##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Form 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number 333-3959-01 FelCor Lodging Limited Partnership  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    75-2544994
(I.R.S. Employer
Identification No.)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 Noo Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
o Nox




---



FELCOR LODGING LIMITED PARTNERSHIP INDEX PagePART I. -- FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Consolidated Balance Sheets June 30, 2004 (unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Operations  For the Three and Six Months Ended June 30, 2004 and 2003 (unaudited)
    
    
    4Consolidated Statements of Comprehensive Loss  For the Three and Six Months Ended June 30, 2004 and 2003 (unaudited)
    
    
    5Consolidated Statements of Cash Flows  For the Six Months Ended June 30, 2004 and 2003 (unaudited)
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsGeneral
    
    
    24Financial Comparison
    
    
    24Results of Operations
    
    
    25Liquidity and Capital Resources
    
    
    33Inflation
    
    
    35Seasonality
    
    
    35Disclosure Regarding Forward Looking Statements
    
    
    36Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4.
    
    Controls and Procedures
    
    
    36PART II.  OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    37SIGNATURE
    
    
    
    
    40Certification of the Chief Executive OfficerCertification of the Principal Financial OfficerCertification of the Chief Executive OfficerCertification of the Principal Financial Officer
  2




---



##### Table of Contents



PART I.  FINANCIAL INFORMATION 
 Item 1. Financial Statements FELCOR LODGING LIMITED PARTNERSHIP 
 CONSOLIDATED BALANCE SHEETS (unaudited, in thousands)
 June 30,
    
    December 31,2004
    
    2003ASSETSInvestment in hotels, net of accumulated depreciation of $936,781 at
June 30, 2004 and $886,168 at December 31, 2003
    
    $
    3,084,113
    
    
    $
    3,103,796Investment in unconsolidated entities
    
    
    116,973
    
    
    
    116,553Hotels held for sale
    
    
    3,169
    
    
    
    21,838Cash and cash equivalents
    
    
    148,146
    
    
    
    246,036Accounts receivable, net of allowance for doubtful accounts of $831
at June 30, 2004 and $1,104 at December 31, 2003
    
    
    59,887
    
    
    
    45,385Deferred expenses, net of accumulated amortization of $18,450 at
June 30, 2004 and $16,080 at December 31, 2003
    
    
    19,955
    
    
    
    24,278Other assets
    
    
    28,559
    
    
    
    33,007Total assets
    
    $
    3,460,802
    
    
    $
    3,590,893LIABILITIES AND PARTNERS CAPITALDebt, net of discount of $4,610 at June 30, 2004 and $4,253 at
December 31, 2003
    
    $
    1,872,795
    
    
    $
    2,037,355Distributions payable
    
    
    7,849
    
    
    
    5,504Accrued expenses and other liabilities
    
    
    154,727
    
    
    
    151,423Minority interest in other partnerships
    
    
    45,954
    
    
    
    50,197Total liabilities
    
    
    2,081,325
    
    
    
    2,244,479Commitments and contingenciesRedeemable units at redemption value, 3,033 and 3,034 units issued
and outstanding at June 30, 2004 and December 31, 2003, respectively
    
    
    36,698
    
    
    
    33,612Preferred units, $.01 par value, 20,000 units authorized: Series A
Cumulative Convertible Preferred Units, 10,580 and 5,980 units
issued and outstanding at June 30, 2004 and December 31, 2003,
respectively
    
    
    256,600
    
    
    
    149,512Series B Cumulative Redeemable Preferred Units, 68 units issued and
outstanding at June 30, 2004 and December 31, 2003
    
    
    169,395
    
    
    
    169,395Common
units, 59,423 and 59,120 units issued and outstanding at June
30, 2004 and December 31, 2003, respectively
    
    
    908,276
    
    
    
    984,417Accumulated other comprehensive income
    
    
    8,508
    
    
    
    9,478Total partners capital
    
    
    1,342,779
    
    
    
    1,312,802Total liabilities, redeemable units and partners capital
    
    $
    3,460,802
    
    
    $
    3,590,893
 The accompanying notes are an integral part of these consolidated financial statements. 3




---



##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP 
 CONSOLIDATED STATEMENTS OF OPERATIONS For the Three and Six Months June 30, 2004 and 2003
(unaudited, in thousands, except for per unit data)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Hotel operating revenue
    
    $
    329,566
    
    
    $
    301,943
    
    
    $
    635,850
    
    
    $
    584,258Retail space rental and other revenue
    
    
    180
    
    
    
    236
    
    
    
    425
    
    
    
    618Total revenues
    
    
    329,746
    
    
    
    302,179
    
    
    
    636,275
    
    
    
    584,876Expenses:Hotel departmental expenses
    
    
    118,694
    
    
    
    104,487
    
    
    
    229,307
    
    
    
    203,321Other property operating costs
    
    
    92,549
    
    
    
    84,355
    
    
    
    183,841
    
    
    
    168,048Management and franchise fees
    
    
    17,184
    
    
    
    15,347
    
    
    
    32,751
    
    
    
    30,398Taxes, insurance and lease expense
    
    
    30,967
    
    
    
    31,254
    
    
    
    62,154
    
    
    
    61,534Corporate expenses
    
    
    4,393
    
    
    
    3,737
    
    
    
    7,779
    
    
    
    7,160Depreciation
    
    
    30,148
    
    
    
    34,317
    
    
    
    60,797
    
    
    
    67,993Total operating expenses
    
    
    293,935
    
    
    
    273,497
    
    
    
    576,629
    
    
    
    538,454Operating income
    
    
    35,811
    
    
    
    28,682
    
    
    
    59,646
    
    
    
    46,422Interest expense, net
    
    
    (39,737
    )
    
    
    (41,007
    )
    
    
    (80,857
    )
    
    
    (80,826
    )Charge-off of deferred financing costs
    
    
    (3,944
    )
    
    
    (2,834
    )
    
    
    (4,174
    )
    
    
    (2,834
    )Loss on early extinguishment of debt
    
    
    (28,246
    )
    
    
    
    
    
    
    (28,246
    )
    
    
    Gain on swap termination
    
    
    1,005
    
    
    
    
    
    
    
    1,005
    
    
    
    Loss before equity in income of unconsolidated
entities, minority interests and gain on sales
of assets
    
    
    (35,111
    )
    
    
    (15,159
    )
    
    
    (52,626
    )
    
    
    (37,238
    )Equity in income from unconsolidated entities
    
    
    2,691
    
    
    
    726
    
    
    
    3,673
    
    
    
    578Gain on sale of assets
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    153Minority interests
    
    
    314
    
    
    
    293
    
    
    
    243
    
    
    
    (138
    )Loss from continuing operations
    
    
    (32,106
    )
    
    
    (13,987
    )
    
    
    (48,710
    )
    
    
    (36,645
    )Discontinued operations
    
    
    (1,645
    )
    
    
    (7,709
    )
    
    
    (7,147
    )
    
    
    (7,699
    )Net loss
    
    
    (33,751
    )
    
    
    (21,696
    )
    
    
    (55,857
    )
    
    
    (44,344
    )Preferred distributions
    
    
    (8,970
    )
    
    
    (6,728
    )
    
    
    (15,696
    )
    
    
    (13,454
    )Net loss applicable to common unitholders
    
    $
    (42,721
    )
    
    $
    (28,424
    )
    
    $
    (71,553
    )
    
    $
    (57,798
    )Basic and diluted loss per common unit data:Net loss from continuing operations
    
    $
    (0.66
    )
    
    $
    (0.34
    )
    
    $
    (1.04
    )
    
    $
    (0.81
    )Net loss
    
    $
    (0.69
    )
    
    $
    (0.46
    )
    
    $
    (1.15
    )
    
    $
    (0.93
    )Weighted average common units outstanding
    
    
    61,983
    
    
    
    61,845
    
    
    
    61,985
    
    
    
    61,833
 The accompanying notes are an integral part of these consolidated financial statements. 4




---



##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS For the Three and Six Months Ended June 30, 2004 and 2003
(unaudited, in thousands)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (33,751
    )
    
    $
    (21,696
    )
    
    $
    (55,857
    )
    
    $
    (44,344
    )Foreign currency translation adjustment
    
    
    (509
    )
    
    
    6,216
    
    
    
    (970
    )
    
    
    11,035Comprehensive loss
    
    $
    (34,260
    )
    
    $
    (15,480
    )
    
    $
    (56,827
    )
    
    $
    (33,309
    )
 The accompanying notes are an integral part of these consolidated financial statements. 5




---



##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP 
 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2004 and 2003
(unaudited, in thousands)
 Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (55,857
    )
    
    $
    (44,344
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation
    
    
    61,065
    
    
    
    73,191Loss on sale of assets
    
    
    941
    
    
    
    330Amortization of deferred financing fees
    
    
    2,370
    
    
    
    2,375Accretion of debt, net of discount
    
    
    310
    
    
    
    207Amortization of unearned compensation
    
    
    1,101
    
    
    
    1,080Equity in income from unconsolidated entities
    
    
    (3,673
    )
    
    
    (578
    )Distributions of income from unconsolidated entities
    
    
    403
    
    
    
    780Loss (gain) on early extinguishment of debt
    
    
    28,246
    
    
    
    (1,260
    )Impairment loss
    
    
    
    
    
    
    7,824Charge-off of deferred financing costs
    
    
    4,174
    
    
    
    2,834Minority interests
    
    
    (243
    )
    
    
    138Changes in assets and liabilities:Accounts receivable
    
    
    (13,238
    )
    
    
    (4,058
    )Other assets
    
    
    3,748
    
    
    
    (4,316
    )Accrued expenses and other liabilities
    
    
    172
    
    
    
    2,556Net cash flow provided by operating activities
    
    
    29,519
    
    
    
    36,759Cash flows (used in) provided by investing activities:Acquisition of hotel
    
    
    (27,759
    )
    
    
    Improvements and additions to hotels
    
    
    (34,005
    )
    
    
    (42,279
    )Proceeds from sale of assets
    
    
    40,863
    
    
    
    12,292Cash from purchase of percentage interest in Interstate Joint Venture
    
    
    
    
    
    
    2,705Distributions of capital from unconsolidated entities
    
    
    2,726
    
    
    
    2,133Net cash flow used in investing activities
    
    
    (18,175
    )
    
    
    (25,149
    )Cash flows (used in) provided by financing activities:Proceeds from borrowings
    
    
    344,490
    
    
    
    321,119Repayment of borrowings
    
    
    (537,606
    )
    
    
    (190,367
    )Payment of deferred financing fees
    
    
    (2,221
    )
    
    
    (3,654
    )Net proceeds from sale of preferred units
    
    
    104,461
    
    
    
    Distributions paid to minority interest holders
    
    
    (4,000
    )
    
    
    Distributions paid to preferred unitholders
    
    
    (13,351
    )
    
    
    (13,455
    )Distributions paid to common unitholders
    
    
    
    
    
    
    (9,307
    )Net cash flow provided by (used in) financing activities
    
    
    (108,227
    )
    
    
    104,336Effect of exchange rate changes on cash
    
    
    (1,007
    )
    
    
    181Net change in cash and cash equivalents
    
    
    (97,890
    )
    
    
    116,127Cash and cash equivalents at beginning of periods
    
    
    246,036
    
    
    
    66,542Cash and cash equivalents at end of periods
    
    $
    148,146
    
    
    $
    182,669Supplemental cash flow information Interest paid
    
    $
    89,538
    
    
    $
    80,937
 The accompanying notes are an integral part of these consolidated financial statements. 6




---



##### Table of Contents



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
largest owner of full service, all-suite hotels in the nation. Our sole
general partner is FelCor Lodging Trust Incorporated, or FelCor, the second
largest lodging real estate investment trust, or REIT. At June 30, 2004,
FelCor owned an approximately 95% equity interest in our operations. At June
30, 2004, our portfolio of hotels in continuing operations included 71 upscale,
all-suite hotels, and we are the owner of the largest number of Embassy Suites
Hotels®, Crowne Plaza®, Holiday Inn® and independently-owned Doubletree® hotels
in North America. Our portfolio also includes 72 hotels in the upscale and
full service segments. At June 30, 2004, we had ownership interests in 159 hotels. We owned a
100% real estate interest in 122 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 154 of these hotels, we reflect their operating revenues
and expenses in our consolidated statements of operations. The operations of
153 of the 154 hotels were included in continuing operations at June 30, 2004.
The remaining one hotel was held for sale as of June 30, 2004, and its
operations are included in discontinued operations. The operating revenues and
expenses of the remaining five hotels are unconsolidated. At June 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 153 hotels
included in our consolidated hotel continuing operations at June 30, 2004: Brand
    
    Hotels
    
    RoomsEmbassy Suites Hotels
    
    
    56
    
    
    
    14,279Doubletree and Doubletree Guest Suites®
    
    
    10
    
    
    
    2,206Holiday Inn - branded
    
    
    43
    
    
    
    13,751Crowne Plaza and Crowne Plaza Suites®
    
    
    15
    
    
    
    5,108Sheraton® and Sheraton Suites®
    
    
    10
    
    
    
    3,269Other brands
    
    
    19
    
    
    
    4,117Total hotels
    
    
    153
 The hotels shown in the above table are located in the United States (33
states) and Canada (two hotels), with concentrations in Texas (35 hotels),
California (19 hotels), Florida (16 hotels) and Georgia (14 hotels).
Approximately 55% of our hotel room revenues were generated from hotels in
these four states during the six months ended June 30, 2004. At June 30, 2004, of the 153 consolidated hotels included in continuing
operations, (i) subsidiaries of InterContinental Hotels Group, or IHG, managed
64, (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) two independent management companies managed one each. Certain reclassifications have been made to prior period financial
information to conform to the current periods presentation with no effect to
previously reported net loss or partners capital. 7




---



##### Table of Contents



FELCOR LODGING LIMITED
PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    Organization  (continued) The financial information for the three and six months ended June 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 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 six months ended June 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 six months ended June 30,
2004, are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 2004.  2.
    
    Acquisition of Hotels Our hotel acquisitions consist almost exclusively of land, building,
furniture, fixtures and equipment, and inventory. We allocate the purchase
price among these asset classes based upon their respective values determined
in accordance with Statement of Financial Accounting Standards, or SFAS 141,
Business Combinations. When we acquire properties, we acquire them for use.
The only intangible assets typically acquired consist of miscellaneous
operating agreements, all of which are of short duration and at market rates.
We do not acquire any significant in-place leases or other intangible assets
(e.g., management agreements, franchise agreements or trademarks) when we
acquire hotels. In conjunction with the acquisition of a hotel, we typically
negotiate new franchise and management agreements with the selected brand owner
and manager.  3.
    
    Investment in Unconsolidated Entities We owned 50% interests in joint venture entities that owned 20 hotels at
June 30, 2004, and December 31, 2003. We also owned a 50% interest in entities
that own an undeveloped parcel of land, provide condominium management
services, develop condominiums in Myrtle Beach, South Carolina, and lease 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. Summarized unaudited combined financial information for 100% of these
unconsolidated entities is as follows (in thousands): June 30,
    
    December 31,2004
    
    2003Balance sheet information:Investment in hotels, net of accumulated depreciation
    
    $
    359,460
    
    
    $
    326,835Total assets
    
    $
    386,415
    
    
    $
    366,046Debt
    
    $
    292,721
    
    
    $
    275,209Total liabilities
    
    $
    293,391
    
    
    $
    276,773Equity
    
    $
    93,024
    
    
    $
    89,273
 Debt of our unconsolidated entities at June 30, 2004, included $210.2
million of non-recourse mortgage debt, of which our pro rata share is $105.1
million. Debt of our unconsolidated entities at June 30, 2004, also included $41.3
million of mortgage debt guaranteed by us and $41.2 million of mortgage debt
guaranteed by Hilton, one of our joint venture partners. The debt guaranteed
by us consisted primarily of 50% of a loan related to the construction of a
residential condominium project in Myrtle Beach, South Carolina. The loan
commitment is for $97.6 million of which approximately $82.4 million was
outstanding as of June 30, 2004. Our guarantee reduces from 50% to 25% of the
outstanding balance when the condominium project is completed and receives a
certificate of occupancy, which we expect to occur in third quarter 2004. 8




---



##### Table of Contents



FELCOR LODGING LIMITED
PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  3.
    
    Investment in Unconsolidated Entities  (continued) Our guarantee is a payment guarantee and will become payable in the event
that the joint venture fails to pay interest or principal due under the debt
agreement. The loan matures in August 2005, and bears interest at LIBOR plus
200 basis points. As of June 30, 2004, we had not established any liability
related to our guarantees of debt because it was not probable that we would be
required to perform under these guarantees. Summarized combined statement of operations information for 100% of our
unconsolidated entities is as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Total revenues
    
    $
    18,093
    
    
    $
    21,720
    
    
    $
    32,411
    
    
    $
    42,868Net income
    
    $
    6,076
    
    
    $
    2,806
    
    
    $
    8,782
    
    
    $
    3,717
  4.
    
    Debt Debt at June 30, 2004 and December 31, 2003, consists of the following (in
thousands): Balance OutstandingEncumbered
    
    Interest Rate at
    
    Maturity
    
    June 30,
    
    December 31,Hotels
    
    June 30, 2004
    
    Date
    
    2004
    
    2003Promissory note
    
    none
    
    
    3.13
    %(a)
    
    June 2016
    
    $
    650
    
    
    $
    650Senior unsecured term
notes
    
    none
    
    
    
    
    
    Oct. 2004
    
    
    
    
    
    
    174,888Senior unsecured term
notes
    
    none
    
    
    5.84
    (a)
    
    June 2011
    
    
    175,000
    
    
    
    Senior unsecured term
notes
    
    none
    
    
    7.63
    
    
    Oct. 2007
    
    
    122,375
    
    
    
    124,617Senior unsecured term
notes
    
    none
    
    
    10.00
    
    
    Sept. 2008
    
    
    273,386
    
    
    
    596,865Senior unsecured term
notes
    
    none
    
    
    9.00
    
    
    June 2011
    
    
    298,283
    
    
    
    298,158Total unsecured debt(e)
    
    
    
    
    
    
    8.48
    
    
    
    
    
    
    
    869,694
    
    
    
    1,195,178Mortgage debt
    
    1 hotel
    
    
    7.23
    
    
    Sept. 2005
    
    
    10,934
    
    
    
    11,286Mortgage debt
    
    14 hotels
    
    
    5.01
    (b)
    
    July 2009  2014
    
    
    169,490
    
    
    
    Mortgage debt
    
    10 hotels
    
    
    3.63
    (c)
    
    May 2006
    
    
    146,393
    
    
    
    148,080Mortgage debt
    
    15 hotels
    
    
    5.92
    (d)
    
    Nov. 2007
    
    
    130,143
    
    
    
    131,721Mortgage debt
    
    1 hotel
    
    
    4.00
    (a)
    
    August 2008
    
    
    15,500
    
    
    
    15,500Mortgage debt
    
    7 hotels
    
    
    7.54
    
    
    April 2009
    
    
    91,470
    
    
    
    92,445Mortgage debt
    
    6 hotels
    
    
    7.55
    
    
    June 2009
    
    
    68,841
    
    
    
    69,566Mortgage debt
    
    8 hotels
    
    
    8.70
    
    
    May 2010
    
    
    176,840
    
    
    
    178,118Mortgage debt
    
    7 hotels
    
    
    8.73
    
    
    May 2010
    
    
    137,071
    
    
    
    138,200Mortgage debt
    
    8 hotels
    
    
    7.48
    
    
    April 2011
    
    
    49,898
    
    
    
    50,305Other
    
    1 hotel
    
    
    9.17
    
    
    August 2011
    
    
    6,521
    
    
    
    6,956Total secured debt(e)
    
    78 hotels
    
    
    6.96
    
    
    
    
    
    
    
    1,003,101
    
    
    
    842,177Total(e)
    
    
    
    
    
    
    7.45
    %
    
    
    
    
    
    $
    1,872,795
    
    
    $
    2,037,355
  (a)
    
    Variable interest rate based on LIBOR, which was 1.1% at June 30, 2004.(b)
    
    $99 million of this debt had a variable interest rate based on LIBOR,
which was 1.1% at June 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)
    
    $100 million of this note was matched with interest rate swap agreements
that effectively converted the fixed interest rate of 7.46% on this note
to a variable interest rate based on LIBOR.(e)
    
    Interest rates are calculated based on the weighted average outstanding
debt at June 30, 2004. 9




---



##### Table of Contents



FELCOR LODGING LIMITED
PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  4.
    
    Debt  (continued) We reported interest expense of $39.7 million (net of interest income of
$0.6 million, and capitalized interest of $0.2 million), and $41.0 million (net
of interest income of $0.6 million and capitalized interest of $0.1 million)
for the three months ended June 30, 2004 and 2003, respectively. For the six
months ended June 30, 2004 and 2003, respectively, we reported interest expense
of $80.9 million (net of interest income of $1.3 million and capitalized
interest of $0.2 million) and $80.8 million (net of interest income of $0.9
million and capitalized interest of $0.5 million). Ratings downgrades in 2003
on our senior unsecured debt resulted in a 50 basis point step-up in interest
rates on our senior unsecured debt due in September 2008 ($275 million
outstanding par value as of June 30, 2004) and our senior unsecured debt due in
June 2011 ($300 million outstanding par value as of June 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 issued $175 million in aggregate principal amount of
Senior Floating Notes due 2011, the 2011 Notes. We received net proceeds of
$174.1 million. The 2011 Notes will mature on June 1, 2011. The 2011 Notes
bear interest, adjusted semi annually, at the six-month LIBOR rate plus 4.25%
and rank equally with our other existing senior unsecured debt. The Notes are
callable on or after December 1, 2006, at an initial redemption price of 102%.
In July 2004, we issued an additional $115 million of the 2011 Notes with
identical terms and conditions as the original $175 million. 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 $1,018.14
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. We also recorded a $1 million gain on the
unwinding of the 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 a tender offer and by purchases on the open
market at an average price of 107.21. 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 July
2004, we purchased an additional $115 million of these notes and recorded a
$7.6 million loss on early extinguishment of debt and wrote off debt issue
costs of $1.2 million.
After the July 2004 purchases, $160 million of par value
remained outstanding on these notes. 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: (1) $107 million of nine separate fixed rate CMBS loans
secured by nine hotels and weighted average rate of 6.5% and maturity dates
ranging from 2009 to 2014, and (2) $87 million of a cross-collateralized
floating rate CMBS loan secured by six hotels at a rate of LIBOR plus 2.11% and
a maturity date of 2014. On July 28, 2004 we cancelled the balance of the $200
million facility. Most of our mortgage debt is non-recourse to us and contains provisions
allowing for the substitution of collateral upon satisfaction of certain
conditions. Most of our mortgage debt is prepayable, subject to various
prepayment penalties, yield maintenance or defeasance obligations. Our
liability with regard to non-recourse debt is generally limited to the
guarantee of the borrowing entitys obligations to pay for the lenders losses
caused by misconduct, fraud or misappropriation of funds and other typical
exceptions from the non-recourse provisions in the mortgages, such as for
environmental liabilities. 10




---



##### Table of Contents



FELCOR LODGING LIMITED
PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  4.
    
    Debt  (continued) 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 at least the remainder of 2004.
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.  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 generally accepted accounting principles,
while still meeting strategic economic objectives and maintaining adequate
liquidity and flexibility. Instruments that meet these hedging criteria are
formally designated as hedges at the inception of the derivative contract. To manage the relative mix of our debt between fixed and variable rate
instruments, through June 30, 2004, we had entered into four interest rate swap
agreements with two financial institutions with an aggregate notional value of
$100 million. These interest rate swap agreements modify a portion of the
interest characteristics of our outstanding fixed rate debt, without an
exchange of the underlying principal amount, and effectively convert fixed rate
debt to a variable rate. During June we unwound six interest rate swap agreements with an aggregate
notional amount of $175 million that were matched with the $175 million notes
due 2004 that were redeemed. A $1 million gain was recorded offsetting the
loss on the redemption of the debt. Also during June, 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 cost will decrease the value of these notes and will be amortized
to interest expense over the life of the debt. During July 2004 the remaining
four interest rate swap agreements having a notional value of $100 million,
were unwound at a cost of $1.3 million. The $1.3 million cost will decrease
the mortgage debt due November 2007 and will be amortized to interest expense
over the life of this debt. 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. 11




---



##### Table of Contents



FELCOR LODGING LIMITED
PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  5.
    
    Derivatives  (continued) The interest rate swap agreements held at June 30, 2004, are designated as
fair value hedges, are marked to market through the income statement, but are
offset by the change in fair value of our swapped outstanding fixed rate debt.
The estimated unrealized net loss on these interest rate swap agreements was
approximately $1.8 million at June 30, 2004, and represents the amount we would
pay if the agreements were terminated, based on then current market rates. The amounts paid or received by us under the terms of the interest rate
swap agreements are accrued as interest rates change, and we recognize them as
an adjustment to interest expense, which will have a corresponding effect on
our future cash flows. The interest rate swaps decreased interest expense by
$1.4 million and $1.7 million during the three months ended June 30, 2004 and
2003, respectively. The swaps decreased interest expense $4.2 million and $3.3
million during the six months ended June 30, 2004 and 2003, respectively. Our
interest rate swaps have monthly to semi-annual settlement dates. 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 $146.4 million. We concurrently sold interest rate caps
with identical terms. These interest rate cap agreements, which
terminate in May 2006, have not been
designated as hedges. The fair value of both the purchased and sold interest
rate caps was $0.1 million at June 30, 2004, resulting in no net earnings
impact.  6.
    
    Preferred Units On April 5, 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 to FelCor 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.  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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Room revenue
    
    $
    260,699
    
    
    $
    238,347
    
    
    $
    504,218
    
    
    $
    462,613Food and beverage revenue
    
    
    51,875
    
    
    
    47,553
    
    
    
    98,455
    
    
    
    90,637Other operating departments
    
    
    16,992
    
    
    
    16,043
    
    
    
    33,177
    
    
    
    31,008Total hotel operating revenues
    
    $
    329,566
    
    
    $
    301,943
    
    
    $
    635,850
    
    
    $
    584,258
 Approximately 99.9% of our revenue 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), in 2004 and 2003. 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 12




---



##### Table of Contents



FELCOR LODGING LIMITED
PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  7.
    
    Hotel Operating Revenue, Departmental Expenses and Other Property Operating Costs  (continued) 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
0.1% of our revenue was from retail space rental revenue and other sources in
2004 and 2003. 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 $6.1 million and $2.1
million for the three months ended June 30, 2004 and 2003, respectively, and
$13.2 million and $2.1 million for the six months ended June 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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Room
    
    $
    69,322
    
    
    $
    60,801
    
    
    $
    134,285
    
    
    $
    118,354Food and beverage
    
    
    40,674
    
    
    
    36,511
    
    
    
    78,143
    
    
    
    71,031Other operating departments
    
    
    8,698
    
    
    
    7,175
    
    
    
    16,879
    
    
    
    13,936Total hotel departmental expenses
    
    $
    118,694
    
    
    $
    104,487
    
    
    $
    229,307
    
    
    $
    203,321
 Other property operating costs from continuing operations were comprised
of the following (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Hotel general and administrative expense
    
    $
    30,715
    
    
    $
    28,167
    
    
    $
    60,577
    
    
    $
    56,678Marketing
    
    
    28,361
    
    
    
    25,371
    
    
    
    55,594
    
    
    
    50,101Repair and maintenance
    
    
    17,901
    
    
    
    16,164
    
    
    
    35,813
    
    
    
    32,276Utilities
    
    
    15,572
    
    
    
    14,653
    
    
    
    31,857
    
    
    
    28,993Total other property operating costs
    
    $
    92,549
    
    
    $
    84,355
    
    
    $
    183,841
    
    
    $
    168,048
 Included in hotel departmental expenses and other property operating costs
are hotel employee compensation and benefit expenses of $108.0 million and
$96.6 million for the three months ended June 30, 2004 and 2003, respectively
and $210.7 million and $191.0 million for the six months ended June 30, 2004
and 2003, respectively. Included in total hotel departmental expenses and other property operating
costs was $4.9 million and $1.4 million for the three months ended June 30,
2004 and 2003, respectively, and $9.9 million and $1.4 million for the six
months ended June 30, 2004 and 2003, respectively, related to the consolidation
of our joint venture with Interstate which became effective June 1, 2003. 13




---



##### Table of Contents



FELCOR LODGING LIMITED
PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  8.
    
    Taxes, Insurance and Lease Expense Taxes, insurance and lease expense from continuing operations is comprised
of the following (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Operating
lease expense (a)
    
    $
    16,636
    
    
    $
    15,077
    
    
    $
    31,009
    
    
    $
    27,910Real estate and other taxes
    
    
    11,042
    
    
    
    12,030
    
    
    
    24,013
    
    
    
    24,911Property and general liability insurance
    
    
    3,289
    
    
    
    4,147
    
    
    
    7,132
    
    
    
    8,713Total taxes, insurance and lease expense
    
    $
    30,967
    
    
    $
    31,254
    
    
    $
    62,154
    
    
    $
    61,534
  (a)
    
    Includes lease expense associated with 15 hotels owned by
unconsolidated entities. Included in lease expense are $7.4 million and
$5.6 million in percentage rent for the three months ended June 30, 2004
and 2003, respectively, and $12.1 million and $9.1 million in percentage
rent for the six months ended June 30, 2004 and 2003, respectively.  9.
    
    Discontinued Operations Included in discontinued operations are the results of operations of the
eight hotels sold or otherwise disposed of in 2004, one hotel designated as
held for sale at June 30, 2004, and 16 hotels sold in 2003. Condensed
financial information for the hotels included in discontinued operations is as
follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June,2004
    
    2003
    
    2004
    
    2003Hotel operating revenue
    
    $
    5,690
    
    
    $
    26,377
    
    
    $
    14,776
    
    
    $
    51,026Hotel operating expenses
    
    
    6,121
    
    
    
    25,842
    
    
    
    16,082
    
    
    
    51,000Operating income (loss)
    
    
    (431
    )
    
    
    535
    
    
    
    (1,306
    )
    
    
    26Direct interest costs
    
    
    
    
    
    
    (244
    )
    
    
    
    
    
    
    (678
    )Gain on the early extinguishment of debt
    
    
    
    
    
    
    307
    
    
    
    
    
    
    
    1,260Impairment
    
    
    
    
    
    
    (7,824
    )
    
    
    
    
    
    
    (7,824
    )Lease termination expense
    
    
    
    
    
    
    
    
    
    
    (4,900
    )
    
    
    Loss on sale of assets
    
    
    (1,214
    )
    
    
    (483
    )
    
    
    (941
    )
    
    
    (483
    )Loss from discontinued operations
    
    $
    (1,645
    )
    
    $
    (7,709
    )
    
    $
    (7,147
    )
    
    $
    (7,699
    )
 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. From the sale of these hotels we recognized a loss of $0.9 million and
recorded a lease termination expense of $4.9 million. 14




---



##### Table of Contents



FELCOR LODGING LIMITED
PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  10.
    
    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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Numerator:Loss from continuing operations
    
    $
    (32,106
    )
    
    $
    (13,987
    )
    
    $
    (48,710
    )
    
    $
    (36,645
    )Less: Preferred distributions
    
    
    (8,970
    )
    
    
    (6,728
    )
    
    
    (15,696
    )
    
    
    (13,454
    )Loss from continuing operations
applicable to common unitholders
    
    
    (41,076
    )
    
    
    (20,715
    )
    
    
    (64,406
    )
    
    
    (50,099
    )Discontinued operations
    
    
    (1,645
    )
    
    
    (7,709
    )
    
    
    (7,147
    )
    
    
    (7,699
    )Net loss applicable to common unitholders
    
    $
    (42,721
    )
    
    $
    (28,424
    )
    
    $
    (71,553
    )
    
    $
    (57,798
    )Denominator:Denominator for basic earnings per units
    
    
    61,982
    
    
    
    61,845
    
    
    
    61,985
    
    
    
    61,833Denominator for diluted earnings per
units  adjusted weighted average units
and assumed conversions
    
    
    61,982
    
    
    
    61,845
    
    
    
    61,985
    
    
    
    61,833Loss per unit data:Basic:Loss from continuing operations
    
    $
    (0.66
    )
    
    $
    (0.34
    )
    
    $
    (1.04
    )
    
    $
    (0.81
    )Discontinued operations
    
    
    (0.03
    )
    
    
    (0.12
    )
    
    
    (0.11
    )
    
    
    (0.12
    )Net loss
    
    $
    (0.69
    )
    
    $
    (0.46
    )
    
    $
    (1.15
    )
    
    $
    (0.93
    )Diluted:Loss from continuing operations
    
    $
    (0.66
    )
    
    $
    (0.34
    )
    
    $
    (1.04
    )
    
    $
    (0.81
    )Discontinued operations
    
    
    (0.03
    )
    
    
    (0.12
    )
    
    
    (0.11
    )
    
    
    (0.12
    )Net loss
    
    $
    (0.69
    )
    
    $
    (0.46
    )
    
    $
    (1.15
    )
    
    $
    (0.93
    )
 Securities that could potentially dilute basic earnings per unit in the
future 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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003FelCors restricted shares granted but not vested
    
    
    382
    
    
    
    309
    
    
    
    255
    
    
    
    309Series A convertible preferred units
    
    
    8,202
    
    
    
    4,636
    
    
    
    8,202
    
    
    
    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 $5.2 million and $2.9 million for the three months and $8.1
million and $5.8 million for the six months ended June 30, 2004 and 2003,
respectively. 15




---



##### Table of Contents



FELCOR LODGING LIMITED
PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  11.
    
    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 FelCors
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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Loss from continuing operations, as reported
    
    $
    (32,106
    )
    
    $
    (13,987
    )
    
    $
    (48,710
    )
    
    $
    (36,645
    )Add stock based compensation included in
the net loss, as reported
    
    
    519
    
    
    
    565
    
    
    
    1,022
    
    
    
    1,080Less 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
    
    
    (597
    )
    
    
    (589
    )
    
    
    (1,107
    )
    
    
    (1,177
    )Loss from continuing operations, pro forma
    
    $
    (32,184
    )
    
    $
    (14,011
    )
    
    $
    (48,795
    )
    
    $
    (36,742
    )Basic and diluted net loss per common unit:As reported
    
    $
    (0.66
    )
    
    $
    (0.34
    )
    
    $
    (1.04
    )
    
    $
    (0.81
    )Pro forma
    
    $
    (0.66
    )
    
    $
    (0.34
    )
    
    $
    (1.04
    )
    
    $
    (0.81
    )
 The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.  12.
    
    Lease Termination Costs We leased the San Francisco Holiday Inn Select Downtown & Spa hotel under
a lease that expired at June 30, 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 have
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 their management agreement with respect to this hotel upon its
termination in connection with the above settlement. The operations of this
hotel are included in discontinued operations for the three and six months
ended June 30, 2004 and 2003.  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. 16




---



##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  13.
    
    Consolidating Financial Information  (continued) CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2004
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSNet investment in hotel properties
    
    $
    226,277
    
    
    $
    1,069,189
    
    
    $
    1,788,647
    
    
    $
    
    
    
    $
    3,084,113Equity investment in consolidated entities
    
    
    1,951,862
    
    
    
    
    
    
    
    
    
    
    
    (1,951,862
    )
    
    
    Investment in unconsolidated entities
    
    
    85,352
    
    
    
    31,621
    
    
    
    
    
    
    
    
    
    
    
    116,973Assets held for sale
    
    
    
    
    
    
    3,169
    
    
    
    
    
    
    
    
    
    
    
    3,169Cash and cash equivalents
    
    
    57,969
    
    
    
    71,073
    
    
    
    19,104
    
    
    
    
    
    
    
    148,146Accounts receivable
    
    
    2,420
    
    
    
    57,459
    
    
    
    8
    
    
    
    
    
    
    
    59,887Deferred assets
    
    
    11,291
    
    
    
    708
    
    
    
    7,956
    
    
    
    
    
    
    
    19,955Other assets
    
    
    3,868
    
    
    
    21,442
    
    
    

    3,249
    
    
    
    
    
    
    
    28,559Total assets
    
    $
    2,339,039
    
    
    $
    1,254,661
    
    
    $
    1,818,964
    
    
    $
    (1,951,862
    )
    
    $
    3,460,802LIABILITIES AND PARTNERS CAPITALDebt
    
    $
    935,442
    
    
    $
    122,257
    
    
    $
    815,096
    
    
    $
    
    
    
    $
    1,872,795Distributions payable
    
    
    7,849
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,849Accrued expenses and other liabilities
    
    
    11,392
    
    
    
    118,965
    
    
    
    24,370
    
    
    
    
    
    
    
    154,727Minority
interest - other partnerships
    
    
    4,879
    
    
    
    (4,673
    )
    
    
    45,748
    
    
    
    
    
    
    
    45,954Total liabilities
    
    
    959,562
    
    
    
    236,549
    
    
    
    885,214
    
    
    
    
    
    
    
    2,081,325Redeemable units, at redemption value
    
    
    36,698
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,698Preferred units
    
    
    425,995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425,995Common units
    
    
    916,784
    
    
    
    1,009,604
    
    
    
    933,750
    
    
    
    (1,951,862
    )
    
    
    908,276Accumulated other comprehensive income
    
    
    
    
    
    
    8,508
    
    
    
    
    
    
    
    
    
    
    
    8,508Total partners capital
    
    
    1,342,779
    
    
    
    1,018,112
    
    
    
    933,750
    
    
    
    (1,951,862
    )
    
    
    1,342,779Total liabilities, redeemable
units and partners capital
    
    $
    2,339,039
    
    
    $
    1,254,661
    
    
    $
    1,818,964
    
    
    $
    (1,951,862
    )
    
    $
    3,460,802
 17




---



##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  12.
    
    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
    
    
    170,057
    
    
    
    59,317
    
    
    
    16,662
    
    
    
    
    
    
    
    246,036Accounts receivable
    
    
    2,214
    
    
    
    40,568
    
    
    
    2,603
    
    
    
    
    
    
    
    45,385Deferred assets
    
    
    15,133
    
    
    
    783
    
    
    
    8,362
    
    
    
    
    
    
    
    24,278Other assets
    
    
    10,467
    
    
    
    16,907
    
    
    
    5,633
    
    
    
    
    
    
    
    33,007Total 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
 18




---



##### 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 June 30, 2004
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Hotel operating revenue
    
    $
    
    
    
    $
    329,566
    
    
    $
    
    
    
    $
    
    
    
    $
    329,566Percentage lease revenue
    
    
    9,851
    
    
    
    44,609
    
    
    
    52,006
    
    
    
    (106,466
    )
    
    
    Other revenue
    
    
    180
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180Total revenue
    
    
    10,031
    
    
    
    374,175
    
    
    
    52,006
    
    
    $
    (106,466
    )
    
    
    329,746Expenses:Hotel operating expense
    
    
    
    
    
    
    228,427
    
    
    
    
    
    
    
    
    
    
    
    228,427Taxes, insurance and lease expense
    
    
    (352
    )
    
    
    130,902
    
    
    
    6,883
    
    
    
    (106,466
    )
    
    
    30,967Corporate expenses
    
    
    761
    
    
    
    2,000
    
    
    
    1,632
    
    
    
    
    
    
    
    4,393Depreciation
    
    
    2,799
    
    
    
    11,776
    
    
    
    15,573
    
    
    
    
    
    
    
    30,148Total operating expenses
    
    
    3,208
    
    
    
    373,105
    
    
    
    24,088
    
    
    
    (106,466
    )
    
    
    293,935Operating income
    
    
    6,823
    
    
    
    1,070
    
    
    
    27,918
    
    
    
    
    
    
    
    35,811Interest expense, net
    
    
    (24,237
    )
    
    
    (2,716
    )
    
    
    (12,784
    )
    
    
    
    
    
    
    (39,737
    )Charge-off of deferred financing cost
    
    
    (3,944
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,944
    )Loss on early extinguishment of debt
    
    
    (28,246
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,246
    )Gain on swap termination
    
    
    1,005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,005Income (loss) before equity in income
from unconsolidated entities, minority
interests and gain on sale of assets
    
    
    (48,599
    )
    
    
    (1,646
    )
    
    
    15,134
    
    
    
    
    
    
    
    (35,111
    )Equity in income from consolidated
entities
    
    
    12,754
    
    
    
    
    
    
    
    
    
    
    
    (12,754
    )
    
    
    Equity in income from unconsolidated
entities
    
    
    2,570
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    2,691Minority interests in other partnerships
    
    
    (476
    )
    
    
    970
    
    
    
    (180
    )
    
    
    
    
    
    
    314Income (loss) from continuing operations
    
    
    (33,751
    )
    
    
    (555
    )
    
    
    14,954
    
    
    
    (12,754
    )
    
    
    (32,106
    )Discontinued operations from
consolidated entities
    
    
    
    
    
    
    (1,645
    )
    
    
    
    
    
    
    
    
    
    
    (1,645
    )Net income (loss)
    
    
    (33,751
    )
    
    
    (2,200
    )
    
    
    14,954
    
    
    
    (12,754
    )
    
    
    (33,751
    )Preferred distributions
    
    
    (8,970
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,970
    )Net income (loss) applicable to
unitholders
    
    $
    (42,721
    )
    
    $
    (2,200
    )
    
    $
    14,954
    
    
    $
    (12,754
    )
    
    $
    (42,721
    )
 19




---



##### 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 June 30, 2003
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Hotel operating revenue
    
    $
    
    
    
    $
    303,273
    
    
    $
    (1,330
    )
    
    $
    
    
    
    $
    301,943Percentage lease revenue
    
    
    11,277
    
    
    
    44,277
    
    
    
    42,924
    
    
    
    (98,478
    )
    
    
    Other revenue
    
    
    520
    
    
    
    (284
    )
    
    
    
    
    
    
    
    
    
    
    236Total revenue
    
    
    11,797
    
    
    
    347,266
    
    
    
    41,594
    
    
    
    (98,478
    )
    
    
    302,179Expenses:Hotel operating expense
    
    
    
    
    
    
    203,855
    
    
    
    334
    
    
    
    
    
    
    
    204,189Taxes, insurance and other
    
    
    1,865
    
    
    
    120,714
    
    
    
    7,153
    
    
    
    (98,478
    )
    
    
    31,254Corporate expenses
    
    
    445
    
    
    
    2,249
    
    
    
    1,043
    
    
    
    
    
    
    
    3,737Depreciation
    
    
    4,883
    
    
    
    14,397
    
    
    
    15,037
    
    
    
    
    
    
    
    34,317Total operating expenses
    
    
    7,193
    
    
    
    341,215
    
    
    
    23,567
    
    
    
    (98,478
    )
    
    
    273,497Operating income
    
    
    4,604
    
    
    
    6,051
    
    
    
    18,027
    
    
    
    
    
    
    
    28,682Interest expense, net
    
    
    (25,423
    )
    
    
    (3,205
    )
    
    
    (12,379
    )
    
    
    
    
    
    
    (41,007
    )Charge-off of deferred financing costs
    
    
    (2,830
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (2,834
    )Income (loss) before equity in income
from unconsolidated entities, minority
interests, and gain on sale of assets
    
    
    (23,649
    )
    
    
    2,842
    
    
    
    5,648
    
    
    
    
    
    
    
    (15,159
    )Equity in loss from consolidated entities
    
    
    (483
    )
    
    
    
    
    
    
    
    
    
    
    483
    
    
    
    Equity in income from unconsolidated
entities
    
    
    1,017
    
    
    
    (291
    )
    
    
    
    
    
    
    
    
    
    
    726Gain on sale of assets
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    153Minority interests in other partnerships
    
    
    (14
    )
    
    
    (89
    )
    
    
    396
    
    
    
    
    
    
    
    293Income
(loss) from continuing operations
    
    
    (23,129
    )
    
    
    2,615
    
    
    
    6,044
    
    
    
    483
    
    
    
    (13,987
    )Discontinued operations from
consolidated entities
    
    
    1,433
    
    
    
    (1,820
    )
    
    
    (7,322
    )
    
    
    
    
    
    
    (7,709
    )Net income (loss)
    
    
    (21,696
    )
    
    
    795
    
    
    
    (1,278
    )
    
    
    483
    
    
    
    (21,696
    )Preferred distributions
    
    
    (6,728
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,728
    )Net income (loss) applicable to
unitholders
    
    $
    (28,424
    )
    
    $
    795
    
    
    $
    (1,278
    )
    
    $
    483
    
    
    $
    (28,424
    )
 20




---



##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  13.
    
    Consolidating Financial Information  (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2004
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Hotel operating revenue
    
    $
    
    
    
    $
    635,850
    
    
    $
    
    
    
    $
    
    
    
    $

    635,850Percentage lease revenue
    
    
    18,539
    
    
    
    84,697
    
    
    
    107,661
    
    
    
    (210,897
    )
    
    
    Other revenue
    
    
    425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425Total revenue
    
    
    18,964
    
    
    
    720,547
    
    
    
    107,661
    
    
    
    (210,897
    )
    
    
    636,275Expenses:Hotel operating expense
    
    
    
    
    
    
    445,899
    
    
    
    
    
    
    
    
    
    
    
    445,899Taxes, insurance and lease expense
    
    
    1,287
    
    
    
    257,179
    
    
    
    14,585
    
    
    
    (210,897
    )
    
    
    62,154Corporate expenses
    
    
    1,037
    
    
    
    3,874
    
    
    
    2,868
    
    
    
    
    
    
    
    7,779Depreciation
    
    
    6,063
    
    
    
    22,670
    
    
    
    32,064
    
    
    
    
    
    
    
    60,797Total operating expenses
    
    
    8,387
    
    
    
    729,622
    
    
    
    49,517
    
    
    
    (210,897
    )
    
    
    576,629Operating income (loss)
    
    
    10,577
    
    
    
    (9,075
    )
    
    
    58,144
    
    
    
    
    
    
    
    59,646Interest expense, net
    
    
    (49,996
    )
    
    
    (5,441
    )
    
    
    (25,420
    )
    
    
    
    
    
    
    (80,857
    )Charge-off of deferred financing cost
    
    
    (4,174
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,174
    )Loss on early extinguishment of debt
    
    
    (28,246
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,246
    )Gain on swap termination
    
    
    1,005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,005Income (loss) before equity in income
from unconsolidated entities, minority
interests and gain on sale of assets
    
    
    (70,834
    )
    
    
    (14,516
    )
    
    
    32,724
    
    
    
    
    
    
    
    (52,626
    )Equity in income from consolidated
entities
    
    
    11,198
    
    
    
    
    
    
    
    
    
    
    
    (11,198
    )
    
    
    Equity in income from unconsolidated
entities
    
    
    4,096
    
    
    
    (423
    )
    
    
    
    
    
    
    
    
    
    
    3,673Minority interests in other partnerships
    
    
    (317
    )
    
    
    876
    
    
    
    (316
    )
    
    
    
    
    
    
    243Income (loss) from continuing operations
    
    
    (55,857
    )
    
    
    (14,063
    )
    
    
    32,408
    
    
    
    (11,198
    )
    
    
    (48,710
    )Discontinued operations from
consolidated entities
    
    
    
    
    
    
    (6,810
    )
    
    
    (337
    )
    
    
    
    
    
    
    (7,147
    )Net income (loss)
    
    
    (55,857
    )
    
    
    (20,873
    )
    
    
    32,071
    
    
    
    (11,198
    )
    
    
    (55,857
    )Preferred distributions
    
    
    (15,696
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,696
    )Net income (loss) applicable to
unitholders
    
    $
    (71,553
    )
    
    $
    (20,873
    )
    
    $
    32,071
    
    
    $
    (11,198
    )
    
    $
    (71,553
    )
 21




---



##### Table of Contents



FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  13.
    
    Consolidating Financial Information  (continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2003
(in thousands) Subsidiary
    
    Non-Guarantor
    
    
    
    
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Hotel operating revenue
    
    $
    
    
    
    $
    584,258
    
    
    $
    
    
    
    $
    
    
    
    $
    584,258Percentage lease revenue
    
    
    26,143
    
    
    
    81,814
    
    
    
    81,477
    
    
    
    (189,434
    )
    
    
    Other revenue
    
    
    332
    
    
    
    286
    
    
    
    
    
    
    
    
    
    
    
    618Total revenue
    
    
    26,475
    
    
    
    666,358
    
    
    
    81,477
    
    
    
    (189,434
    )
    
    
    584,876Expenses:Hotel operating expense
    
    
    121
    
    
    
    400,777
    
    
    
    869
    
    
    
    
    
    
    
    401,767Taxes, insurance and lease expense
    
    
    5,188
    
    
    
    232,931
    
    
    
    12,849
    
    
    
    (189,434
    )
    
    
    61,534Corporate expenses
    
    
    849
    
    
    
    4,323
    
    
    
    1,988
    
    
    
    
    
    
    
    7,160Depreciation
    
    
    10,214
    
    
    
    29,550
    
    
    
    28,229
    
    
    
    
    
    
    
    67,993Total operating expenses
    
    
    16,372
    
    
    
    667,581
    
    
    
    43,935
    
    
    
    (189,434
    )
    
    
    538,454Operating income (loss)
    
    
    10,103
    
    
    
    (1,223
    )
    
    
    37,542
    
    
    
    
    
    
    
    46,422Interest expense, net
    
    
    (51,209
    )
    
    
    (6,359
    )
    
    
    (23,258
    )
    
    
    
    
    
    
    (80,826
    )Charge-off of deferred financing cost
    
    
    (2,830
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (2,834
    )Income (loss) before equity in income
from unconsolidated entities, minority
interests and gain on sale of assets
    
    
    (43,936
    )
    
    
    (7,586
    )
    
    
    14,284
    
    
    
    
    
    
    
    (37,238
    )Equity in income from unconsolidated
entities
    
    
    1,087
    
    
    
    (509
    )
    
    
    
    
    
    
    
    
    
    
    578Gain on sale of assets
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    153Equity in loss from consolidated entities
    
    
    (5,218
    )
    
    
    
    
    
    
    
    
    
    
    5,218
    
    
    
    Minority interests in other partnerships
    
    
    (14
    )
    
    
    (89
    )
    
    
    (35
    )
    
    
    
    
    
    
    (138
    )Income (loss) from continuing operations
    
    
    (48,081
    )
    
    
    (8,031
    )
    
    
    14,249
    
    
    
    5,218
    
    
    
    (36,645
    )Discontinued operations from
consolidated entities
    
    
    3,737
    
    
    
    (4,560
    )
    
    
    (6,876
    )
    
    
    
    
    
    
    (7,699
    )Net income (loss)
    
    
    (44,344
    )
    
    
    (12,591
    )
    
    
    7,373
    
    
    
    5,218
    
    
    
    (44,344
    )Preferred distributions
    
    
    (13,454
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,454
    )Net loss applicable to unitholders
    
    $
    (57,798
    )
    
    $
    (12,591
    )
    
    $
    7,373
    
    
    $
    5,218
    
    
    $
    (57,798
    )
 22




---



##### 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 Six Months Ended June 30, 2004
(in thousands) Subsidiary
    
    Non-Guarantor
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    ConsolidatedCash flows from (used in) operating activities
    
    $
    (38,357
    )
    
    $
    2,336
    
    
    $
    65,540
    
    
    $
    29,519Cash flows from (used in) investing activities
    
    
    (77
    )
    
    
    (16,049
    )
    
    
    (2,049
    )
    
    
    (18,175
    )Cash flows from (used in) financing activities
    
    
    (73,654
    )
    
    
    26,476
    
    
    
    (61,049
    )
    
    
    (108,227
    )Effect of exchange rates changes on cash
    
    
    
    
    
    
    (1,007
    )
    
    
    
    
    
    
    (1,007
    )Change in cash and cash equivalents
    
    
    (112,088
    )
    
    
    11,756
    
    
    
    2,442
    
    
    
    (97,890
    )Cash and cash equivalents at beginning of period
    
    
    170,057
    
    
    
    59,317
    
    
    
    16,662
    
    
    
    246,036Cash and equivalents at end of period
    
    $
    57,969
    
    
    $
    71,073
    
    
    $
    19,104
    
    
    $
    148,146
 CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2003
(in thousands) Subsidiary
    
    Non-Guarantor
    
    TotalFelCor L.P.
    
    Guarantors
    
    Subsidiaries
    
    ConsolidatedCash flows from (used in) operating activities
    
    $
    (19,491
    )
    
    $
    12,326
    
    
    $
    39,490
    
    
    $
    32,325Cash flows used in investing activities
    
    
    (6,747
    )
    
    
    (2,440
    )
    
    
    (15,182
    )
    
    
    (24,369
    )Cash flows from (used in) financing activities
    
    
    124,608
    
    
    
    6,800
    
    
    
    (23,418
    )
    
    
    107,990Effect of exchange rates changes on cash
    
    
    
    
    
    
    181
    
    
    
    
    
    
    
    181Change in cash and cash equivalents
    
    
    98,370
    
    
    
    16,867
    
    
    
    890
    
    
    
    116,127Cash and cash equivalents at beginning of period
    
    
    24,725
    
    
    
    24,479
    
    
    
    17,338
    
    
    
    66,542Cash and equivalents at end of period
    
    $
    123,095
    
    
    $
    41,346
    
    
    $
    18,228
    
    
    $
    182,669
 23




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations 
 General In the second quarter of 2004, revenue per available room, or RevPAR, for
our consolidated hotel portfolio in continuing operations, increased 7.3%
compared to the same period last year, which surpassed our original
expectations of a 5% to 6% increase. Through June 30, 2004, we will have had
seven consecutive months with year-over-year RevPAR increases and our first
quarterly year-over-year increase in average daily rates, or ADR, since the
first quarter of 2001. Occupied rooms at our hotels, or occupancy, increased
5.5% for the quarter, compared to the same quarter last year, while the ADR of
our hotel portfolio increased 1.7%. Hotel demand continues to get stronger
and, similar to past lodging cycles, as our hotel occupancy increases, ADR
should improve. As a result of the increased ADR, in June 2004 we experienced
our first improvement in hotel operating margins since December of 2002. 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 six months of 2004, we have spent $34 million for
capital improvements and replacements, and anticipate capital spending on our
hotels to approximate $75 million to $100 million for the full year. At June 30, 2004, we had 26 hotels that we had previously designated as
non-strategic and intend to sell by the end of 2005, with expected proceeds of
approximately $200 million. We expect to complete hotel sales in 2004 of
approximately $125 million. In 2004, through June 30, we have disposed of
eight non-strategic hotels, receiving aggregate net proceeds of $41 million. 
 Financial Comparison (in thousands of dollars, except RevPAR and operating
margin) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003RevPAR
    
    $
    67.04
    
    
    $
    62.47
    
    
    $
    64.96
    
    
    $
    61.38Operating Margin(1)
    
    
    30.7
    %
    
    
    31.4
    %
    
    
    29.9
    
    
    
    30.3
    %Funds From Operations (FFO)(1) (2)
    
    $
    (9.5
    )
    
    $
    11.8
    
    
    $
    (1.0
    )
    
    $
    21.4Earnings Before Interest, Taxes,
Depreciation and Amortization
(EBITDA)(1)(2)
    
    $
    41.7
    
    
    $
    63.0
    
    
    $
    100.6
    
    
    $
    122.8Net loss(3)
    
    $
    (33.8
    )
    
    $
    (21.7
    )
    
    $
    (55.9
    )
    
    $
    (44.3
    )
   (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 FFO and EBITDA are the following amounts (in thousands): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Charge off of deferred debt costs
    
    $
    3,944
    
    
    $
    2,834
    
    
    $
    4,174
    
    
    $
    2,834Loss (gain) on early
extinguishment of debt
    
    
    28,246
    
    
    
    (307
    )
    
    
    28,246
    
    
    
    (1,260
    )Gain from swap termination
    
    
    (1,005
    )
    
    
    
    
    
    
    (1,005
    )
    
    
    Impairment
    
    
    
    
    
    
    7,824
    
    
    
    
    
    
    
    7,824$
    31,185
    
    
    $
    10,351
    
    
    $
    31,415
    
    
    $
    9,398
  (3)
    
    Included in net loss are the following amounts (in thousands): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Lease termination costs
    
    $
    
    
    
    $
    
    
    
    $
    4,900
    
    
    $
    Charge off of deferred debt costs
    
    
    3,944
    
    
    
    2,834
    
    
    
    4,174
    
    
    
    2,834Loss (gain) on early
extinguishment of debt
    
    
    28,246
    
    
    
    (307
    )
    
    
    28,246
    
    
    
    (1,260
    )Gain from swap termination
    
    
    (1,005
    )
    
    
    
    
    
    
    (1,005
    )
    
    
    Impairment
    
    
    
    
    
    
    7,824
    
    
    
    
    
    
    
    7,824$
    31,185
    
    
    $
    10,351
    
    
    $
    36,315
    
    
    $
    9,398
 24




---



##### Table of Contents



Results of Operations Comparison of the Three Months Ended June 30, 2004 and 2003 At June 30, 2004, we had 153 hotels included in our consolidated
continuing operations, of which 26 hotels had been identified as non-strategic.
The 26 non-strategic hotels included in continuing operations at June 2004,
represented 16% of the rooms in our hotel portfolio, but only 8% of our 2003
consolidated hotel operating profit. The operating margin for these 26 hotels
was 21.2%, compared to 30.9% for the remainder of our portfolio. For the three months ended June 30, 2004, we recorded a loss applicable to
common unitholders of $43 million, or a loss per unit of $0.69. Included in
the loss for the quarter was $31 million ($0.50 per unit) of net expenses
associated with the early retirement of $500 million of senior notes. For the
same period in 2003, we recorded a loss of $28 million, or a loss per unit of
$0.46. Results of operations for the second quarter of 2003 included $10
million ($0.17 per unit) of expenses related to impairment losses and the
charge-off of deferred financing costs, net of gain on early extinguishment of
debt. Revenues from continuing operations for the second quarter were $330
million, reflecting an increase of $28 million, or 9%, compared to the same
quarter in 2003. The increase in revenues was primarily related to a 7.3%
increase in our hotel portfolios RevPAR, compared to the same quarter in 2003.
Occupancy increased 5.5%, to 68.6%, and ADR increased 1.7% to $97.78, compared
to the same quarter of 2003. The increases in occupancy and ADR are
attributable to the strengthening lodging market. Included in total hotel operating revenue was $6.1 million and $2.1
million for the three months ended June 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 it was
accounted for by the equity method prior to June 2003. Our second quarter 2004 hotel operating profit from continuing operations
increased by $3 million over the same period in 2003. Operating margin, which
is hotel operating profit divided by hotel revenue, decreased from 32.4% to
30.7%. We attribute the decrease in operating margin principally to increased
hotel occupancy of 5.5% with only a 1.7% increase in average rate, coupled with
increases in labor related costs. Discontinued operations for the quarter represent the operating income,
direct interest costs and gains or losses on sale of eight hotels disposed
during 2004, one hotel that was designated as held for sale at June 30, 2004,
and 16 hotels disposed of in 2003. Comparison of the Six Months Ended June 30, 2004 and 2003 For the six months ended June 30, 2004, we recorded a loss applicable to
common unitholders of $72 million ($1.15 per unit) compared to a loss in 2003
of $58 million ($0.93 per unit). Results of operations for the six months
ended June 30, 2004, included $31 million ($0.51 per unit) of net expenses
principally associated with the early retirement of $500 million of senior
notes and a nonrecurring lease termination cost of $5 million ($0.08 per unit).
Included in the prior year loss was $9 million ($0.15 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 six months 2004 were $636
million, reflecting an increase of $51 million, or 9% compared to the same
period in 2003. The increase in revenues was primarily related to the 5.8%
increase in our hotel portfolios RevPAR, compared to the same period in 2003.
Occupancy increased 5.3% to 66.5% and ADR increased 0.5% to $97.62, 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 $13.2 million and $2.1
million for the six months ended June 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 it was accounted for
by the equity method prior to June 2003. 25




---



##### Table of Contents



Our six month 2004 hotel operating profit from continuing operations
increased by $7 million over the same period in 2003. Operating margin
decreased from 31.3% to 29.9%. We attribute the decrease in operating margin
principally to the 5.3% increase in occupied rooms with only a 0.5% increase in
average room rate, coupled with increases in labor related costs, compared to
the same period in 2003. Discontinued operations for the quarter represent the operating income,
direct interest costs and gains or losses on sale of eight hotels disposed
during 2004, one hotel that was designated as held for sale at June 30, 2004,
and 16 hotels disposed of in 2003. 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 measurements of performance to be
helpful in evaluating a real estate companys operations. We consider Funds
From Operations, or FFO, and Earnings Before Interest, Taxes, Depreciation, and
Amortization, or EBITDA, 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. 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
generally accepted accounting principles), excluding gains or losses from sales
of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect funds from operations
on the same basis. FFO and EBITDA are not measures of operating performance
under generally accepted accounting principles in the U.S., or GAAP. However,
we believe that FFO and EBITDA are helpful to management and investors as
supplemental measures of the performance of an equity REIT. We compute FFO in
accordance with standards established by NAREIT. This may not be comparable to
FFO reported by other REITs that do not define the term in accordance with the
current NAREIT definition, or that interpret the current NAREIT definition
differently than we do. FFO and EBITDA should not be considered as alternatives to net income,
operating profit, cash flow from operations, or any other operating performance
measure prescribed by GAAP. Neither should FFO, FFO per unit and 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 unit
does not measure, and should not be used as a measure of amounts that accrue
directly to the benefit of unitholders. 26




---



##### Table of Contents



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 June 30,2004
    
    2003Per Unit
    
    
    
    
    
    
    
    
    
    Per UnitDollars
    
    Units
    
    Amount
    
    Dollars
    
    Units
    
    AmountNet loss
    
    $
    (33,751
    )
    
    
    
    
    
    
    
    
    
    $
    (21,696
    )Preferred distributions
    
    
    (8,970
    )
    
    
    
    
    
    
    
    
    
    
    (6,728
    )Net loss applicable to common
unitholders
    
    $
    (42,721
    )
    
    
    61,983
    
    
    $
    (0.69
    )
    
    $
    (28,424
    )
    
    
    61,845
    
    
    $
    (0.46
    )Depreciation from continuing operations
    
    
    30,148
    
    
    
    
    
    
    
    0.49
    
    
    
    34,317
    
    
    
    
    
    
    
    0.55Depreciation from unconsolidated
entities and discontinued operations
    
    
    1,870
    
    
    
    
    
    
    
    0.03
    
    
    
    5,609
    
    
    
    
    
    
    
    0.09Loss on sale of assets
    
    
    1,214
    
    
    
    
    
    
    
    0.02
    
    
    
    330
    
    
    
    
    
    
    
    0.01Conversion of options and unvested
restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    309
    
    
    
    FFO
    
    $
    (9,489
    )
    
    
    61,983
    
    
    $
    (0.15
    )
    
    $
    11,832
    
    
    
    62,154
    
    
    $
    0.19
 Six Months Ended June 30,2004
    
    2003Per Unit
    
    
    
    
    
    
    
    
    
    Per UnitDollars
    
    Units
    
    Amount
    
    Dollars
    
    Units
    
    AmountNet loss
    
    $
    (55,857
    )
    
    
    
    
    
    
    
    
    
    $
    (44,344
    )Preferred distributions
    
    
    (15,696
    )
    
    
    
    
    
    
    
    
    
    
    (13,454
    )Net loss applicable to common
stockholders
    
    $
    (71,553
    )
    
    
    61,985
    
    
    $
    (1.15
    )
    
    $
    (57,798
    )
    
    
    61,833
    
    
    $
    (0.93
    )Depreciation from continuing operations
    
    
    60,797
    
    
    
    
    
    
    
    0.98
    
    
    
    67,993
    
    
    
    
    
    
    
    1.09Depreciation from unconsolidated
entities and discontinued operations
    
    
    3,888
    
    
    
    
    
    
    
    0.06
    
    
    
    10,899
    
    
    
    
    
    
    
    0.17Loss on sale of assets
    
    
    941
    
    
    
    
    
    
    
    0.01
    
    
    
    330
    
    
    
    
    
    
    
    0.01Lease
termination costs(a)
    
    
    4,900
    
    
    
    
    
    
    
    0.08
    
    
    
    
    
    
    
    Conversion of options and unvested
restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    309
    
    
    
    FFO
    
    $
    (1,027
    )
    
    
    61,985
    
    
    $
    (0.02
    )
    
    $
    21,424
    
    
    
    62,142
    
    
    $
    0.34
  (a)
    
    We consider this lease termination cost, associated with the early termination of a lease, to be unusual or
nonrecurring in accordance with Item 10 of Regulation S-K. 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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Charge off of deferred debt costs
    
    $
    3,944
    
    
    $
    2,834
    
    
    $
    4,174
    
    
    $
    2,834Loss (gain) on early extinguishment of debt
    
    
    28,246
    
    
    
    (307
    )
    
    
    28,246
    
    
    
    (1,260
    )Gain from swap termination
    
    
    (1,005
    )
    
    
    
    
    
    
    (1,005
    )
    
    
    Impairment
    
    
    
    
    
    
    7,824
    
    
    
    
    
    
    
    7,824$
    31,185
    
    
    $
    10,351
    
    
    $
    31,415
    
    
    $
    9,398Per unit amounts
    
    $
    0.50
    
    
    $
    0.17
    
    
    $
    0.51
    
    
    $
    0.15
 27




---



##### Table of Contents



Reconciliation of Net Loss to EBITDA
(in thousands) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (33,751
    )
    
    $
    (21,696
    )
    
    $
    (55,857
    )
    
    $
    (44,344
    )Depreciation from continuing operations
    
    
    30,148
    
    
    
    34,317
    
    
    
    60,797
    
    
    
    67,993Depreciation from unconsolidated
entities and discontinued operations
    
    
    1,870
    
    
    
    5,609
    
    
    
    3,888
    
    
    
    10,899Loss on sale of assets
    
    
    1,214
    
    
    
    330
    
    
    
    941
    
    
    
    330Lease termination costs
    
    
    
    
    
    
    
    
    
    
    4,900
    
    
    
    Interest expense
    
    
    40,334
    
    
    
    41,561
    
    
    
    82,178
    
    
    
    81,751Interest expense from unconsolidated
entities and discontinued operations
    
    
    1,407
    
    
    
    2,296
    
    
    
    2,727
    
    
    
    5,073Amortization expense
    
    
    519
    
    
    
    564
    
    
    
    1,022
    
    
    
    1,080EBITDA
    
    $
    41,741
    
    
    $
    62,981
    
    
    $
    100,596
    
    
    $
    122,782
 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
    
    Six Months EndedJune 30,
    
    June 302004
    
    2003
    
    2004
    
    2003Charge off of deferred debt costs
    
    $
    3,944
    
    
    $
    2,834
    
    
    $
    4,174
    
    
    $
    2,834Loss (gain) on early extinguishment of debt
    
    
    28,246
    
    
    
    (307
    )
    
    
    28,246
    
    
    
    (1,260
    )Gain on swap termination
    
    
    (1,005
    )
    
    
    
    
    
    
    (1,005
    )
    
    
    Impairment
    
    
    
    
    
    
    7,824
    
    
    
    
    
    
    
    7,824$
    31,185
    
    
    $
    10,351
    
    
    $
    31,415
    
    
    $
    9,398
 Hotel Operating Profit and Operating Margin Hotel operating profit and 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 give investors a more complete
understanding of the operating results over which our individual hotels and
operating managers have direct control. 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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Total revenue
    
    $
    329,746
    
    
    $
    302,179
    
    
    $
    636,275
    
    
    $
    584,876Retail space rental and other revenue
    
    
    (180
    )
    
    
    (236
    )
    
    
    (425
    )
    
    
    (618
    )Hotel revenue
    
    
    329,566
    
    
    
    301,943
    
    
    
    635,850
    
    
    
    584,258Hotel operating expenses
    
    
    (228,427
    )
    
    
    (204,189
    )
    
    
    (445,899
    )
    
    
    (401,767
    )Hotel operating profit
    
    $
    101,139
    
    
    $
    97,754
    
    
    $
    189,951
    
    
    $
    182,491Operating margin
    
    
    30.7
    %
    
    
    32.4
    %
    
    
    29.9
    %
    
    
    31.2
    %
 28




---



##### Table of Contents



Hotel Operating Expense Composition
(dollars in thousands) Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003% of% of Hotel
    
    
    
    
    
    % of Hotel
    
    
    
    
    
    Hotel
    
    
    
    
    
    % of HotelRevenue
    
    
    
    
    
    Revenue
    
    
    
    
    
    Revenue
    
    
    
    
    
    RevenueHotel departmental expenses:Room
    
    $
    69,322
    
    
    
    21.0
    %
    
    $
    60,801
    
    
    
    20.1
    %
    
    $
    134,285
    
    
    
    21.1
    %
    
    $
    118,354
    
    
    
    20.2
    %Food and beverage
    
    
    40,674
    
    
    
    12.4
    
    
    
    36,511
    
    
    
    12.1
    
    
    
    78,143
    
    
    
    12.3
    
    
    
    71,031
    
    
    
    12.2Other operating departments
    
    
    8,698
    
    
    
    2.6
    
    
    
    7,175
    
    
    
    2.4
    
    
    
    16,879
    
    
    
    2.7
    
    
    
    13,936
    
    
    
    2.4Total hotel
departmental expenses
    
    
    118,694
    
    
    
    36.0
    
    
    
    104,487
    
    
    
    34.6
    
    
    
    229,307
    
    
    
    36.1
    
    
    
    203,321
    
    
    
    34.8Other property related costs:Administrative and general
    
    
    30,715
    
    
    
    9.3
    
    
    
    28,167
    
    
    
    9.3
    
    
    
    60,577
    
    
    
    9.5
    
    
    
    56,678
    
    
    
    9.7Marketing and advertising
    
    
    28,361
    
    
    
    8.6
    
    
    
    25,371
    
    
    
    8.4
    
    
    
    55,594
    
    
    
    8.8
    
    
    
    50,101
    
    
    
    8.6Repairs and maintenance
    
    
    17,901
    
    
    
    5.5
    
    
    
    16,164
    
    
    
    5.3
    
    
    
    35,813
    
    
    
    5.6
    
    
    
    32,276
    
    
    
    5.5Energy
    
    
    15,572
    
    
    
    4.7
    
    
    
    14,653
    
    
    
    4.9
    
    
    
    31,857
    
    
    
    5.0
    
    
    
    28,993
    
    
    
    5.0Total other property related
costs
    
    
    92,549
    
    
    
    28.1
    
    
    
    84,355
    
    
    
    27.9
    
    
    
    183,841
    
    
    
    28.9
    
    
    
    168,048
    
    
    
    28.8Management and franchise fees
    
    
    17,184
    
    
    
    5.2
    
    
    
    15,347
    
    
    
    5.1
    
    
    
    32,751
    
    
    
    5.1
    
    
    
    30,398
    
    
    
    5.2Hotel operating expenses
    
    $
    228,427
    
    
    
    69.3
    %
    
    $
    204,189
    
    
    
    67.6
    %
    
    $
    445,899
    
    
    
    70.1
    %
    
    $
    401,767
    
    
    
    68.8
    %
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Reconciliation of total operating expenses to hotel operating expenses:Total operating expenses
    
    $
    293,935
    
    
    $
    273,497
    
    
    $
    576,629
    
    
    $
    538,454Taxes, insurance and lease expense
    
    
    (30,967
    )
    
    
    (31,254
    )
    
    
    (62,154
    )
    
    
    (61,534
    )Corporate expenses
    
    
    (4,393
    )
    
    
    (3,737
    )
    
    
    (7,779
    )
    
    
    (7,160
    )Depreciation
    
    
    (30,148
    )
    
    
    (34,317
    )
    
    
    (60,797
    )
    
    
    (67,993
    )Hotel operating expenses
    
    $
    228,427
    
    
    $
    204,189
    
    
    $
    445,899
    
    
    $
    401,767
 29




---



##### Table of Contents



Hotel Portfolio Composition The following tables set forth, as of June 30, 2004, for our consolidated
hotel portfolio of 153 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
    
    
    
    33
    %
    
    
    48
    %Holiday
Inn®-branded
    
    
    43
    
    
    
    13,751
    
    
    
    32
    
    
    
    24Sheraton®-branded
    
    
    10
    
    
    
    3,269
    
    
    
    8
    
    
    
    8Crowne Plaza®
    
    
    15
    
    
    
    5,108
    
    
    
    12
    
    
    
    7Doubletree®-branded
    
    
    10
    
    
    
    2,206
    
    
    
    5
    
    
    
    6Other
    
    
    19
    
    
    
    4,117
    
    
    
    10
    
    
    
    7
 % of
    
    % of 2003 HotelTop Markets
    
    Hotels
    
    Rooms
    
    Total Rooms
    
    Operating Profit(b)Atlanta
    
    
    12
    
    
    
    3,514
    
    
    
    8
    %
    
    
    7
    %Dallas
    
    
    15
    
    
    
    4,724
    
    
    
    11
    
    
    
    6San Francisco Bay Area
    
    
    8
    
    
    
    2,690
    
    
    
    6
    
    
    
    6Los Angeles Area
    
    
    6
    
    
    
    1,492
    
    
    
    3
    
    
    
    4Boca Raton/Ft. Lauderdale
    
    
    4
    
    
    
    1,118
    
    
    
    3
    
    
    
    4Orlando
    
    
    6
    
    
    
    2,219
    
    
    
    5
    
    
    
    4Chicago
    
    
    4
    
    
    
    1,239
    
    
    
    3
    
    
    
    4New Orleans
    
    
    2
    
    
    
    746
    
    
    
    2
    
    
    
    3San Diego
    
    
    1
    
    
    
    600
    
    
    
    1
    
    
    
    3Minneapolis
    
    
    4
    
    
    
    955
    
    
    
    2
    
    
    
    3Houston
    
    
    8
    
    
    
    1,969
    
    
    
    5
    
    
    
    3Phoenix
    
    
    4
    
    
    
    1,016
    
    
    
    2
    
    
    
    3Philadelphia
    
    
    3
    
    
    
    1,174
    
    
    
    3
    
    
    
    3
 % of
    
    % of 2003 HotelTop Four States
    
    Hotels
    
    Rooms
    
    Total Rooms
    
    Operating Profit(b)California
    
    
    19
    
    
    
    5,593
    
    
    
    13
    %
    
    
    17
    %Texas
    
    
    35
    
    
    
    9,659
    
    
    
    23
    
    
    
    15Florida
    
    
    16
    
    
    
    5,343
    
    
    
    13
    
    
    
    11Georgia
    
    
    14
    
    
    
    3,868
    
    
    
    9
    
    
    
    8
 % of
    
    % of 2003 HotelLocation
    
    Hotels
    
    Rooms
    
    Total Rooms
    
    Operating Profit(b)Suburban
    
    
    69
    
    
    
    17,649
    
    
    
    41
    %
    
    
    40
    %Urban
    
    
    32
    
    
    
    9,978
    
    
    
    23
    
    
    
    27Airport
    
    
    30
    
    
    
    9,206
    
    
    
    22
    
    
    
    22Resort
    
    
    12
    
    
    
    3,677
    
    
    
    9
    
    
    
    9Highway
    
    
    10
    
    
    
    2,220
    
    
    
    5
    
    
    
    2
 Categories as defined by
    
    
    
    
    
    
    
    
    
    % of
    
    % of 2003 HotelSmith Travel Research
    
    Hotels
    
    Rooms
    
    Total Rooms
    
    Operating Profit(b)Upscale all-suite
    
    
    71
    
    
    
    17,324
    
    
    
    40
    %
    
    
    56
    %Full service
    
    
    45
    
    
    
    14,492
    
    
    
    34
    
    
    
    26Upscale
    
    
    27
    
    
    
    9,232
    
    
    
    22
    
    
    
    17Limited service
    
    
    10
    
    
    
    1,682
    
    
    
    4
    
    
    
    1
 % of
    
    % of 2003 HotelHotels
    
    Rooms
    
    Total Rooms
    
    Operating Profit(b)Core Hotels
    
    
    127
    
    
    
    35,734
    
    
    
    84
    %
    
    
    92
    %Non-Strategic Hotels(a)
    
    
    26
    
    
    
    6,996
    
    
    
    16
    
    
    
    8
  (a)
    
    Excludes one hotel that met the held for sale accounting requirements,
and was 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. 30




---



##### Table of Contents



Hotel Operating Statistics The following tables set forth historical occupancy, ADR and RevPAR at
June 30, 2004 and 2003, and the percentage changes therein between the periods
presented, for our 153 consolidated hotels included in continuing operations: Operating Statistics by Brand Occupancy (%)Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceEmbassy Suites Hotels
    
    
    72.3
    
    
    
    69.3
    
    
    
    4.3
    
    
    
    70.7
    
    
    
    68.0
    
    
    
    4.1Holiday Inn-branded hotels
    
    
    67.9
    
    
    
    65.1
    
    
    
    4.4
    
    
    
    64.7
    
    
    
    62.5
    
    
    
    3.5Crowne Plaza hotels
    
    
    65.4
    
    
    
    59.5
    
    
    
    9.9
    
    
    
    63.2
    
    
    
    57.3
    
    
    
    10.3Doubletree-branded hotels
    
    
    70.1
    
    
    
    68.9
    
    
    
    1.7
    
    
    
    69.4
    
    
    
    66.4
    
    
    
    4.4Sheraton-branded hotels
    
    
    66.0
    
    
    
    60.3
    
    
    
    9.5
    
    
    
    65.0
    
    
    
    59.6
    
    
    
    9.1Other hotels
    
    
    63.0
    
    
    
    58.1
    
    
    
    8.5
    
    
    
    62.1
    
    
    
    57.5
    
    
    
    8.1Total hotels
    
    
    68.6
    
    
    
    65.0
    
    
    
    5.5
    
    
    
    66.5
    
    
    
    63.2
    
    
    
    5.3
 ADR ($)Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceEmbassy Suites Hotels
    
    
    117.60
    
    
    
    115.67
    
    
    
    1.7
    
    
    
    118.43
    
    
    
    117.64
    
    
    
    0.7Holiday Inn-branded hotels
    
    
    80.50
    
    
    
    78.98
    
    
    
    1.9
    
    
    
    79.60
    
    
    
    78.79
    
    
    
    1.0Crowne Plaza hotels
    
    
    93.95
    
    
    
    93.69
    
    
    
    0.3
    
    
    
    90.87
    
    
    
    92.77
    
    
    
    (2.0
    )Doubletree-branded hotels
    
    
    105.10
    
    
    
    102.83
    
    
    
    2.2
    
    
    
    104.45
    
    
    
    103.40
    
    
    
    1.0Sheraton-branded hotels
    
    
    96.82
    
    
    
    94.26
    
    
    
    2.7
    
    
    
    97.19
    
    
    
    96.30
    
    
    
    0.9Other hotels
    
    
    82.53
    
    
    
    80.30
    
    
    
    2.8
    
    
    
    82.83
    
    
    
    81.90
    
    
    
    1.1Total hotels
    
    
    97.78
    
    
    
    96.17
    
    
    
    1.7
    
    
    
    97.62
    
    
    
    97.13
    
    
    
    0.5
 RevPAR ($)Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceEmbassy Suites Hotels
    
    
    84.99
    
    
    
    80.15
    
    
    
    6.0
    
    
    
    83.78
    
    
    
    79.96
    
    
    
    4.8Holiday Inn-branded hotels
    
    
    54.69
    
    
    
    51.38
    
    
    
    6.4
    
    
    
    51.48
    
    
    
    49.21
    
    
    
    4.6Crowne Plaza hotels
    
    
    61.42
    
    
    
    55.72
    
    
    
    10.2
    
    
    
    57.43
    
    
    
    53.17
    
    
    
    8.0Doubletree-branded hotels
    
    
    73.65
    
    
    
    70.85
    
    
    
    4.0
    
    
    
    51.44
    
    
    
    47.07
    
    
    
    9.3Sheraton-branded hotels
    
    
    63.89
    
    
    
    56.82
    
    
    
    12.4
    
    
    
    63.22
    
    
    
    57.40
    
    
    
    10.1Other hotels
    
    
    52.03
    
    
    
    46.67
    
    
    
    11.5
    
    
    
    51.44
    
    
    
    47.07
    
    
    
    9.3Total hotels
    
    
    67.04
    
    
    
    62.47
    
    
    
    7.3
    
    
    
    64.96
    
    
    
    61.38
    
    
    
    5.8
 31




---



##### Table of Contents



Operating Statistics for Our Top Markets Occupancy (%)Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceAtlanta
    
    
    66.9
    
    
    
    63.7
    
    
    
    5.0
    
    
    
    66.9
    
    
    
    65.0
    
    
    
    2.8Dallas
    
    
    55.1
    
    
    
    49.7
    
    
    
    10.8
    
    
    
    55.4
    
    
    
    49.9
    
    
    
    11.0San Francisco Bay Area
    
    
    67.5
    
    
    
    64.5
    
    
    
    4.7
    
    
    
    64.6
    
    
    
    62.7
    
    
    
    3.1Los Angeles Area
    
    
    69.1
    
    
    
    71.0
    
    
    
    (2.6
    )
    
    
    69.6
    
    
    
    70.9
    
    
    
    (1.7
    )Boca Raton/Ft. Lauderdale
    
    
    77.0
    
    
    
    72.1
    
    
    
    6.9
    
    
    
    82.0
    
    
    
    77.5
    
    
    
    5.9Orlando
    
    
    79.3
    
    
    
    74.4
    
    
    
    6.6
    
    
    
    77.6
    
    
    
    70.1
    
    
    
    10.8Chicago
    
    
    76.4
    
    
    
    72.4
    
    
    
    5.5
    
    
    
    69.3
    
    
    
    65.4
    
    
    
    6.0New Orleans
    
    
    75.5
    
    
    
    73.0
    
    
    
    3.5
    
    
    
    70.8
    
    
    
    67.6
    
    
    
    4.8San Diego
    
    
    83.3
    
    
    
    76.9
    
    
    
    8.3
    
    
    
    84.8
    
    
    
    77.5
    
    
    
    9.5Minneapolis
    
    
    69.4
    
    
    
    64.1
    
    
    
    8.2
    
    
    
    66.0
    
    
    
    61.9
    
    
    
    6.7Houston
    
    
    69.4
    
    
    
    65.6
    
    
    
    5.8
    
    
    
    70.7
    
    
    
    65.4
    
    
    
    8.0Phoenix
    
    
    67.1
    
    
    
    67.3
    
    
    
    (0.3
    )
    
    
    73.3
    
    
    
    73.6
    
    
    
    (0.4
    )Philadelphia
    
    
    72.8
    
    
    
    67.0
    
    
    
    8.7
    
    
    
    64.5
    
    
    
    59.8
    
    
    
    7.8
 ADR ($)Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceAtlanta
    
    
    86.23
    
    
    
    84.00
    
    
    
    2.7
    
    
    
    87.38
    
    
    
    86.73
    
    
    
    0.8Dallas
    
    
    84.12
    
    
    
    83.36
    
    
    
    0.9
    
    
    
    84.05
    
    
    
    85.30
    
    
    
    (1.5
    )San Francisco Bay Area
    
    
    114.24
    
    
    
    113.08
    
    
    
    1.0
    
    
    
    111.28
    
    
    
    112.65
    
    
    
    (1.2
    )Los Angeles Area
    
    
    111.17
    
    
    
    101.87
    
    
    
    9.1
    
    
    
    109.28
    
    
    
    101.66
    
    
    
    7.5Boca Raton/Ft. Lauderdale
    
    
    107.17
    
    
    
    107.19
    
    
    
    0.0
    
    
    
    124.07
    
    
    
    125.84
    
    
    
    (1.4
    )Orlando
    
    
    75.20
    
    
    
    73.96
    
    
    
    1.7
    
    
    
    79.41
    
    
    
    78.40
    
    
    
    1.3Chicago
    
    
    108.45
    
    
    
    113.98
    
    
    
    (4.8
    )
    
    
    102.09
    
    
    
    108.36
    
    
    
    (5.8
    )New Orleans
    
    
    144.35
    
    
    
    130.99
    
    
    
    10.2
    
    
    
    145.94
    
    
    
    142.51
    
    
    
    2.4San Diego
    
    
    124.69
    
    
    
    115.84
    
    
    
    7.6
    
    
    
    119.72
    
    
    
    118.99
    
    
    
    0.6Minneapolis
    
    
    123.37
    
    
    
    123.53
    
    
    
    (0.1
    )
    
    
    121.97
    
    
    
    121.77
    
    
    
    0.2Houston
    
    
    68.61
    
    
    
    71.49
    
    
    
    (4.0
    )
    
    
    71.76
    
    
    
    71.96
    
    
    
    (0.3
    )Phoenix
    
    
    94.36
    
    
    
    88.72
    
    
    
    6.4
    
    
    
    112.19
    
    
    
    105.22
    
    
    
    6.6Philadelphia
    
    
    110.20
    
    
    
    109.51
    
    
    
    0.6
    
    
    
    104.08
    
    
    
    105.12
    
    
    
    (1.0
    )
 RevPAR ($)Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    % Variance
    
    2004
    
    2003
    
    % VarianceAtlanta
    
    
    57.70
    
    
    
    53.52
    
    
    
    7.8
    
    
    
    58.42
    
    
    
    56.40
    
    
    
    3.6Dallas
    
    
    46.35
    
    
    
    41.46
    
    
    
    11.8
    
    
    
    46.56
    
    
    
    42.56
    
    
    
    9.4San Francisco Bay Area
    
    
    77.10
    
    
    
    72.90
    
    
    
    5.8
    
    
    
    71.91
    
    
    
    70.59
    
    
    
    1.9Los Angeles Area
    
    
    76.83
    
    
    
    72.28
    
    
    
    6.3
    
    
    
    76.10
    
    
    
    72.04
    
    
    
    5.6Boca Raton/Ft. Lauderdale
    
    
    82.54
    
    
    
    77.24
    
    
    
    6.9
    
    
    
    101.72
    
    
    
    97.47
    
    
    
    4.4Orlando
    
    
    59.65
    
    
    
    55.01
    
    
    
    8.4
    
    
    
    61.64
    
    
    
    54.94
    
    
    
    12.2Chicago
    
    
    82.91
    
    
    
    82.57
    
    
    
    0.4
    
    
    
    70.77
    
    
    
    70.89
    
    
    
    (0.2
    )New Orleans
    
    
    109.04
    
    
    
    95.61
    
    
    
    14.1
    
    
    
    103.39
    
    
    
    96.36
    
    
    
    7.3San Diego
    
    
    103.87
    
    
    
    89.14
    
    
    
    16.5
    
    
    
    101.58
    
    
    
    92.19
    
    
    
    10.2Minneapolis
    
    
    85.62
    
    
    
    79.21
    
    
    
    8.1
    
    
    
    80.52
    
    
    
    75.34
    
    
    
    6.9Houston
    
    
    47.60
    
    
    
    46.87
    
    
    
    1.6
    
    
    
    50.72
    
    
    
    47.07
    
    
    
    7.7Phoenix
    
    
    63.29
    
    
    
    59.68
    
    
    
    6.0
    
    
    
    82.26
    
    
    
    77.43
    
    
    
    6.2Philadelphia
    
    
    80.25
    
    
    
    73.36
    
    
    
    9.4
    
    
    
    67.13
    
    
    
    62.91
    
    
    
    6.7
 32




---



##### 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 six months ended June 30, 2004,
net cash flow provided by operating activities, consisting primarily of hotel
operations, was $30 million. At June 30, 2004, we had cash on hand of
approximately $148 million. Included in cash on hand are approximately $33
million held under our hotel management agreements to meet our hotel minimum
working capital requirements and $21 million held in escrow under certain of
our debt agreements. We currently expect that our cash flow provided by operating activities
for 2004 will be approximately $98 million to $103 million (full year 2003 cash
flow from operating activities was $48 million). Included in our projection of
cash flow from operating activities is a third quarter $8 million gain from our
joint venture interest in the development and sale of the Margate condominium
project in Myrtle Beach, South Carolina. Our cash flow forecasts assume a full
year RevPAR increase of 4% to 5% and operating margin of approximately 29% to
30%. For 2004, our current operating plan contemplates preferred distribution
payments of $34 million, capital expenditures of approximately $75 to $100
million ($34 million had been spent at June 30, 2004), debt maturities of $175
million (which was prepaid in June 2004), $17 million in normal recurring
principal payments and sales of approximately $125 million in non-strategic
hotels. We expect cash necessary to fund cash flow shortfalls and
distributions, if any, will be funded from our cash balances and proceeds from
the sale of hotels. 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 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. On April 5, 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 FelCor of
approximately $104 million. The proceeds were contributed to us in exchange
for a like number of Series A preferred units. The proceeds were used to
retire senior unsecured debt. In May 2004, we issued $175 million in aggregate principal amount of
Senior Floating Notes due 2011, the 2011 Notes. We received net proceeds of
$174.1 million. The 2011 Notes will mature on June 1, 2011. The 2011 Notes
bear interest, adjusted semi annually, at the six-month LIBOR rate 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. 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 $1,018.14
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 offset by a $1 million gain on
the unwinding of the 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 a tender offer and by purchases on the open market. 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 $3.6 million. In July
2004, we purchased an additional $115 million of these notes and recorded a
$7.6 million loss on early extinguishment of debt and wrote off debt issue
costs of $1.2 million. We expect to retire the remaining $160 million of these
senior notes during 2004 or 2005 using cash on hand, proceeds from asset sales
or proceeds from capital transactions. 33




---



##### Table of Contents



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: (1) $107 million of nine separate fixed rate CMBS loans
secured by nine hotels and weighted average rate of 6.5% and maturity dates
ranging from 2009 to 2014, and (2) $87 million of a cross-collateralized
floating rate CMBS loan secured by six hotels at a rate of LIBOR plus 2.11% and
a maturity date of 2014. On July 28, 2004 we cancelled the balance of the $200
million facility. Most of our mortgage debt is non-recourse to us and contains provisions
allowing for the substitution of collateral upon satisfaction of certain
conditions. Most of our mortgage debt is prepayable, subject to various
prepayment penalties, yield maintenance or defeasance obligations. Our publicly-traded senior unsecured notes require that we satisfy 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 the 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 capital 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 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 to satisfy FelCors REIT qualification requirement that they
distribute currently at least 90% of their 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. We currently
anticipate that we will continue to meet our financial covenant and incurrence
tests. Quantitative and Qualitative Disclosures About Market Risk At June 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. 34




---



##### Table of Contents



Expected Maturity Date
at June 30, 2004
(dollars in thousands) Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    ValueLiabilitiesFixed rate:Debt
    
    $
    7,841
    
    
    $
    25,770
    
    
    $
    16,561
    
    
    $
    260,220
    
    
    $
    289,996
    
    
    $
    840,765
    
    
    $
    1,441,153
    
    
    $
    1,499,956Average interest rate
    
    
    7.77
    %
    
    
    7.62
    %
    
    
    7.89
    %
    
    
    7.47
    %
    
    
    9.90
    %
    
    
    8.39
    %
    
    
    8.51
    %Floating rate:Debt
    
    
    2,868
    
    
    
    5,927
    
    
    
    143,559
    
    
    
    2,561
    
    
    
    18,168
    
    
    
    263,169
    
    
    
    436,252
    
    
    
    436,252Average interest rate(a)
    
    
    3.72
    %
    
    
    3.72
    %
    
    
    3.63
    %
    
    
    3.88
    %
    
    
    3.98
    %
    
    
    5.18
    %
    
    
    4.58
    %Interest rate swaps (fixed to floating)(b)Notional amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    (c)
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (1,647
    )Pay rate(b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.58
    %
    
    
    
    
    
    
    
    
    
    
    5.58
    %Receive rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.46
    %
    
    
    
    
    
    
    
    
    
    
    7.46
    %Total debt
    
    $
    10,709
    
    
    $
    31,697
    
    
    $
    160,120
    
    
    $
    262,781
    
    
    $
    308,164
    
    
    $
    1,103,934
    
    
    
    1,877,405Average interest rate
    
    
    6.69
    %
    
    
    6.89
    %
    
    
    4.07
    %
    
    
    6.76
    %
    
    
    9.55
    %
    
    
    7.63
    %
    
    
    7.45
    %Net discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,610
    )Total debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,872,795
  (a)
    
    The average floating rate of interest represents the implied forward
rate in the yield curve at June 30, 2004.(b)
    
    The interest rate swaps decreased our interest expense by $4.2 million
during the six months ended June 30, 2004.(c)
    
    All interest rate swaps were unwound in July 2004. 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. 35




---



##### Table of Contents



Disclosure Regarding Forward Looking Statements Portions of this Quarterly Report on Form 10-Q include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward looking statements include, without limitation, any statement
that may predict, forecast, indicate or imply future results, performance or
achievements. Forward-looking statements involve risks and uncertainties that
may cause actual results to differ materially from the results contained in the
forward-looking statements. The risks, uncertainties and assumptions that may
affect our actual results, some of which are discussed more fully in our
previous filings under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended (collectively, Cautionary
Disclosures) include: general economic conditions, including the timing and
magnitude of any recovery from the current soft economy; future acts of
terrorism; the impact on the travel industry of increased security precautions;
the availability of capital; the impact of U.S. military involvement in the
Middle East and elsewhere; the ability to effect sales of non-strategic hotels
at anticipated prices and numerous other factors that may affect results,
performance and achievements. The forward looking statements included herein,
and all subsequent written and oral forward looking statements attributable to
us or persons acting on our behalf, are expressly qualified in their entirety
by the Cautionary Disclosures. We undertake no obligation to update any
forward-looking statements to reflect future events or circumstances. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Information and disclosures regarding market risks applicable to 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 June 30, 2004. 
 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, in accordance with Rule
13a-15 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. (a) Changes in internal controls. Not applicable. 36




---



##### Table of Contents



PART II.  OTHER INFORMATION 
 Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are furnished in accordance with the provisions
of Item 601 of Regulation S-K: Exhibit Number
    
    Description of Exhibit10.28.6
    
    Termination Agreement, dated July 28, 2004, by and among
FCH/DT BWI Hotel, L.L.C., FCH/DT BWI Holdings, L.P., FelCor
Hotel Asset Company, L.L.C., FelCor/JPM Atlanta CP Hotel,
L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM
Austin HI Holdings, L.P., FelCor/JPM Austin Holdings, L.P.,
FelCor/JPM Boca Raton Hotel, L.L.C., FelCor/JPM BWI Hotel,
L.L.C., FelCor/JPM Denver Hotel, L.L.C., FelCor/JPM LBV
Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C.,
FelCor/JPM Nashville Hotel, L.L.C., FelCor/JPM Orlando
Hotel, L.L.C., FelCor/JPM Orlando I-Drive Hotel, L.L.C.,
FelCor/JPM Phoenix Hotel, L.L.C., FelCor/JPM Troy Hotel,
L.L.C., FelCor/JPM Wilmington Hotel, L.L.C., BHR
Operations, L.L.C., DJONT Leasing, L.L.C., DJONT
Operations, L.L.C., DJONT/JPM Atlanta CP Leasing, L.L.C.,
DJONT/JPM Atlanta ES Leasing, L.L.C., DJONT/JPM Austin HI
Leasing, L.P., DJONT/JPM Austin Leasing, L.P., DJONT/JPM
Boca Raton Leasing, L.L.C., DJONT/JPM BWI Leasing, L.L.C.,
DJONT/JPM Denver Leasing, L.L.C., DJONT/JPM LBV Leasing,
L.L.C., DJONT/JPM Mandalay Leasing, L.L.C., DJONT/JPM
Orlando I-Drive Leasing, L.L.C., DJONT/JPM Orlando Leasing,
L.L.C., DJONT/JPM Phoenix Leasing, L.L.C., DJONT/JPM Troy
Leasing, L.L.C., DJONT/JPM Wilmington Leasing, L.L.C.,
FCH/DT Leasing, L.L.C., FCH/DT Leasing II, L.L.C., FelCor
TRS Holdings, L.P., FelCor Lodging Limited Partnership and
JPMorgan Chase Bank. (filed as Exhibit 10.31.6 to FelCor
Lodging Trust Incorporateds Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004 (the FelCor June 2004
10-Q) and incorporated herein by reference).10.31
    
    Form of Loan Agreement, each dated either May 26, 2004,
June 10, 2004 or July 19, 2004, between JPMorgan Chase
Bank, as lender, and each of FelCor/JPM Boca Raton Hotel,
L.L.C., FelCor/JPM Phoenix Hotel, L.L.C., FelCor/JPM
Wilmington Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel,
L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM
Orlando Hotel, L.L.C., FelCor/JPM Denver Hotel, L.L.C.,
FelCor/JPM Troy Hotel, L.L.C. and FelCor/JPM BWI Hotel,
L.L.C. and FCH/DT BWI Hotel, L.L.C., as borrowers, and
acknowledged and agreed by FelCor Lodging Limited
Partnership (filed as Exhibit 10.34 to the FelCor June 2004
10-Q and incorporated herein by reference).10.31.1
    
    Form of Mortgage, Renewal Mortgage, Deed of Trust, Deed to
Secure Debt, Indemnity Deed of Trust and Assignment of
Leases and Rents, Security Agreement and Fixture Filing,
each dated either May 26, 2004, June 10, 2004 or July 19,
2004, from FelCor/JPM Wilmington Hotel, L.L.C., DJONT/JPM
Wilmington Leasing, L.L.C., FelCor/JPM Phoenix Hotel,
L.L.C., DJONT/JPM Phoenix Leasing, L.L.C., FelCor/JPM Boca
Raton Hotel, L.L.C., DJONT/JPM Boca Raton Leasing, L.L.C.,
FelCor/JPM Atlanta ES Hotel, L.L.C., DJONT/JPM Atlanta ES
Leasing, L.L.C., FelCor/JPM Austin Holdings, L.P.,
DJONT/JPM Austin Leasing, L.P., FelCor/JPM Orlando Hotel,
L.L.C., DJONT/JPM Orlando Leasing, L.L.C., FelCor/JPM
Denver Hotel, L.L.C., DJONT/JPM Denver Leasing, L.L.C.,
FelCor/JPM Troy Hotel, L.L.C., DJONT/JPM Troy Leasing,
L.L.C., FCH/DT BWI Holdings, L.P., FCH/DT BWI Hotel, L.L.C.
and DJONT/JPM BWI Leasing, L.L.C., to, and for the benefit
of, JPMorgan Chase Bank, as mortgagee or beneficiary (filed
as Exhibit 10.34.1 to the FelCor June 2004 10-Q and
incorporated herein by reference).
 37




---



##### Table of Contents



Exhibit Number
    
    Description of Exhibit10.31.2
    
    Form of nine separate Promissory Notes, each dated either
May 26, 2004, June 10, 2004 or July 19, 2004, made by
FelCor/JPM Wilmington Hotel, L.L.C., FelCor/JPM Phoenix
Hotel, L.L.C., FelCor/JPM Boca Raton Hotel, L.L.C.,
FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin
Holdings, L.P., FelCor/JPM Orlando Hotel, L.L.C.,
FelCor/JPM Denver Hotel, L.L.C., FelCor/JPM Troy Hotel,
L.L.C. and FelCor/JPM BWI Hotel, L.L.C., each separately
payable to the order of JPMorgan Chase Bank in the
respective original principal amounts of $11,000,000
(Wilmington, Delaware), $21,368,000 (Phoenix, Arizona),
$5,500,000 (Boca Raton, Florida), $13,500,000 (Atlanta,
Georgia), $9,616,000 (Austin, Texas), $9,798,000 (Orlando,
Florida), $5,000,000 (Aurora, Colorado), $6,900,000 (Troy,
Michigan) and $24,120,000 (Linthicum, Maryland) (filed as
Exhibit 10.34.2 to the FelCor June 2004 10-Q and
incorporated herein by reference).10.31.3
    
    Form of Guaranty of Recourse Obligations of Borrower, each
dated either May 26, 2004, June 10, 2004 or July 19, 2004,
made by FelCor Lodging Limited Partnership in favor of
JPMorgan Chase Bank (filed as Exhibit 10.34.3 to the FelCor
June 2004 10-Q and incorporated herein by reference).10.32
    
    Loan Agreement, dated July 28, 2004, by and among
FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Austin HI
Holdings, L.P., FelCor/JPM Brunswick Hotel, L.L.C.,
FelCor/JPM LBV Hotel, L.L.C., FelCor/JPM Mandalay Hotel,
L.L.C. and FelCor/JPM Orlando I-Drive Hotel, L.L.C., as
borrowers, and JPMorgan Chase Bank, as lender, and
acknowledged and agreed to by FelCor Lodging Limited
Partnership (filed as Exhibit 10.35 to the FelCor June 2004
10-Q and incorporated herein by reference).10.32.1
    
    Form of Mortgage, Leasehold Mortgage, Deed of Trust, Deed
to Secure Debt and Assignment of Leases and Rents, Security
Agreement and Fixture Filing, each dated July 28, 2004,
from FelCor/JPM Atlanta CP Hotel, L.L.C., DJONT/JPM Atlanta
CP Leasing, L.L.C., FelCor/JPM Austin HI Holdings, L.P.,
DJONT/JPM Austin HI Leasing, L.P., FelCor/JPM Brunswick
Hotel, L.L.C., DJONT/JPM Brunswick Leasing, L.L.C.,
FelCor/JPM LBV Hotel, L.L.C., DJONT/JPM LBV Leasing,
L.L.C., FelCor/JPM Mandalay Hotel, L.L.C., DJONT/JPM
Mandalay Leasing, L.L.C., FelCor/JPM Orlando I-Drive Hotel,
L.L.C. and DJONT/JPM Orlando I-Drive Leasing, L.L.C., to,
and for the benefit of, JPMorgan Chase Bank, as mortgagee
or beneficiary (filed as Exhibit 10.35.1 to the FelCor June
2004 10-Q and incorporated herein by reference).10.32.2
    
    Promissory Note, dated July 28, 2004, in the original
principal amount of $87,000,000 made by FelCor/JPM Atlanta
CP Hotel, L.L.C., FelCor/JPM Austin HI Holdings, L.P.,
FelCor/JPM Brunswick Hotel, L.L.C., FelCor/JPM LBV Hotel,
L.L.C., FelCor/JPM Mandalay Hotel, L.L.C. and FelCor/JPM
Orlando I-Drive Hotel, L.L.C., payable to the order of
JPMorgan Chase Bank (filed as Exhibit 10.35.2 to the FelCor
June 2004 10-Q and incorporated herein by reference).10.32.3
    
    Guaranty of Recourse Obligations of Borrower, dated July
28, 2004, made by FelCor Lodging Limited Partnership in
favor of JPMorgan Chase Bank (filed as Exhibit 10.35.3 to
the FelCor June 2004 10-Q and incorporated herein by
reference).31.1
    
    Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
 38




---



##### Table of Contents



Exhibit Number
    
    Description of Exhibit31.2
    
    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).
  (b)
    
    Since March 31, 2004, the Partnership has filed the following Current
Reports on Form 8-K: A Current Report on Form 8-K, dated May 11, 2004, was filed by the
Partnership on May 14, 2004. This filing, under Item 5, disclosed that FelCor
Lodging Trust Incorporated (FelCor), the sole general partner of the
Partnership, issued press releases announcing the redemption of the 7 3/8%
senior notes due 2004 of the Partnership, the Partnerships proposed senior
unsecured notes offering and the commencement by the Partnership of a tender
offer for its outstanding 9 1/2% senior notes due 2008. Copies of the press
releases were filed as Exhibits 99.1, 99.2 and 99.3, respectively. A Current Report on Form 8-K, dated May 17, 2004, was filed by the
Partnership on May 21, 2004. This filing, under Item 5, disclosed that FelCor
issued press releases announcing the pricing of the Partnerships senior
unsecured notes being offered and an amendment to the Partnerships tender
offer for its outstanding 9 1/2% senior notes due 2008. Copies of the press
releases were filed as Exhibits 99.1 and 99.2, respectively. A Current Report on Form 8-K, dated June 24, 2004, was filed by the
Partnership on June 29, 2004. This filing, under Item 5, disclosed that FelCor
issued press releases announcing the pricing of the Partnerships senior
unsecured notes being offered and the commencement by the Partnership of a
tender offer for its outstanding 9 1/2% senior notes due 2008. Copies of the
press releases were filed as Exhibits 99.1 and 99.2, respectively. A Current Report on Form 8-K, dated July 22, 2004, was filed by the
Partnership on July 22, 2004. This filing, under Item 5, updates Items 6, 7
and 8 of the Partnerships annual report on Form 10-K for the year ended
December 31, 2003, to reflect the hotels sold during the first quarter of 2004
and the hotels held for sale at March 31, 2004 as discontinued operations,
pursuant to the requirements of Statement of Financial Accounting Standards 144
Accounting for the Impairment or Disposal of Long Lived Assets, for the three
years ended December 31, 2003, 2002 and 2001, and to reflect the effect of this
reclassification on Managements Discussion and Analysis of Financial Condition
and Results of Operations and Selected Financial Data. These updated items
were filed as Exhibit 99.1. 39




---



##### Table of Contents



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: August 6, 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
 40




---



##### Table of Contents



INDEX TO EXHIBITS 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).