed the sale
of three of the six hotels held for sale at September 30, 2004. During 2004
(through November 1), we have sold 15 hotels for $127 million, the proceeds of
which were used to retire debt. For the remainder of 2004, proceeds from the
sale of non-strategic hotels are currently estimated to be approximately $34
million, which we expect to use to retire additional debt. During the fourth
quarter of 2004, we expect to recognize gains of approximately $18 million upon
the sale of hotels. 
 Financial Comparison (in thousands of dollars, except RevPAR and hotel operating margin) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003RevPAR
    
    $
    66.30
    
    
    $
    63.36
    
    
    $
    66.24
    
    
    $
    63.06Hotel operating margin(1)
    
    
    19.7
    %
    
    
    19.1
    %
    
    
    20.1
    %
    
    
    20.5
    %Loss from continuing operations(2)
    
    $
    (37,641
    )
    
    $
    (73,296
    )
    
    $
    (89,953
    )
    
    $
    (109,043
    )Funds From Operations (FFO)(1) (3)
    
    $
    (18,610
    )
    
    $
    (101,260
    )
    
    $
    (24,536
    )
    
    $
    (79,836
    )Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA)(1) (3)
    
    $
    31,447
    
    
    $
    (50,259
    )
    
    $
    126,202
    
    
    $
    72,193
   (1)
    
    Included in the Financial Comparison are non-GAAP financial measures,
including operating margin, FFO and EBITDA. Further discussion, and a
detailed reconciliation, of these non-GAAP financial measures to our
financial statements are found elsewhere in this Managements Discussion
and Analysis of Financial Condition and Results of Operations.(2)
    
    Included in the loss from continuing operations are the following
amounts (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Charge off of deferred debt costs
    
    $
    1,920
    
    
    $
    
    
    
    $
    6,094
    
    
    $
    2,834Loss (gain) on early extinguishment of debt
    
    
    10,987
    
    
    
    
    
    
    
    39,233
    
    
    
    Gain from swap termination
    
    
    
    
    
    
    
    
    
    
    (1,005
    )
    
    
    Impairment loss
    
    
    28,498
    
    
    
    53,204
    
    
    
    28,498
    
    
    
    53,204Hurricane loss
    
    
    2,125
    
    
    
    
    
    
    
    2,125
    
    
    
    
 26




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##### Table of Contents



(3)
    
    In accordance with the guidance provided by the Securities and
Exchange Commission, or SEC, on non-GAAP financial measures, FFO and
EBITDA have not been adjusted to add back the following items included
in net loss for the periods presented (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Charge off of deferred debt costs
    
    $
    1,920
    
    
    $
    
    
    
    $
    6,094
    
    
    $
    2,834Loss (gain) on early extinguishment of debt
    
    
    10,987
    
    
    
    (351
    )
    
    
    39,233
    
    
    
    (1,611
    )Lease termination cost
    
    
    
    
    
    
    
    
    
    
    4,900
    
    
    
    Gain from swap termination
    
    
    
    
    
    
    
    
    
    
    (1,005
    )
    
    
    Impairment loss
    
    
    33,027
    
    
    
    112,702
    
    
    
    33,027
    
    
    
    120,526
 
 Results of Operations Comparison of the Three Months Ended September 30, 2004 and 2003 At September 30, 2004, we had 143 hotels included in our consolidated
continuing operations, of which 16 had been identified as non-strategic. The
16 non-strategic hotels included in continuing operations at September 30,
2004, represented 11% of the rooms in our hotel portfolio but only 6% of our
consolidated hotel operating profit. For the three months ended September 30, 2004, we recorded a loss from
continuing operations of $38 million, or a loss per unit from continuing
operations of $0.76. Included in the loss from continuing operations for the
quarter were impairment losses of $28 million ($0.46 per unit), $13 million
($0.21 per unit) of expenses associated with the early retirement of $179
million of senior notes and $2 million ($0.03 per unit) of hurricane loss
expenses. For the same period in 2003, we recorded a loss from continuing
operations of $73 million, or a loss per unit from continuing operations of
$1.29. Results of continuing operations for the third quarter of 2003 included
$53 million ($0.86 per unit) of expenses related to impairment losses. Revenues from continuing operations for the third quarter were $305
million, reflecting an increase of $19 million, or 7%, compared to the same
quarter in 2003. The increase in revenues was primarily related to a 4.6%
increase in our hotel portfolios RevPAR, compared to the same quarter in 2003.
Occupancy increased 1.9% to 67.7%, and ADR increased 2.7% to $98.00, compared
to the same quarter of 2003. The increases in occupancy and ADR are
attributable to the strengthening lodging market. Our third quarter 2004 hotel operating profit from continuing operations
increased by 9%, to $60 million, compared to the same period in 2003. The 9%
increase in hotel operating profit is nearly two times our RevPAR growth for
the period. Hotel operating margin, which is hotel operating profit divided by
hotel revenue, increased 60 basis points, to 19.7%. The improvement in hotel
operating margin resulted principally from a decrease in property taxes and
insurance, partially offset by an increase in labor related costs. Property tax
expense decreased in the quarter, compared to the prior year, largely from
reductions in assessed values and resolutions of prior years property tax
appeals. The reduction in insurance expense, compared to the prior year,
reflects the softening in the property insurance markets and reductions in
general liability losses. Interest expense included in continuing operations decreased by 16%, to
$35 million. The reduction in interest is related to a $213 million reduction
in our outstanding debt, resulting from the early retirement of a portion of
our senior notes, and a nearly 500 basis point reduction in average interest
rate, compared to the third quarter of 2003. Included in the loss from continuing operations for the quarter was a $28
million impairment loss. The impairment loss included in continuing operations
related to ten hotels. Seven of the hotels had significantly lower operating
cash flows, compared to the prior year and budget, and the estimated holding
period was reduced. With respect to one hotel, we entered into an option to
sell it for less than its book value and for two hotels whose expected holding
periods had been shortened, we recorded an impairment loss to reduce their
carrying value to current estimated fair value. 27




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##### Table of Contents



Equity in income from unconsolidated entities includes $10 million,
representing our gain related to the development and sale of a 251-unit
residential condominium in Myrtle Beach, South Carolina. Discontinued operations for the quarter represent the operating income,
direct interest costs and gains or losses on sale of five hotels disposed
during the quarter, six hotels that were designated as held for sale at
September 30, 2004, and 16 hotels disposed of in 2003. Included in
discontinued operations in the third quarter 2004 and 2003 were impairment
charges of $5 million and $59 million, respectively. Comparison of the Nine Months Ended September 30, 2004 and 2003 For the nine months ended September 30, 2004, we recorded a loss from
continuing operations of $90 million ($1.86 per unit) compared to a loss in
2003 of $109 million ($2.09 per unit). Results of continuing operations for
the nine months ended September 30, 2004, included a $28 million ($0.46 per
unit) impairment loss, $45 million ($0.73 per unit) of expenses associated with
the early retirement of $679 million of senior notes, $2 million ($0.03 per
unit) of hurricane related expenses and a $1 million ($0.02 per unit) gain from
the termination of interest rate swaps. Included in the prior year loss from
continuing operations was $53 million ($0.86 per unit) of expenses related to
impairment losses and the charge-off of deferred financing costs, net of a gain
on early extinguishment of debt. Revenues from continuing operations for the nine months 2004 were $907
million, reflecting an increase of 8% compared to the same period in 2003. The
increase in revenues was primarily related to the 5.0% increase in our hotel
portfolios RevPAR, compared to the same period in 2003. Occupancy increased
3.5% to 67.0% and ADR increased 1.4% to $98.83, compared to the same quarter of
2003. The increases in occupancy and ADR are attributed to the strengthening
lodging market. Included in total hotel operating revenue was $18.6 million and $7.8
million for the nine months ended September 30, 2004 and 2003, respectively,
related to the consolidation of our joint venture with Interstate Hotels &
Resorts. This joint venture became consolidated on June 1, 2003, and was
accounted for by the equity method prior to that date. Our 2004 hotel operating profit from continuing operations for the nine
months ended September 30, 2004, increased by $9.5 million over the same period
in 2003. Operating margin decreased from 20.5% to 20.1%. We attribute the
decrease in operating margin principally to increased labor-related costs,
partially offset by improvements in property tax and insurance costs. Equity in income from unconsolidated entities includes $10 million,
representing our gain related to the development and sale of a 251-unit
residential condominium in Myrtle Beach, South Carolina. Discontinued operations for the nine months represent the operating
income, direct interest costs and gains or losses on sale of 13 hotels disposed
of during 2004, six hotels that were designated as held for sale at September
30, 2004, and 16 hotels disposed in 2003. Included in discontinued operations
for the nine months of 2004 and 2003 are impairment charges of $5 million and
$67 million, respectively. 
 Non-GAAP Financial Measures Funds From Operations and EBITDA Historical cost accounting for real estate assets implicitly assumes that
the value of real estate assets diminish predictably over time. Since real
estate values instead have historically risen or fallen with market conditions,
most industry investors consider supplemental measures of performance to be
helpful in evaluating a real estate companys operations. Funds From
Operations and Earnings Before Interest, Taxes, Depreciation, and Amortization
are not measures of operating performance under GAAP. However, we consider FFO
and EBITDA 28




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##### Table of Contents



to be supplemental measures of a REITs performance and should be
considered along with, but not as an
alternative to, net income as a measure of our operating performance. FFO and
EBITDA reflect additional ways of viewing our operations that we believe, when
viewed in conjunction with our GAAP results and the reconciliations to the
corresponding GAAP financial measures, provide a more complete understanding of
factors and trends affecting our business than could be obtained absent this
disclosure. Management strongly encourages investors to review our financial
information in its entirety and not to rely on any single financial measure. The White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts, or
NAREIT, defines FFO as net income or loss (computed in accordance with GAAP),
excluding gains or losses from sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect FFO on the same basis. We compute FFO in accordance with
standards established by NAREIT. This may not be comparable to FFO reported by
other REITs that do not define the term in accordance with the current NAREIT
definition, or that interpret the current NAREIT definition differently than we
do. EBITDA is a commonly used measure of performance in many industries.
We define EBITDA as net income or loss (computed in accordance with
GAAP) plus interest, income taxes, depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect EBITDA on the same basis. FFO and EBITDA should not be considered as alternatives to operating
profit, cash flow from operations, or any other operating performance measure
prescribed by GAAP. Neither should FFO, FFO per share or EBITDA be considered
as measures of our liquidity or indicative of funds available for our cash
needs, including our ability to make cash distributions. FFO per share does
not measure, and should not be used as a measure of, amounts that accrue
directly to the benefit of stockholders. 29




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The following tables detail our computation of FFO and EBITDA (in
thousands): Reconciliation of Net Loss to FFO
(in thousands, except per unit data) Three Months Ended September 30,2004
    
    2003Per Unit
    
    
    
    
    
    
    
    
    
    Per UnitDollars
    
    Units
    
    Amount
    
    Dollars
    
    Units
    
    AmountNet loss
    
    $
    (39,207
    )
    
    
    
    
    
    
    
    
    
    $
    (132,932
    )Preferred distributions
    
    
    (9,343
    )
    
    
    
    
    
    
    
    
    
    
    (6,727
    )Net loss applicable to common
unitholders
    
    $
    (48,550
    )
    
    
    61,978
    
    
    $
    (0.78
    )
    
    $
    (139,659
    )
    
    
    61,851
    
    
    $
    (2.26
    )Depreciation from continuing operations
    
    
    30,074
    
    
    
    
    
    
    
    0.48
    
    
    
    31,476
    
    
    
    
    
    
    
    0.51Depreciation from unconsolidated
entities and discontinued operations
    
    
    2,924
    
    
    
    
    
    
    
    0.05
    
    
    
    6,477
    
    
    
    
    
    
    
    0.10Loss (gain) on sale of assets
    
    
    (3,058
    )
    
    
    
    
    
    
    (0.05
    )
    
    
    446
    
    
    
    
    
    
    
    0.01FFO
    
    $
    (18,610
    )
    
    
    61,978
    
    
    $
    (0.30
    )
    
    $
    (101,260
    )
    
    
    61,851
    
    
    $
    (1.64
    )
 Nine Months Ended September 30,2004
    
    2003Per Unit
    
    
    
    
    
    
    
    
    
    Per UnitDollars
    
    Units
    
    Amount
    
    Dollars
    
    Units
    
    AmountNet loss
    
    $
    (95,064
    )
    
    
    
    
    
    
    
    
    
    $
    (177,276
    )Preferred distributions
    
    
    (25,039
    )
    
    
    
    
    
    
    
    
    
    
    (20,181
    )Net loss applicable to common
unitholders
    
    $
    (120,103
    )
    
    
    61,982
    
    
    $
    (1.94
    )
    
    $
    (197,457
    )
    
    
    61,843
    
    
    $
    (3.19
    )Depreciation from continuing operations
    
    
    88,445
    
    
    
    
    
    
    
    1.43
    
    
    
    95,009
    
    
    
    
    
    
    
    1.54Depreciation from unconsolidated
entities and discontinued operations
    
    
    9,238
    
    
    
    
    
    
    
    0.15
    
    
    
    21,836
    
    
    
    
    
    
    
    0.35Loss (gain) on sale of assets
    
    
    (2,116
    )
    
    
    
    
    
    
    (0.04
    )
    
    
    776
    
    
    
    
    
    
    
    0.01FFO
    
    $
    (24,536
    )
    
    
    61,982
    
    
    $
    (0.40
    )
    
    $
    (79,836
    )
    
    
    61,843
    
    
    $
    (1.29
    )
 Consistent with SEC guidance on non-GAAP financial measures, FFO has not been
adjusted for the following amounts included in net loss (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Charge off of deferred debt costs
    
    $
    1,920
    
    
    $
    
    
    
    $
    6,094
    
    
    $
    2,834Loss (gain) on early extinguishment of debt
    
    
    10,987
    
    
    
    (351
    )
    
    
    39,233
    
    
    
    (1,611
    )Gain on swap termination
    
    
    
    
    
    
    
    
    
    
    (1,005
    )
    
    
    Lease termination expense from asset
    
    
    
    
    
    
    
    
    
    
    4,900
    
    
    
    Impairment
    
    
    33,027
    
    
    
    112,702
    
    
    
    33,027
    
    
    
    120,526
 30




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##### Table of Contents



Reconciliation of Net Loss to EBITDA
(in thousands) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (39,207
    )
    
    $
    (132,932
    )
    
    $
    (95,064
    )
    
    $
    (177,276
    )Depreciation from continuing operations
    
    
    30,074
    
    
    
    31,476
    
    
    
    88,445
    
    
    
    95,009Depreciation from unconsolidated entities and
discontinued operations
    
    
    2,924
    
    
    
    6,477
    
    
    
    9,238
    
    
    
    21,836Interest expense
    
    
    35,893
    
    
    
    42,793
    
    
    
    118,073
    
    
    
    124,560Interest expense from unconsolidated entities and
discontinued operations
    
    
    1,170
    
    
    
    1,362
    
    
    
    3,895
    
    
    
    6,419Amortization expense
    
    
    593
    
    
    
    565
    
    
    
    1,615
    
    
    
    1,645EBITDA
    
    $
    31,447
    
    
    $
    (50,259
    )
    
    $
    126,202
    
    
    $
    72,193
 Consistent with SEC guidance on non-GAAP financial measures, EBITDA has not
been adjusted for the following amounts included in net loss (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Charge off of deferred debt costs
    
    $
    1,920
    
    
    $
    
    
    
    $
    6,094
    
    
    $
    2,834Loss (gain) on early extinguishment of debt
    
    
    10,987
    
    
    
    (351
    )
    
    
    39,233
    
    
    
    (1,611
    )Gain on swap termination
    
    
    
    
    
    
    
    
    
    
    (1,005
    )
    
    
    Lease termination expense from asset
    
    
    
    
    
    
    
    
    
    
    4,900
    
    
    
    Impairment
    
    
    33,027
    
    
    
    112,702
    
    
    
    33,027
    
    
    
    120,526
 Hotel Operating Profit and Hotel Operating Margin Hotel operating profit and hotel operating margin are commonly used
non-GAAP measures of performance that we utilize to measure the relative
performance of our individual hotels and groups of hotels and to give investors
a more complete understanding of the operating results directly related to our
hotels. We believe that hotel operating profit and operating margin are useful
to investors by providing greater transparency with respect to significant
measures used by management in its financial and operational decision-making. Hotel Operating Profit
(dollars in thousands) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total revenue
    
    $
    304,975
    
    
    $
    285,617
    
    
    $
    906,963
    
    
    $
    841,791Retail space rental and other revenue
    
    
    2,166
    
    
    
    221
    
    
    
    2,590
    
    
    
    838Hotel revenue
    
    
    302,809
    
    
    
    285,396
    
    
    
    904,373
    
    
    
    840,953Hotel operating expenses
    
    
    243,064
    
    
    
    230,818
    
    
    
    722,854
    
    
    
    668,958Hotel operating profit
    
    $
    59,745
    
    
    $
    54,578
    
    
    $
    181,519
    
    
    $
    171,995Hotel operating margin
    
    
    19.7
    %
    
    
    19.1
    %
    
    
    20.1
    %
    
    
    20.5
    %Reconciliation of total operating expenses to
hotel operating expenses:Total operating expenses
    
    $
    276,929
    
    
    $
    265,593
    
    
    $
    822,868
    
    
    $
    774,426Corporate expenses
    
    
    (3,791
    )
    
    
    (3,299
    )
    
    
    (11,569
    )
    
    
    (10,459
    )Depreciation
    
    
    (30,074
    )
    
    
    (31,476
    )
    
    
    (88,445
    )
    
    
    (95,009
    )Hotel operating expenses
    
    $
    243,064
    
    
    $
    230,818
    
    
    $
    722,854
    
    
    $
    668,958
 31




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Reconciliation of Net Loss to Hotel Operating Profit
(in thousands) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (39,207
    )
    
    $
    (132,932
    )
    
    $
    (95,064
    )
    
    $
    (177,276
    )Discontinued operations
    
    
    1,566
    
    
    
    59,636
    
    
    
    5,111
    
    
    
    68,233Equity in income from unconsolidated entities
    
    
    (12,019
    )
    
    
    (1,674
    )
    
    
    (15,692
    )
    
    
    (2,252
    )Loss (gain) on sale of assets
    
    
    (1,094
    )
    
    
    47
    
    
    
    (1,094
    )
    
    
    (106
    )Minority interests
    
    
    (78
    )
    
    
    (560
    )
    
    
    (321
    )
    
    
    (422
    )Interest expense, net
    
    
    35,348
    
    
    
    42,303
    
    
    
    116,210
    
    
    
    123,150Charge-off of deferred financing costs
    
    
    1,920
    
    
    
    
    
    
    
    6,094
    
    
    
    2,834Loss on early extinguishment of debt
    
    
    10,987
    
    
    
    
    
    
    
    39,233
    
    
    
    Hurricane loss
    
    
    2,125
    
    
    
    
    
    
    
    2,125
    
    
    
    Swap termination costs
    
    
    
    
    
    
    
    
    
    
    (1,005
    )
    
    
    Impairment loss
    
    
    28,498
    
    
    
    53,204
    
    
    
    28,498
    
    
    
    53,204Corporate expenses
    
    
    3,791
    
    
    
    3,299
    
    
    
    11,569
    
    
    
    10,459Depreciation
    
    
    30,074
    
    
    
    31,476
    
    
    
    88,445
    
    
    
    95,009Retail space rental and other revenue
    
    
    (2,166
    )
    
    
    (221
    )
    
    
    (2,590
    )
    
    
    (838
    )Hotel operating profit
    
    $
    59,745
    
    
    $
    54,578
    
    
    $
    181,519
    
    
    $
    171,995
 Reconciliation of Ratio of Operating Income to Total Revenue to Hotel Operating Margin Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Ratio of operating income to total revenue
    
    
    9.2
    %
    
    
    7.0
    %
    
    
    9.3
    %
    
    
    8.0
    %Less:Retail space and rental and other revenue
    
    
    (0.7
    )
    
    
    (0.0
    )
    
    
    (0.3
    )
    
    
    (0.1
    )Plus:Corporate expenses
    
    
    1.2
    
    
    
    1.1
    
    
    
    1.3
    
    
    
    1.3Depreciation
    
    
    10.0
    
    
    
    11.0
    
    
    
    9.8
    
    
    
    11.3Hotel operating margin
    
    
    19.7
    %
    
    
    19.1
    %
    
    
    20.1
    %
    
    
    20.5
    %
 32




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##### Table of Contents



Hotel Portfolio Composition The following table sets forth the reconciliation between the hotels owned at June 30, 2004 and
those owned at September 30, 2004. Hotels Held
    
    Hotels infor Sale
    
    Continuing OperationsHotels owned at June 30, 2004
    
    
    1
    
    
    
    153Dispositions in the third quarter 2004:Holiday Inn  Beaumont, TexasHoliday Inn  Midland, TexasBeaver Creek Lodge  Avon, ColoradoHoliday Inn Express & Suites  Omaha, NebraskaHoliday Inn  Albuquerque, New MexicoTotal dispositions in the third quarter 2004
    
    
    (1
    )
    
    
    (4
    )Held for
sale at September 30, 2004(a)
    
    
    6
    
    
    
    (6
    )Hotels owned at September 30, 2004
    
    
    6
    
    
    
    143
  (a)
    
    Three of these hotels have been sold in the fourth quarter 2004, through November 1, 2004 The hotels disposed of during the third quarter generated aggregate gross
proceeds of approximately $28 million and resulted in a gain from the sale of
assets of $3 million during the quarter. 33




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##### Table of Contents



The following tables set forth, as of September 30, 2004, for our consolidated
hotel portfolio of 143 hotels included in continuing operations, distribution
by brand, by our top metropolitan markets, by selected states, by type of
location, and by market segment. % of
    
    % of 2003 HotelBrand
    
    Hotels
    
    Rooms
    
    Total Rooms
    
    Operating Profit(b)Embassy Suites
    
    
    56
    
    
    
    14,279
    
    
    
    36
    %
    
    
    50
    %Holiday Inn-branded
    
    
    39
    
    
    
    12,769
    
    
    
    32
    
    
    
    24Sheraton-branded
    
    
    10
    
    
    
    3,269
    
    
    
    8
    
    
    
    9Crowne Plaza
    
    
    12
    
    
    
    4,025
    
    
    
    10
    
    
    
    6Doubletree-branded
    
    
    10
    
    
    
    2,206
    
    
    
    6
    
    
    
    6Other
    
    
    16
    
    
    
    3,432
    
    
    
    8
    
    
    
    5
 % of
    
    % of 2003 HotelTop Markets
    
    Hotels
    
    Rooms
    
    Total Rooms
    
    Operating ProfitAtlanta
    
    
    12
    
    
    
    3,514
    
    
    
    9

    %
    
    
    8
    %Dallas
    
    
    13
    
    
    
    3,789
    
    
    
    9
    
    
    
    5Los Angeles Area
    
    
    6
    
    
    
    1,492
    
    
    
    4
    
    
    
    5Boca Raton/Ft. Lauderdale
    
    
    4
    
    
    
    1,118
    
    
    
    3
    
    
    
    4New Orleans
    
    
    2
    
    
    
    746
    
    
    
    2
    
    
    
    4San Francisco Bay Area
    
    
    8
    
    
    
    2,690
    
    
    
    7
    
    
    
    4Orlando
    
    
    6
    
    
    
    2,219
    
    
    
    6
    
    
    
    4Minneapolis
    
    
    4
    
    
    
    955
    
    
    
    2
    
    
    
    3San Diego
    
    
    1
    
    
    
    600
    
    
    
    2
    
    
    
    3Phoenix
    
    
    4
    
    
    
    1,016
    
    
    
    3
    
    
    
    3Houston
    
    
    8
    
    
    
    1,969
    
    
    
    5
    
    
    
    3Chicago
    
    
    4
    
    
    
    1,239
    
    
    
    3
    
    
    
    3Philadelphia
    
    
    3
    
    
    
    1,174
    
    
    
    3
    
    
    
    3
 % of
    
    % of 2003 HotelTop Four States
    
    Hotels
    
    Rooms
    
    Total Rooms
    
    Operating ProfitCalifornia
    
    
    19
    
    
    
    5,593
    
    
    
    14
    %
    
    
    16
    %Texas
    
    
    35
    
    
    
    8,284
    
    
    
    21
    
    
    
    14Florida
    
    
    16
    
    
    
    5,343
    
    
    
    13
    
    
    
    11Georgia
    
    
    14
    
    
    
    3,868
    
    
    
    10
    
    
    
    9
 % of
    
    % of 2003 HotelLocation
    
    Hotels
    
    Rooms
    
    Total Rooms
    
    Operating ProfitSuburban
    
    
    66
    
    
    
    16,818
    
    
    
    42
    %
    
    
    40
    %Urban
    
    
    31
    
    
    
    9,628
    
    
    
    24
    
    
    
    27Airport
    
    
    28
    
    
    
    8,509
    
    
    
    21
    
    
    
    21Resort
    
    
    11
    
    
    
    3,605
    
    
    
    9
    
    
    
    10Highway
    
    
    7
    
    
    
    1,420
    
    
    
    4
    
    
    
    2
 % of
    
    % of 2003 HotelSegment
    
    Hotels
    
    Rooms
    
    Total Rooms
    
    Operating ProfitUpscale all-suite
    
    
    69
    
    
    
    17,145
    
    
    
    43
    %
    
    
    58
    %Full service
    
    
    40
    
    
    
    13,004
    
    
    
    33
    
    
    
    24Upscale
    
    
    25
    
    
    
    8,263
    
    
    
    21
    
    
    
    17Limited service
    
    
    9
    
    
    
    1,568
    
    
    
    3
    
    
    
    1
 % of
    
    % of 2003 HotelHotels
    
    Rooms
    
    Total Rooms
    
    Operating ProfitCore Hotels
    
    
    127
    
    
    
    35,734
    
    
    
    89
    %
    
    
    96
    %Non-Strategic Hotels(a)
    
    
    16
    
    
    
    4,246
    
    
    
    11
    
    
    
    4
  (a)
    
    Excludes six hotels that met the held for sale accounting requirements, and were
included in discontinued operations.(b)
    
    A detailed description of Hotel Operating Profit is contained in the Non-GAAP
Financial Measures section
found elsewhere in this Managements Discussion and Analysis of Financial Condition
and Results of Operations. 34




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##### Table of Contents



Hotel Operating Statistics The following tables set forth historical occupancy, ADR and RevPAR at
September 30, 2004 and 2003, and the percentage changes therein between the
periods presented, for our 143 consolidated hotels included in continuing
operations: Operating Statistics by Brand Occupancy (%)Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceEmbassy Suites Hotels
    
    
    71.1
    
    
    
    69.6
    
    
    
    2.2
    
    
    
    70.9
    
    
    
    68.5
    
    
    
    3.4Holiday Inn-branded hotels
    
    
    68.1
    
    
    
    66.5
    
    
    
    2.3
    
    
    
    66.1
    
    
    
    64.2
    
    
    
    3.0Sheraton-branded hotels
    
    
    64.2
    
    
    
    61.5
    
    
    
    4.3
    
    
    
    64.8
    
    
    
    60.3
    
    
    
    7.5Crowne Plaza hotels
    
    
    66.6
    
    
    
    63.5
    
    
    
    4.9
    
    
    
    64.5
    
    
    
    61.2
    
    
    
    5.3Doubletree-branded hotels
    
    
    66.3
    
    
    
    68.2
    
    
    
    (2.8
    )
    
    
    68.3
    
    
    
    67.0
    
    
    
    1.9Other hotels
    
    
    57.3
    
    
    
    59.4
    
    
    
    (3.5
    )
    
    
    58.6
    
    
    
    57.7
    
    
    
    1.6Total hotels
    
    
    67.7
    
    
    
    66.4
    
    
    
    1.9
    
    
    
    67.0
    
    
    
    64.7
    
    
    
    3.5
 ADR ($)Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceEmbassy Suites Hotels
    
    
    115.84
    
    
    
    113.65
    
    
    
    1.9
    
    
    
    117.56
    
    
    
    116.27
    
    
    
    1.1Holiday Inn-branded hotels
    
    
    80.54
    
    
    
    79.39
    
    
    
    1.5
    
    
    
    81.11
    
    
    
    80.09
    
    
    
    1.3Sheraton-branded hotels
    
    
    97.70
    
    
    
    91.91
    
    
    
    6.3
    
    
    
    97.36
    
    
    
    94.79
    
    
    
    2.7Crowne Plaza hotels
    
    
    94.02
    
    
    
    91.52
    
    
    
    2.7
    
    
    
    93.22
    
    
    
    93.23
    
    
    
    0.0Doubletree-branded hotels
    
    
    102.75
    
    
    
    96.92
    
    
    
    6.0
    
    
    
    103.90
    
    
    
    101.17
    
    
    
    2.7Other hotels
    
    
    85.20
    
    
    
    81.06
    
    
    
    5.1
    
    
    
    84.04
    
    
    
    81.16
    
    
    
    3.5Total hotels
    
    
    98.00
    
    
    
    95.45
    
    
    
    2.7
    
    
    
    98.83
    
    
    
    97.42
    
    
    
    1.4
 RevPAR ($)Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceEmbassy Suites Hotels
    
    
    82.35
    
    
    
    79.07
    
    
    
    4.1
    
    
    
    83.30
    
    
    
    79.66
    
    
    
    4.6Holiday Inn-branded hotels
    
    
    54.82
    
    
    
    52.81
    
    
    
    3.8
    
    
    
    53.64
    
    
    
    51.45
    
    
    
    4.3Sheraton-branded hotels
    
    
    62.70
    
    
    
    56.56
    
    
    
    10.9
    
    
    
    63.05
    
    
    
    57.12
    
    
    
    10.4Crowne Plaza hotels
    
    
    62.58
    
    
    
    58.08
    
    
    
    7.7
    
    
    
    60.10
    
    
    
    57.06
    
    
    
    5.3Doubletree-branded hotels
    
    
    68.11
    
    
    
    66.12
    
    
    
    3.0
    
    
    
    70.98
    
    
    
    67.82
    
    
    
    4.7Other hotels
    
    
    48.81
    
    
    
    48.15
    
    
    
    1.4
    
    
    
    49.29
    
    
    
    46.83
    
    
    
    5.3Total hotels
    
    
    66.30
    
    
    
    63.36
    
    
    
    4.6
    
    
    
    66.24
    
    
    
    63.06
    
    
    
    5.0
 35




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##### Table of Contents



Operating Statistics for Our Top Markets Occupancy (%)Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    

    % VarianceAtlanta
    
    
    73.1
    
    
    
    69.9
    
    
    
    4.5
    
    
    
    68.9
    
    
    
    66.7
    
    
    
    3.4Dallas
    
    
    48.0
    
    
    
    47.2
    
    
    
    1.8
    
    
    
    50.6
    
    
    
    47.9
    
    
    
    5.7Los Angeles Area
    
    
    71.2
    
    
    
    72.7
    
    
    
    (2.1
    )
    
    
    70.2
    
    
    
    71.5
    
    
    
    (1.9
    )Boca Raton/Ft. Lauderdale
    
    
    75.9
    
    
    
    65.5
    
    
    
    15.8
    
    
    
    79.9
    
    
    
    73.4
    
    
    
    8.9New Orleans
    
    
    55.7
    
    
    
    60.0
    
    
    
    (7.2
    )
    
    
    65.7
    
    
    
    65.0
    
    
    
    1.1San Francisco Bay Area
    
    
    73.1
    
    
    
    71.7
    
    
    
    1.9
    
    
    
    67.5
    
    
    
    65.7
    
    
    
    2.7Orlando
    
    
    78.5
    
    
    
    69.3
    
    
    
    13.3
    
    
    
    77.9
    
    
    
    69.8
    
    
    
    11.6Minneapolis
    
    
    77.8
    
    
    
    75.1
    
    
    
    3.6
    
    
    
    70.0
    
    
    
    66.3
    
    
    
    5.5San Diego
    
    
    83.8
    
    
    
    88.2
    
    
    
    (5.0
    )
    
    
    84.5
    
    
    
    81.1
    
    
    
    4.2Phoenix
    
    
    56.4
    
    
    
    55.0
    
    
    
    2.5
    
    
    
    67.6
    
    
    
    67.3
    
    
    
    0.5Houston
    
    
    61.5
    
    
    
    66.1
    
    
    
    (6.9
    )
    
    
    67.6
    
    
    
    65.6
    
    
    
    3.0Chicago
    
    
    73.2
    
    
    
    75.3
    
    
    
    (2.7
    )
    
    
    70.6
    
    
    
    68.7
    
    
    
    2.7Philadelphia
    
    
    71.5
    
    
    
    65.7
    
    
    
    8.8
    
    
    
    66.9
    
    
    
    61.8
    
    
    
    8.1
 ADR ($)Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceAtlanta
    
    
    85.76
    
    
    
    83.31
    
    
    
    2.9
    
    
    
    86.80
    
    
    
    85.52
    
    
    
    1.5Dallas
    
    
    89.90
    
    
    
    85.50
    
    
    
    5.1
    
    
    
    89.63
    
    
    
    88.08
    
    
    
    1.8Los Angeles Area
    
    
    115.59
    
    
    
    105.86
    
    
    
    9.2
    
    
    
    111.43
    
    
    
    103.10
    
    
    
    8.1Boca Raton/Ft. Lauderdale
    
    
    93.98
    
    
    
    89.34
    
    
    
    5.2
    
    
    
    114.48
    
    
    
    114.87
    
    
    
    (0.3
    )New Orleans
    
    
    101.44
    
    
    
    106.25
    
    
    
    (4.5
    )
    
    
    133.29
    
    
    
    131.24
    
    
    
    1.6San Francisco Bay Area
    
    
    115.70
    
    
    
    113.90
    
    
    
    1.6
    
    
    
    112.89
    
    
    
    113.11
    
    
    
    (0.2
    )Orlando
    
    
    70.50
    
    
    
    65.98
    
    
    
    6.8
    
    
    
    76.39
    
    
    
    74.25
    
    
    
    2.9Minneapolis
    
    
    129.79
    
    
    
    125.02
    
    
    
    3.8
    
    
    
    124.89
    
    
    
    123.01
    
    
    
    1.5San Diego
    
    
    119.73
    
    
    
    114.55
    
    
    
    4.5
    
    
    
    119.72
    
    
    
    117.36
    
    
    
    2.0Phoenix
    
    
    84.84
    
    
    
    80.18
    
    
    
    5.8
    
    
    
    104.53
    
    
    
    98.33
    
    
    
    6.3Houston
    
    
    66.99
    
    
    
    67.72
    
    
    
    (1.1
    )
    
    
    70.30
    
    
    
    70.52
    
    
    
    (0.3
    )Chicago
    
    
    109.05
    
    
    
    108.78
    
    
    
    0.2
    
    
    
    104.51
    
    
    
    108.52
    
    
    
    (3.7
    )Philadelphia
    
    
    108.22
    
    
    
    105.55
    
    
    
    2.5
    
    
    
    105.27
    
    
    
    105.27
    
    
    
    0.3
 RevPAR ($)Three Months Ended
September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceAtlanta
    
    
    62.67
    
    
    
    58.26
    
    
    
    7.6
    
    
    
    59.85
    
    
    
    57.03
    
    
    
    5.0Dallas
    
    
    43.19
    
    
    
    40.33
    
    
    
    7.1
    
    
    
    45.34
    
    
    
    42.18
    
    
    
    7.5Los Angeles Area
    
    
    82.28
    
    
    
    76.99
    
    
    
    6.9
    
    
    
    78.17
    
    
    
    73.71
    
    
    
    6.1Boca Raton/Ft. Lauderdale
    
    
    71.33
    
    
    
    58.54
    
    
    
    21.9
    
    
    
    91.52
    
    
    
    84.35
    
    
    
    8.5New Orleans
    
    
    56.47
    
    
    
    63.74
    
    
    
    (11.4
    )
    
    
    87.64
    
    
    
    85.37
    
    
    
    2.7San Francisco Bay Area
    
    
    84.54
    
    
    
    81.68
    
    
    
    3.5
    
    
    
    76.15
    
    
    
    74.33
    
    
    
    2.4Orlando
    
    
    55.33
    
    
    
    45.71
    
    
    
    21.0
    
    
    
    59.52
    
    
    
    51.83
    
    
    
    14.8Minneapolis
    
    
    100.93
    
    
    
    93.86
    
    
    
    7.5
    
    
    
    87.38
    
    
    
    81.58
    
    
    
    7.1San Diego
    
    
    100.38
    
    
    
    101.07
    
    
    
    (0.7
    )
    
    
    101.18
    
    
    
    95.18
    
    
    
    6.3Phoenix
    
    
    47.85
    
    
    
    44.12
    
    
    
    8.4
    
    
    
    70.70
    
    
    
    66.20
    
    
    
    6.8Houston
    
    
    41.22
    
    
    
    44.76
    
    
    
    (7.9
    )
    
    
    47.53
    
    
    
    46.29
    
    
    
    2.7Chicago
    
    
    79.84
    
    
    
    81.90
    
    
    
    (2.5
    )
    
    
    73.82
    
    
    
    74.60
    
    
    
    (1.1
    )Philadelphia
    
    
    77.40
    
    
    
    69.35
    
    
    
    11.6
    
    
    
    70.57
    
    
    
    65.08
    
    
    
    8.4
 36




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##### Table of Contents



Liquidity and Capital Resources Our principal source of cash to meet our cash requirements, including
distributions to unitholders and repayments of indebtedness, is from the
results of operations of our hotels. For the nine months ended September 30,
2004, net cash flow provided by operating activities, consisting primarily of
hotel operations, was $54 million. At September 30, 2004, we had cash and cash
equivalents of approximately $154 million. Included in cash and cash
equivalents is approximately $39 million utilized to meet our hotel minimum
working capital requirements. We currently expect that our cash flow provided by operating activities
for 2004 will be approximately $101 million to $103 million (full year 2003
cash flow from operating activities was $48 million). Our cash flow forecasts
assume a full year RevPAR increase of 4.75% to 5.25% and operating margin of
approximately 19.0% to 19.5%. For 2004, our current operating plan
contemplates preferred distribution payments of $35 million, capital
expenditures of approximately $100 million ($64 million had been incurred
through September 30, 2004), $17 million in normal recurring principal payments
and proceeds of approximately $161 million from the sale of non-strategic
hotels ($70 million was received through September 30, 2004 and $57 million was
received in the fourth quarter through November 1, 2004). We currently
anticipate that FelCors board of directors will defer the resumption of common
distributions until the anticipated recovery in our business is more firmly
established, and to determine the amount of preferred distributions, if any,
for each quarterly period, based upon the actual operating results of that
quarter, economic conditions, other operating trends, our financial condition
and capital requirements, as well as the minimum REIT distribution
requirements. In September 2003, we completed an amendment to the InterContinental
Hotels Group, or IHG, management agreement covering 78 of our hotels, pursuant
to which we extended the term of the management contracts on 27 hotels from
2013 to 2018 and, in exchange, we received from IHG a credit of approximately
$25 million, subject to increase under certain circumstances, to apply to the
satisfaction of the liquidated damages otherwise payable to IHG upon the sale
of 35 IHG managed hotels. We agreed that the proceeds of hotel sales for which
the credit was utilized would be applied to the reduction of our debt. In the
fourth quarter of 2004, we utilized the remaining balance of the $25 million
credit available to us. As a result of the full utilization of this credit, we
will again be required to reinvest the proceeds from the sale of IHG managed
hotels in other hotels to be managed by IHG or pay substantial termination
fees. As of November 1, 2004, our reinvestment in IHG managed hotels exceeded
our reinvestment obligation by $13 million. However, anticipated sales of
hotels during the remainder of the fourth quarter of 2004 are expected to
result in our reinvestment obligations exceeding our reinvestment in IHG hotels
made through November 1, 2004. At September 30, 2004, approximately 29% of our outstanding debt had
variable interest rates based on LIBOR. Variable interest rates have recently
been increasing and based on our debt outstanding at September 30, 2004, a one
percent increase in LIBOR would increase our interest expense by $5.3 million
annually. In March 2004, we elected to terminate our line of credit, which resulted
in the first quarter charge-off of unamortized loan costs of $0.2 million. In April 2004, FelCor completed the sale of 4,600,000 shares of its $1.95
Series A Cumulative Convertible Preferred Stock. The shares were sold at a
price of $23.79 per share, which included accrued distributions of $0.51 per
share through April 5, 2004, resulting in net proceeds to us of approximately
$105 million. In August 2004, FelCor completed the sale of an additional
2,300,000 of its Series A preferred stock. These shares were sold at a price
of $23.22 per share, which included accrued distributions of $0.28 per share
through August 22, 2004, resulting in proceeds to us of approximately $52
million. The proceeds were contributed to us in exchange for a like number of
Series A preferred units. The proceeds of both offerings were used to retire
senior unsecured debt. In May 2004, we issued $175 million in aggregate principal amount of
Senior Floating Notes due 2011, or 2011 Notes. We received net proceeds of
$174.1 million. The 2011 Notes will mature on June 1, 2011 and bear interest,
adjusted semi annually, at the six-month LIBOR, plus 4.25%. The Notes are
callable on or after December 1, 2006, and will rank equally with our other
existing senior unsecured debt. In July 2004, we issued an additional $115
million of the 2011 Notes. The proceeds were used to retire senior unsecured
debt. 37




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In June 2004, we redeemed all $175 million in principal amount of our
outstanding 7.375% Senior Notes due 2004. The redemption price was $1,018.14
per $1,000 of the principal amount plus accrued interest. With the retirement
of this debt, we recorded a loss on redemption of $3.2 million and wrote off
$0.3 million of debt issue costs. The loss was partially offset by a $1
million gain on the unwinding of the swaps tied to this debt. During the second and third quarter of 2004, we purchased $504 million
principal amount of our 9.5% Senior Notes due 2008 (which currently bear
interest at 10% as a result of the 2003 downgrade of the credit ratings on our
senior notes) through tender offers, redemptions and purchases in the open
market. With the partial retirement of this debt, we recorded a loss on early
extinguishment of debt of $36 million ($33.6 million related to the premium
paid in excess of par and $2.4 million related to the unamortized discount) and
wrote off debt issue costs of $5.5 million. In October 2004, we called for
redemption an additional $50 million of the senior notes due 2008. We
currently expect to retire the remaining $46 million of these senior notes in
2004, or early 2005, using cash on hand, proceeds from asset sales or proceeds
from other capital transactions. In June 2003, we entered into a new secured delayed draw facility with
JPMorgan Chase Bank for up to $200 million. At June 30, 2004, we had drawn
down $169 million on this facility (collateralized by 14 hotels) and in July
2004, an additional $25 million was funded under the facility and an additional
hotel was added to the collateral. The amount drawn under the facility has
been converted into: (i) $107 million of nine separate fixed rate CMBS loans
secured by nine hotels with a weighted average interest rate of 6.5% and with
maturity dates ranging from 2009 to 2014, and (ii) $87 million of a
cross-collateralized floating rate CMBS loan secured by six hotels with an
interest rate of LIBOR plus 2.11% and with a maturity date of 2014. On July
28, 2004, we cancelled the balance of the $200 million facility. At September 30, 2004, we had aggregate mortgage indebtedness of
approximately $1.0 billion that was secured by 79 of our consolidated hotels
with an aggregate book value of approximately $1.8 billion. Substantially all
of this debt is recourse solely to the specific assets securing the debt,
except in the case of fraud, misapplication of funds and other customary
recourse provisions. Loans secured by 41 hotels provide for lock-box
arrangements. With respect to loans secured by 23 of these hotels, if the debt
service coverage ratios fall below certain levels, the lender is entitled to
apply the revenues from the hotels securing the loan to satisfy current
requirements for debt service, taxes, insurance and other reserves, before the
balance of the revenues, if any, would be available to the owner to pay the
expenses of hotel operations and provide a return to the owner. Eight of these
23 hotels, which accounted for 2% of our total revenues in 2003, are currently
below the prescribed debt service coverage ratios and are subject to these
lock-box requirements. With respect to loans secured by the remaining 18 hotels, the owner is
permitted to retain 115% of budgeted hotel operating expenses before the
remaining revenues would become subject to a similar lock-box arrangement if a
specified debt service coverage ratio was not met. The mortgage loans secured
by 16 of these 18 hotels also provide that, so long as the debt service
coverage ratios remain below a second, even lower minimum level, the lender may
retain any excess cash (after deduction for the 115% of budgeted operating
expenses, debt service, tax, insurance and other reserve requirements) and, if
the debt service coverage ratio remains below this lower minimum level for 12
consecutive months, apply any accumulated excess cash to the prepayment of the
principal amount of the debt. If the debt service coverage ratio exceeds the
lower minimum level for three consecutive months, any then accumulated excess
cash will be returned to the owner. Ten of these 18 hotels, which accounted
for 6% of our total revenues in 2003, are currently below the applicable debt
service coverage ratio and are subject to the lock-box provisions. None of the
hotels are currently below the second, even lower minimum debt service coverage
ratio that would permit the lender to retain excess cash after deduction for
the 115% of budgeted operating expenses, debt service, tax, insurance and other
reserve requirements. Our publicly-traded senior unsecured notes require that we satisfy total
leverage, secured leverage and interest coverage tests in order to: incur
additional indebtedness except to refinance maturing debt with replacement
debt, as defined under our indentures; pay distributions in excess of the minimum
distribution required for FelCor to meet its REIT qualification test;
repurchase units; or merge. As of the date of this filing, we have satisfied all such
tests; 38




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##### Table of Contents



however, under the terms of two of our indentures, we are prohibited from
repurchasing any units, whether common or preferred, subject to
certain exceptions, so long as our debt-to-EBITDA ratio, as defined in the
indentures, exceeds 4.85 to 1. Our current debt-to-EBITDA ratio exceeds that
ratio and is expected to do so for the foreseeable future. Accordingly, we are
prohibited from purchasing any units, except as permitted under
limited exceptions, such as from the proceeds of a substantially concurrent
issuance of other units. If actual operating results fail to meet our current expectations, or if interest rates increase unexpectedly, we
may be unable to continue to satisfy the incurrence test under the indentures
governing our senior unsecured notes. In such an event, we may be prohibited
from utilizing the undrawn amounts currently available to us under our secured
debt facility, except to repay or refinance maturing debt with similar priority
in the capital structure, and may be prohibited from, among other things,
incurring any additional indebtedness or paying distributions on our preferred or
common units, except to the extent necessary for FelCor to satisfy the REIT qualification
requirement that it distribute currently at least 90% of its taxable income.
In the event of our failure of this incurrence test, based upon our current
estimates of taxable income for 2004, we would be unable to distribute the full
amount of distributions accruing under our outstanding preferred units in 2004 and,
accordingly, could pay no distributions on our common units. However, based on our
operating results to date and our current estimates for the remainder of 2004,
we do not anticipate a violation of this incurrence test. Quantitative and Qualitative Disclosures About Market Risk At September 30, 2004, approximately 71% of our consolidated debt had
fixed interest rates. Currently, market rates of interest are below the rates
we are obligated to pay on our fixed-rate debt. The following table provides information about our financial instruments
that are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. For debt obligations, the table presents scheduled
maturities and weighted average interest rates, by maturity dates. For
interest rate swaps, the table presents the notional amount and weighted
average interest rate, by contractual maturity date. The fair value of our
fixed rate debt indicates the estimated principal amount of debt having the
same debt service requirements that could have been borrowed at the date
presented, at then current market interest rates. The fair value of our fixed
to variable interest rate swaps indicates the estimated amount that would have
been received or paid by us had the swaps been terminated at the date
presented. Expected Maturity Date
at September 30, 2004
(dollars in thousands) Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    ValueLiabilitiesFixed rate:Debt
    
    $
    4,472
    
    
    $
    26,326
    
    
    $
    17,155
    
    
    $
    260,852
    
    
    $
    111,950
    
    
    $
    874,229
    
    
    $
    1,294,984
    
    
    $
    1,343,791Average interest rate
    
    
    7.67
    %
    
    
    7.59
    %
    
    
    7.84
    %
    
    
    7.47
    %
    
    
    9.71
    %
    
    
    8.31
    %
    
    
    8.24
    %Floating rate:Debt
    
    
    1,310
    
    
    
    5,392
    
    
    
    143,018
    
    
    
    2,015
    
    
    
    17,619
    
    
    
    369,187
    
    
    
    538,541
    
    
    
    538,541Average
interest rate(a)
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.12
    %
    
    
    3.74
    %
    
    
    3.97
    %
    
    
    5.39
    %
    
    
    4.98
    %Total debt
    
    $
    5,782
    
    
    $
    31,718
    
    
    $
    160,173
    
    
    $
    262,867
    
    
    $
    129,569
    
    
    $
    1,243,416
    
    
    
    1,833,525Average interest rate
    
    
    6.84
    %
    
    
    6.98
    %
    
    
    4.52
    %
    
    
    7.44
    %
    
    
    8.93
    %
    
    
    7.45
    %
    
    
    7.29
    %Net discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,264
    )Total debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,828,261
  (a)
    
    The average floating rate of interest represents the implied forward
rate in the yield curve at September 30, 2004. 39




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Swap contracts, such as described above, contain a credit risk, in that
the counterparties may be unable to fulfill the terms of the agreement. We
minimize that risk by evaluating the creditworthiness of our counterparties,
who are limited to major banks and financial institutions, and we do not
anticipate nonperformance by the counterparties. The Standard & Poors credit
ratings for the financial institutions that are counterparties to the interest
rate swap agreements range from A+ to AA-. 
 Inflation Operators of hotels, in general, possess the ability to adjust room rates
daily to reflect the effects of inflation. Competitive pressures may, however,
require us to reduce room rates in the near term and may limit our ability to
raise room rates in the future. We are also subject to the risk that inflation
will cause increases in hotel operating expenses disproportionately to
revenues. 
 Seasonality The lodging business is seasonal in nature. Generally, hotel revenues are
greater in the second and third calendar quarters than in the first and fourth
calendar quarters, although this may not be true for hotels in major tourist
destinations. Revenues for hotels in tourist areas generally are substantially
greater during tourist season than other times of the year. Seasonal variations
in revenue at our hotels can be expected to cause quarterly fluctuations in our
revenues. Quarterly earnings also may be adversely affected by events beyond
our control, such as extreme weather conditions, economic factors and other
considerations affecting travel. To the extent that cash flow from operations
is insufficient during any quarter, due to temporary or seasonal fluctuations
in revenues, we may utilize cash on hand or borrowings to satisfy our
obligations or make distributions to our equity holders. 
 Disclosure Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q and the documents incorporated by
reference in this Quarterly Report on Form 10-Q include forward-looking
statements that involve a number of risks and uncertainties. Forward-looking
statements can be identified by the use of forward-looking terminology, such as
believes, expects, anticipates, may, will, should, seeks, or
other variations of these terms (including their use in the negative), or by
discussions of strategies, plans or intentions. A number of factors could
cause actual results to differ materially from those anticipated by these
forward-looking statements. Among these factors are:  
    
    general economic and lodging industry conditions, including the
anticipated continuation and magnitude of the current recovery in the
economy, the realization of anticipated job growth, the impact of the
United States military involvement in the Middle East and elsewhere,
future acts of terrorism, and the impact on the travel industry of high
fuel costs and increased security precautions;
    
    our overall debt levels and our ability to obtain new financing and service debt;
    
    our inability to retain earnings;
    
    our liquidity and capital expenditures;
    
    our growth strategy and acquisition activities;
    
    our inability to sell the hotels held for sale at anticipated prices; and
    
    competitive conditions in the lodging industry. In addition, these forward-looking statements are necessarily dependent
upon assumptions and estimates that may prove to be incorrect. Accordingly,
while we believe that the plans, intentions and expectations reflected in these
forward-looking statements are reasonable, we cannot assure you that these
plans, intentions or expectations will be achieved. The forward-looking
statements included in this report, and all subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf,
are expressly qualified in their entirety by the risk factors and cautionary
statements discussed in our filings under the Securities Act of 1933 and the
Securities Exchange Act of 1934. We undertake no obligation to update any
forward-looking statements to reflect future events or circumstances. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Information and disclosures regarding market risks applicable to us is
incorporated herein by reference to the discussion under Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Liquidity and Capital Resources  Quantitative and Qualitative Disclosures
About Market Risks contained elsewhere in this Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2004. 40




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##### Table of Contents



Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of FelCors management,
including its chief executive officer and principal accounting officer who, in
the absence of a chief financial officer, is acting as its principal financial
officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this report (the Evaluation Date). Based on this evaluation,
FelCors chief executive officer and acting principal financial officer
concluded, as of the Evaluation Date, that our disclosure controls and
procedures were effective, such that the information relating to us required to
be disclosed in our reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and is accumulated
and communicated to management, including FelCors chief executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure. (b) Changes in internal control over financial reporting. There have not been any changes in our internal control over financial
reporting (as defined in Rule 15d-15(f) promulgated under the Securities
Exchange Act of 1934) during the quarter covered by this report that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 41




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##### Table of Contents



PART II.  OTHER INFORMATION 
 Item 5. Other Information On October 13, 2004, FelCor Lodging Trust Incorporated, or the Company,
announced the appointment of Richard A. Smith as Executive Vice President and
Chief Financial Officer of the Company. Mr. Smith is anticipated to commence
employment with the Company on November 15, 2004. Mr. Smith, age 42, has been the executive vice president and chief
financial officer of Wyndham International since April 2000, where he has been
responsible for finance strategy and operations. Mr. Smith joined Wyndham
International in September 1999 as senior vice president and treasurer,
overseeing capital market activity, corporate banking relationships, cash
management, risk management and debt compliance. Prior to his tenure at Wyndham
International, Mr. Smith was vice president, corporate finance at Starwood
Hotels & Resorts Worldwide, Inc. He also previously worked for Atlantic
Richfield Company and Coopers & Lybrand. He was licensed as a CPA in Tennessee
in 1991 and in California in 1993. On October 27, 2004, Richard C. North resigned from his position as a
Class II director of the board of directors of the Company. In connection with Mr. Norths resignation, the board of directors of the
Company approved a reduction in the number of its directors from ten to nine.
Additionally, in order to make the number of directors in each class as equal
as possible after giving effect to Mr. Norths resignation, the board of
directors of the Company reclassified Michael D. Rose from a Class I director
to a Class II director, with his consent. The terms of Class I directors and
Class II directors expire at the annual meetings of stockholders to be held in
2007 and 2005, respectively. As a result of these actions, the Companys nine-member board of directors
is equally divided among its three classes. 
 Item 6. Exhibits. The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K: Exhibit Number
    
    Description of Exhibit31.1
    
    Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Principal Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).32.2
    
    Certification of the Principal Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).
 42




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Dated: November 8, 2004 FELCOR LODGING LIMITED PARTNERSHIPa Delaware Limited PartnershipBy:
    
    FelCor Lodging Trust IncorporatedIts General Partner
 By:
    /s/ Lester C. JohnsonLester C. JohnsonSenior Vice President andPrincipal Accounting Officer
 43