1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 24, 1998
FELCOR SUITE HOTELS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 1-14236 72-2541756
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 444-4900
(NOT APPLICABLE)
(Former name or former address, if changed since last report)
2
ITEM 5. OTHER EVENTS
On March 24, 1998, FelCor Suite Hotels, Inc. ("FelCor") announced
that, on March 23, 1998, it had entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Bristol Hotel Company ("Bristol"). Under the
Merger Agreement, Bristol will be merged with and into FelCor. The merger
was unanimously approved by the boards of both companies subject to final
documentation. The merger is expected to close near the end of June 1998.
Bristol is one of the largest owner/operators of full-service hotels in
the United States. Bristol operates 101 hotels in 22 states and Canada, of which
89 are owned or leased. Bristol's hotels are primarily full-service hotels that
operate in the midscale to upscale segments of the lodging industry. Bristol is
the largest franchisee of Holiday Hospitality Corporation ("Holiday
Hospitality") branded of hotels, including Crowne Plaza(R), Holiday Inn
Select(R) and Holiday Inn(R), and also operates 19 hotels under other brands,
including Hampton Inn(R), Courtyard by Marriott(R) and Fairfield Inn(R). Bristol
has also entered into an agreement with Omaha Hotel, Inc. to acquire by merger
20 hotels (the "Omaha Acquisition"), 14 of which are operated under Holiday
Hospitality brands. The Omaha Acquisition is expected to close at the end of
April 1998. In November 1997, Bristol commenced a $400 million renovation and
rebranding program for 51 of its hotels. This program is expected to be
substantially completed by the end of 1999 and to result in the rebranding of 20
hotels to the Crowne Plaza brand.
In the merger, FelCor will acquire Bristol's hotel properties in return
for approximately 31.1 million newly issued shares of FelCor's common stock
based upon an exchange ratio of 0.685 shares of common stock of FelCor for each
share of common stock of Bristol. FelCor will also assume approximately $0.8
billion in Bristol debt. When completed, FelCor is expected to have a market
capitalization of approximately $3.9 billion (based upon the closing price of
FelCor common stock of $36 1/8 per share on March 23, 1998, and including $1.5
billion in debt) and to own 193 hotels with more than 49,000 rooms, including
announced pending acquisitions. The merger is expected to be accretive to
FelCor's funds from operations for 1998 and 1999 despite the ongoing renovation
program by Bristol. A special cash distribution of Bristol's accumulated
earnings and profits is expected to be paid to the shareholders of the merged
company at the end of 1998.
Prior to the merger, Bristol will spin-off to its shareholders, as a
taxable dividend, all of its hotel operating business into a separate publicly
traded company named Bristol Hotels & Resorts ("BHR"). BHR will become one of
FelCor's two major tenants, with leases on all of the Bristol hotels included in
the merger. The initial terms of these leases will be from five to fifteen
years, with optional renewals upon the same terms of up to a total term of 15
years. BHR will continue to be Holiday Hospitality's largest franchisee and will
commit to add 8,700 Holiday-branded rooms over the next five years to its
portfolio. It is expected that BHR and FelCor will work together in the
acquisition and leasing of additional hotels.
At the closing of the merger, FelCor's common stock will be owned
approximately 56% by FelCor shareholders and 44% by Bristol shareholders.
Affiliates of Bass plc and Hampstead Group, which each currently own 32% of
Bristol, will each have an approximate 13% equity stake in FelCor. Both of these
Bristol investors have agreed to vote their shares in favor of the merger. Bass
plc and its subsidiaries will reduce their ownership in BHR to 9.9%, in order to
ensure FelCor's compliance with REIT requirements. Outstanding Bristol options
will be split into options for both FelCor and BHR shares. The existing vesting
schedules will continue with no options vesting for change of control. Future
service with either company will satisfy vesting requirements.
Fairness opinions have been received from FelCor's investment advisor,
BT Wolfensohn, and Bristol's investment advisor, Merrill Lynch.
The proposed merger is subject to shareholder approval and other
customary conditions. FelCor and BHR will be completely independent public
companies with no overlap in managements or boards of directors. However, three
current Bristol board members will become FelCor board members upon the merger
and not serve on BHR's board: Donald J. McNamara, Chairman of The Hampstead
Group; Richard C. North, Financial Director of Bass plc; and Robert H. Lutz, Jr.
Chairman and CEO of Amresco, Inc. Both companies will maintain their existing
headquarters facilities in Dallas. FelCor will continue to operate as a REIT.
BHR will operate as a C-corporation and will apply for listing on the New York
Stock Exchange.
Under the Merger Agreement, a break-up fee of $65 million, subject to
certain limitations, must be paid by either Bristol or FelCor if the Merger
Agreement is terminated due to its breach of a representation, warranty or
covenant that cannot be cured by September 30, 1998, if its board of directors
withdraws its recommendation of the Merger or recommends a competing proposal or
takes certain other actions in pursuit of a competing transaction.
Pursuant to certain requirements in the Merger Agreement, on April 21,
1998, FelCor agreed to lend $120 million to Bristol, at LIBOR plus 2%, in order
to fund (i) the cash portion of the purchase price and prepayment of certain
debt assumed as a result of the Omaha Acquisition, (ii) the purchase of a
Holiday Inn hotel, (iii) the prepayment by Bristol of $30 million of senior
debt, and (iv) $33 million of Bristol's on-going renovation costs. Loan advances
will be made when needed for their designated uses. The loan will be secured by
mortgages on hotels, and pledges of ownership interests in entities that own
hotels, valued in excess of $100 million, net of first lien debt. The loan will
be due 120 days after termination of the Merger Agreement for any reason, except
that if FelCor's shareholders fail to approve the Merger, up to $56.2 million of
the loan would be converted to an unsecured debt of Bristol due December 31,
2003.
The merger is expected to add 109 primarily full-service hotels with
more than 28,000 rooms to FelCor's portfolio and create a new significant
relationship for FelCor with BHR and Bass plc through Holiday Hospitality and
Bass's recently announced pending acquisition of Inter-Continental. The average
Bristol hotel has 266 rooms and more than 8,000 square feet of meeting space.
The average cost to FelCor of the hotels to be acquired in the merger is
approximately $66,000 per room.
In addition to its current standing as the largest owner of hotels
branded by Promus Hotels, Inc. ("Promus"), FelCor expects to become, as a result
of the merger, the world's largest owner of Holiday Hospitality branded hotels.
FelCor expects to change its name upon closing of the transaction to "FelCor
Lodging Trust Incorporated" or a similar name.
The following table sets forth certain information with respect to each
of the hotels that FelCor expects to acquire from Bristol.
NUMBER
HOTEL NAME LOCATION OF ROOMS
---------- -------- --------
OWNED OR LEASED HOTELS
Holiday Inn -- Montgomery......................................... Montgomery, AL 213
Holiday Inn -- Texarkana I-30..................................... Texarkana, AR 210
Days Inn -- Flagstaff............................................. Flagstaff, AZ 157
Fairfield Inn -- Downtown Scottsdale.............................. Scottsdale, AZ 218
Holiday Inn -- Santa Barbara...................................... Santa Barbara, CA 160
Holiday Inn Select -- Irvine/Orange County Airport (2)............ Irvine, CA 334
Holiday Inn Select -- Pleasanton(1)............................... Pleasanton, CA 244
Holiday Inn -- San Diego on the Bay............................... San Diego, CA 600
Holiday Inn -- San Jose North..................................... San Jose, CA 305
Holiday Inn -- San Francisco Financial District(2)................ San Francisco, CA 565
Holiday Inn -- San Francisco Fisherman's Wharf.................... San Francisco, CA 584
Holiday Inn Select -- San Francisco Union Square(1)............... San Francisco, CA 400
Holiday Inn Express -- Colorado Springs Central................... Colorado Springs, CO 207
Ramada Inn -- Colorado Springs North.............................. Colorado Springs, CO 220
Holiday Inn -- Hartford Downtown(1)............................... Hartford, CT 342
Holiday Inn Select -- Stamford.................................... Stamford, CT 383
Holiday Inn -- Washington D.C. Downtown........................... Washington, D.C. 208
Holiday Inn Select -- Cocoa Beach Oceanfront Resort............... Cocoa Beach, FL 500
Holiday Inn -- Nikki Bird......................................... Kissimmee, FL 529
Holiday Inn Select -- Miami International Airport(1).............. Miami, FL 304
Holiday Inn Select -- Orlando International Airport............... Orlando, FL 288
Holiday Inn -- Orlando International Drive Resort................. Orlando, FL 652
Holiday Inn -- Orlando North/Winter Park.......................... Orlando, FL 200
Holiday Inn -- Near Busch Gardens(R) Tampa........................ Tampa, FL 395
Courtyard by Marriott -- Downtown Atlanta......................... Atlanta, GA 211
Fairfield Inn -- Downtown Atlanta................................. Atlanta, GA 242
Holiday Inn -- Atlanta Airport North.............................. Atlanta, GA 493
Harvey Hotel -- Atlanta Powers Ferry(1)........................... Atlanta, GA 296
Crowne Plaza -- Atlanta Airport................................... Atlanta, GA 378
Holiday Inn Select -- Atlanta Perimeter Dunwoody.................. Atlanta, GA 250
Holiday Inn Express -- Atlanta I-20 East.......................... Atlanta, GA 167
Holiday Inn Express -- Atlanta Northeast.......................... Atlanta, GA 199
Holiday Inn -- Atlanta South/Jonesboro............................ Atlanta, GA 180
Holiday Inn -- Columbus Airport North............................. Columbus, GA 223
Hampton Inn -- Marietta........................................... Marietta, GA 140
Allerton Hotel -- Chicago(2)...................................... Chicago, IL 378
Chateau LeMoyne -- New Orleans Holiday Inn........................ New Orleans, LA 171
Holiday Inn -- New Orleans French Quarter......................... New Orleans, LA 276
Holiday Inn Select -- Boston Government Center(2)................. Boston, MA 303
Holiday Inn -- Kansas City Northeast.............................. Kansas City, MO 167
Holiday Inn -- Westport........................................... St. Louis, MO 167
Holiday Inn -- Jackson Southwest.................................. Jackson, MS 289
Crowne Plaza -- Downtown Jackson.................................. Jackson, MS 354
Hampton Inn -- Jackson North...................................... Jackson, MS 119
Harvey Hotel & Suites -- Jackson North............................ Jackson, MS 224
Whispering Woods Hotel and Conference Center...................... Olive Branch, MS 181
Holiday Inn -- Albuquerque Mountainview........................... Albuquerque, NM 360
Holiday Inn Select -- Philadelphia Center City(1)................. Philadelphia, PA 445
Holiday Inn -- Independence Mall.................................. Philadelphia, PA 364
The Mills House Hotel -- Charleston Holiday Inn................... Charleston, SC 214
Holiday Inn -- Columbia Airport................................... Columbia, SC 148
Holiday Inn Select -- Greenville (Roper)(1)....................... Greenville, SC 208
Holiday Inn -- Spartanburg West................................... Spartanburg, SC 224
Holiday Inn -- Chattanooga Southeast I-75......................... Chattanooga, TN 230
Holiday Inn -- Knoxville West..................................... Knoxville, TX 242
Holiday Inn Select -- Nashville Opryland/Airport(2)............... Nashville, TN 384
Holiday Inn -- Amarillo I-40...................................... Amarillo, TX 247
Holiday Inn -- Austin Town Lake................................... Austin, TX 320
Holiday Inn -- Beaumont Midtown I-10.............................. Beaumont, TX 190
Bristol House -- Dallas........................................... Dallas, TX 127
Fairfield Inn -- Dallas Regal Row................................. Dallas, TX 204
Harvey Hotel -- Dallas............................................ Dallas, TX 313
Harvey Hotel -- Addison........................................... Dallas, TX 429
Crowne Plaza -- Dallas (1)........................................ Dallas, TX 295
Hampton -- Downtown Dallas/West End............................... Dallas, TX 311
Harvey Hotel -- Dallas Brookhollow(1)............................. Dallas, TX 354
Courtyard by Marriott -- Houston Near The Galleria................ Houston, TX 209
Fairfield Inn -- Houston Near The Galleria........................ Houston, TX 107
Holiday Inn Select -- Houston Near Greenway Plaza................. Houston, TX 355
Holiday Inn -- Medical Center(1).................................. Houston, TX 297
Fairfield Inn -- Houston I-10 East................................ Houston, TX 160
Holiday Inn -- Houston Intercontinental Airport................... Houston, TX 413
Hampton Inn -- Houston I-10 East.................................. Houston, TX 90
Holiday Inn Select -- Houston I-10 West(2)........................ Houston, TX 349
Harvey Suites -- Houston Medical Center(3)........................ Houston, TX 285
Harvey Suites -- DFW Airport...................................... Irving, TX 164
Harvey Hotel -- DFW Airport....................................... Irving, TX 506
Harvey Hotel -- Plano............................................. Plano, TX 279
Holiday Inn -- Plano.............................................. Plano, TX 161
Holiday Inn -- San Antonio Downtown............................... San Antonio, TX 314
Holiday Inn Select -- San Antonio International Airport........... San Antonio, TX 397
Holiday Inn -- Waco I-35.......................................... Waco, TX 171
Holiday Inn -- Salt Lake City Airport............................. Salt Lake City, UT 190
Holiday Inn -- Cambridge.......................................... Cambridge, Ontario 139
Holiday Inn Select -- Toronto Airport............................. Toronto, Ontario 444
Holiday Inn -- Kitchener Waterloo................................. Kitchener, Ontario 182
Holiday Inn -- Peterborough -- Waterfront......................... Peterborough, Ontario 154
Holiday Inn -- Sarnia............................................. Sarnia, Ontario 151
Holiday Inn -- Toronto Yorkdale................................... Toronto, Ontario 370
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NUMBER
HOTEL NAME LOCATION OF ROOMS
---------- -------- --------
PENDING OMAHA ACQUISITION HOTELS
Holiday Inn -- Omaha Central I-80................................. Omaha, NE 383
Hampton Inn -- Omaha Central...................................... Omaha, NE 132
Homewood Suites -- Omaha.......................................... Omaha, NE 116
Holiday Inn -- Omaha Northwest.................................... Omaha, NE 213
Hampton Inn -- Omaha Southwest.................................... Omaha, NE 131
Holiday Inn Express & Suites -- Omaha SW.......................... Omaha, NE 78
Hampton Inn -- Moline............................................. Moline, IL 138
Holiday Inn Express -- Moline Airport............................. Moline, IL 111
Holiday Inn -- Moline Airport..................................... Moline, IL 216
Holiday Inn -- Davenport.......................................... Davenport, Iowa 287
Hampton Inn -- Davenport.......................................... Davenport, Iowa 132
Holiday Inn -- Hays............................................... Hays, KS 190
Hampton Inn -- Hays............................................... Hays, KS 116
Holiday Inn -- Salina............................................. Salina, KS 192
Holiday Inn Express & Suites -- Salina I-70....................... Salina, KS 93
Holiday Inn -- Great Bend......................................... Great Bend, KS 175
Holiday Inn Express -- Colby...................................... Colby, KS 72
Holiday Inn -- Midland Country Villa.............................. Midland, TX 250
Holiday Inn Hotel & Suites -- Odessa Centre....................... Odessa, TX 245
Holiday Inn Express & Suites -- Odessa Parkway.................... Odessa, TX 186
- ---------------
(1) These hotels are expected to be converted to Crowne Plaza hotels
during 1998.
(2) These hotels are expected to be converted to Crowne Plaza hotels
during 1999.
(3) This hotel is expected to be converted to a Holiday Inn and Suites
during 1998.
The consolidated financial statements of Bristol as of December 31, 1997
and 1996 and for the years ended December 31, 1997 and 1996, the consolidated
statements of income, of changes in stockholders' equity and of cash flows for
Bristol and for the eleven months ended December 31, 1995 and the combined
statements of income and cash flows for Harvey Hotel Companies for the one month
ended January 31, 1995, are included in this Form 8-K, commencing on page F-1.
See "Index to Financial Statements" below.
Certain matters discussed herein and the information incorporated by
reference herein, may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, (the "Securities Act") and the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") and as such may involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of FelCor to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the actual
results, performance or achievements of FelCor to differ materially from
FelCor's expectations are disclosed in other filings of FelCor under the
Securities Act and the Exchange Act ("Cautionary Statements"). All
forward-looking statements attributable to FelCor are expressly qualified in
their entirety by the Cautionary Statements.
ITEM 7. EXHIBITS
(c) Exhibits. The following exhibits are furnished in accordance with Item
601 of Regulation S-K:
Exhibit No. Description
2.1 Agreement and Plan of Merger by and between FelCor Suite Hotels,
Inc. and Bristol Hotel Company dated as of March 23, 1998
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Price Waterhouse LLP
4
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of Bristol Hotel Company:
Report of Arthur Andersen LLP F-1
Report of Price Waterhouse LLP F-2
Consolidated balance sheets F-3
Consolidated and combined statements of income F-4
Consolidated and combined statements of changes
in stockholders' equity F-5
Consolidated and combined statements of cash flows F-6
Notes to consolidated and combined financial statements F-8
5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Bristol Hotel Company
We have audited the accompanying consolidated balance sheets of Bristol Hotel
Company (a Delaware corporation) as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bristol Hotel Company as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 6, 1998 (except with respect
to the matter discussed in Note 20 as
to which the date is March 25, 1998)
F-1
6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Bristol Hotel Company
In our opinion, the accompanying consolidated statements of income, of changes
in stockholders' equity and of cash flows for Bristol Hotel Company and its
subsidiaries ("Company") and the combined statements of income and cash flows
for Harvey Hotel Companies ("Predecessor") present fairly, in all material
respects, the results of operations and cash flows of the Company and its
Predecessor for the eleven months ended December 31, 1995 and for the one month
ended January 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company
and its Predecessor's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Bristol Hotel Company and its subsidiaries
for any period subsequent to December 31, 1995.
PRICE WATERHOUSE LLP
Dallas, Texas
February 23, 1996
F-2
7
BRISTOL HOTEL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
1997 1996
------------ ------------
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 86,167 $ 4,666
Trading securities ................................................. 103 116
Accounts receivable (net of allowance of $2,259 and $344) ......... 31,305 10,501
Inventory .......................................................... 8,286 3,320
Deposits ........................................................... 7,569 5,404
Other current assets ............................................... 1,626 950
---------- ----------
Total current assets .................................... 135,056 24,957
---------- ----------
Property and equipment (net of accumulated depreciation
of $76,172 and $31,071) ........................................... 1,439,167 552,564
Other assets
Restricted cash .................................................... 9,283 3,069
Investments in joint ventures, net ................................. 12,396 --
Goodwill (net of accumulated amortization of $891) ................. 52,773 --
Deferred charges and other noncurrent assets (net of
accumulated amortization of $1,965 and $2,144) ................. 17,963 12,198
---------- ----------
Total assets ............................................ $1,666,638 $ 592,788
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt .................................. $ 8,455 $ 15,769
Accounts payable and accrued expenses .............................. 27,366 10,626
Accrued construction costs ......................................... 1,330 4,797
Accrued property, sales and use taxes .............................. 15,911 7,346
Accrued insurance reserves ......................................... 9,530 6,920
Advance deposits ................................................... 1,156 278
---------- ----------
Total current liabilities ............................... 63,748 45,736
---------- ----------
Long-term debt, excluding current portion ............................. 708,864 216,925
Deferred income taxes ................................................. 242,530 75,619
Other liabilities ..................................................... 2,702 2,351
---------- ----------
Total liabilities ....................................... 1,017,844 340,631
---------- ----------
Common stock ($.01 par value; 150,000,000 shares
authorized, 45,734,472 and 24,848,760 shares issued
at December 31, 1997 and 1996, respectively, and
43,641,401 and 24,848,760 shares outstanding at
December 31, 1997 and 1996, respectively) ......................... 436 166
Additional paid-in capital ............................................ 606,935 231,181
Cumulative translation adjustment ..................................... 286 --
Retained earnings ..................................................... 41,137 20,810
---------- ----------
Total stockholders' equity .............................. 648,794 252,157
---------- ----------
Total liabilities and stockholders' equity .............. $1,666,638 $ 592,788
========== ==========
The accompanying notes are an integral part of these consolidated
balance sheets.
F-3
8
BRISTOL HOTEL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
HARVEY HOTEL COMPANIES (PREDECESSOR)
COMBINED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
HARVEY HOTEL
BRISTOL HOTEL COMPANY COMPANIES
---------------------------------------------------------- -----------------
Eleven
Year Ended Year Ended Months Ended Month Ended
December 31, 1997 December 31, 1996 December 31, 1995 January 31, 1995
----------------- ----------------- ----------------- -----------------
REVENUE:
Rooms ......................................... $ 377,380 $ 149,794 $ 115,771 $ 4,006
Food and beverage ............................. 92,596 44,344 36,070 1,505
Management fees ............................... 4,948 2,513 1,382 34
Other ......................................... 29,594 15,189 11,972 398
----------------- ----------------- ----------------- -----------------
Total revenue ............................... 504,518 211,840 165,195 5,943
----------------- ----------------- ----------------- -----------------
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms ....................................... 105,063 37,706 32,692 1,124
Food and beverage ........................... 69,766 31,282 27,118 1,006
Other ....................................... 9,326 4,528 4,258 49
Undistributed operating expenses:
Administrative and general .................. 44,255 18,266 16,184 186
Marketing ................................... 34,439 15,555 12,070 393
Property operating costs .................... 44,303 17,499 16,313 360
Property taxes, rent and insurance .......... 35,330 10,903 8,425 269
Depreciation and amortization ............... 39,690 18,377 13,505 309
Corporate expense ........................... 24,450 10,958 8,035 315
----------------- ----------------- ----------------- -----------------
Operating income ................................ 97,896 46,766 26,595 1,932
----------------- ----------------- ----------------- -----------------
Other (income) expense:
Interest expense .............................. 44,591 18,616 18,374 652
Equity in income of joint ventures ............ (1,916) -- -- --
Other ......................................... -- -- 257 --
----------------- ----------------- ----------------- -----------------
Income before minority interest, income taxes,
extra-ordinary items and pro forma income
taxes ........................................ 55,221 28,150 7,964 1,280
Minority interest ............................... -- -- 173 --
----------------- ----------------- ----------------- -----------------
Income before income taxes, extraordinary items
and pro forma income taxes ................... 55,218 28,150 7,791 1,280
Income taxes .................................... 22,007 10,401 2,822 --
----------------- ----------------- ----------------- -----------------
Income before extraordinary items and pro forma
income taxes ................................. 33,214 17,749 4,969 1,280
Extraordinary loss on early extinguishment
of debt, net of tax .......................... (12,741) -- (1,908) --
----------------- ----------------- ----------------- -----------------
Net income before pro forma income taxes ........ $ 20,473 $ 17,749 $ 3,061 1,280
================= ================= =================
Pro forma income taxes (Unaudited)............... 435
-----------------
Net income after pro forma income tax expense
(Unaudited) ................................. $ 845
=================
Earnings per common and common equivalent share:
Income before extraordinary item:
Basic ....................................... $ 0.89 $ 0.71 $ 0.28 --
Diluted ..................................... $ 0.87 $ 0.70 $ 0.28 --
Net income:
Basic ....................................... $ 0.55 $ 0.71 $ 0.17 --
Diluted ..................................... $ 0.53 $ 0.70 $ 0.17 --
Weighted average number of common and common
equivalent shares outstanding:
Basic ......................................... 37,359,364 24,848,760 17,857,936 --
Diluted ....................................... 38,332,302 25,526,413 17,908,955 --
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-4
9
BRISTOL HOTEL COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
COMMON STOCK ADDITIONAL UNREALIZED CUMULATIVE RETAINED
---------------------- PAID-IN GAIN (LOSS) TRANSLATION EARNINGS
SHARES AMOUNT CAPITAL ON SECURITIES ADJUSTMENT (DEFICIT) TOTAL
---------- ---------- ---------- ------------- ----------- ---------- ----------
Balance at January 31, 1995 ............ 9,856,178 $ 99 $ 123,104 $ -- $ -- $ -- $ 123,203
Unrealized gain on securities, net ... -- -- -- 262 -- -- 262
Issuance of common stock ............. 6,709,662 67 109,529 -- -- -- 109,596
Net of income ........................ -- -- -- -- -- 3,061 3,061
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 ........... 16,565,840 166 232,633 262 -- 3,061 236,122
Reclass securities to trading ........ -- -- -- (262) -- -- (262)
Employee stock options ............... -- -- 216 -- -- -- 216
Adjustment to offering costs for
1995 common stock issuance ......... -- -- (1,668) -- -- -- (1,668)
Net income ........................... -- -- -- -- -- 17,749 17,749
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ........... 16,565,840 166 231,181 -- -- 20,810 252,157
Employee stock options ............... -- -- 296 -- -- -- 296
Exercise of employee stock options ... 6,619 -- 114 -- -- -- 114
Issuance of stock in Holiday Inn
Acquisition .......................... 9,361,308 93 267,874 -- -- -- 267,967
Issuance of common stock, net of
costs .............................. 3,162,500 31 107,470 -- -- -- 107,501
Stock split .......................... 14,545,134 146 -- -- -- (146) --
Foreign currency translation ......... -- -- -- -- 286 -- 286
Net income ........................... -- -- -- -- -- 20,473 20,473
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 ........... 43,641,401 $ 436 $ 606,935 $ -- $ 286 $ 41,137 $ 648,794
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-5
10
BRISTOL HOTEL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
HARVEY HOTEL COMPANIES (PREDECESSOR)
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
HARVEY HOTEL
BRISTOL HOTEL COMPANY COMPANIES
--------------------------------------------------------- ------------------
Eleven
Year Ended Year Ended Months Ended Month Ended
December 31, 1997 December 31, 1996 December 31, 1995 January 31, 1995
----------------- ----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................... $ 20,473 $ 17,749 $ 3,061 $ 1,280
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................ 39,690 18,377 13,505 309
Amortization of deferred financing fees ...... 2,749 2,062 -- --
Other ........................................ -- -- 602 --
Equity in earnings of joint ventures ......... (1,399) -- -- --
Compensation expense recognized for
employee stock options ..................... 410 216 -- --
Unrealized gain on marketable securities ..... -- (378) -- --
Non-cash portion of extraordinary item,
net of tax ................................. 11,009 -- 1,908 --
Changes in assets and liabilities:
Changes in working capital ................... 1,645 (684) (714) 641
Decrease (increase) in restricted cash ....... (6,214) (2,449) 2,860 (84)
Distributions from joint ventures ............ 650 -- -- --
Increase (decrease) in other liabilities ..... 217 (460) (4,260) 421
Deferred tax provision ....................... 5,805 6,171 (326) --
----------------- ----------------- ----------------- -----------------
Net cash provided by operating
activities .............................. 75,035 40,604 16,636 2,567
----------------- ----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to property and equipment ......... (54,071) (93,936) (60,941) (721)
Purchases of property and equipment,
net of associated debt ....................... (86,977) (6,300) (20,000) --
Sales of property and equipment ................ -- -- 4,711 --
Holiday Inn Acquisition, net of costs .......... (400,159) -- -- --
Sales of marketable securities ................. -- 726 -- 1,928
----------------- ----------------- ----------------- -----------------
Net cash provided by (used in)
investing activities .................... (541,207) (99,510) (76,230) 1,207
----------------- ----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Refinancing ...................... 600,000 -- -- --
Proceeds from New Credit Facility .............. 560,000 -- -- --
Repayment of New Credit Facility ............... (560,000) -- -- --
Paydown of Senior Notes ........................ (40,000) -- -- --
Proceeds from Offering, net of costs ........... 107,852 -- -- --
Early extinguishment of long-term debt ......... (133,540) -- -- --
Distributions to predecessor equity holders .... -- -- (4,140) (8,009)
Additions to notes receivable - partners ....... -- -- -- 488
Principal payments and extinguishment of
long-term debt ............................... (7,058) (4,826) (156,612) (121)
Proceeds from issuance of long-term debt ....... 43,410 66,976 123,387 --
Payment of offering costs ...................... -- (1,342) -- --
Proceeds from affiliate ........................ -- -- 19,900 --
Proceeds from initial public offering,
net of offering costs ........................ -- -- 88,557 --
Dividend paid to minority partner .............. -- -- (335) --
Decrease in accounts receivable affiliate ...... -- -- 542 --
Decrease (increase) in deferred charges
and other non-current assets .................. (22,991) (5,142) (9,212) 316
----------------- ----------------- ----------------- -----------------
Net cash provided by (used in)
financing activities .................... 547,673 55,666 62,087 (7,326)
----------------- ----------------- ----------------- -----------------
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-6
11
BRISTOL HOTEL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
HARVEY HOTEL COMPANIES (PREDECESSOR)
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
HARVEY HOTEL
BRISTOL HOTEL COMPANY COMPANIES
------------------------------------------------------- -----------------
Eleven
Year Ended Year Ended Months Ended Month Ended
December 31, 1997 December 31, 1996 December 31, 1995 January 31, 1995
----------------- ----------------- ----------------- -----------------
Net increase (decrease) in cash and
cash equivalents ................................. $ 81,501 $ (3,240) $ 2,493 $ (3,552)
Cash and cash equivalents at beginning of period ... 4,666 7,906 5,413 4,118
----------------- ----------------- ----------------- -----------------
Cash and cash equivalents at end of period ......... $ 86,167 $ 4,666 $ 7,906 $ 566
================= ================= ================= =================
Supplemental cash flow information:
Interest paid .................................... $ 39,706 $ 17,696 $ 17,111 $ 330
================= ================= ================= =================
Income taxes paid ................................ $ 10,942 $ 3,543 $ 2,685 $ --
================= ================= ================= =================
Non-cash investing and financing activities:
Debt assumed to acquire property
and equipment .................................. $ 21,813 $ -- $ 12,100 $ --
================= ================= ================= =================
Sale of non-hotel properties for assumption
of liabilities ................................. $ -- $ -- $ 4,723 $ --
================= ================= ================= =================
Purchase of minority interest for common stock ... $ -- $ -- $ 1,110 $ --
================= ================= ================= =================
Common stock issued in Holiday Inn Acquisition ..... $ 267,967 $ -- $ -- $ --
================= ================= ================= =================
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-7
12
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Bristol Hotel Company (the "Company") is a Delaware corporation which was
incorporated in November 1994 and began operations after the acquisitions
of Harvey Hotel Company, Ltd. and its subsidiaries (together, "Harvey
Hotel Companies" or "Predecessor") and United Inns, Inc. ("United Inns")
(collectively, the "Combination"). The Company owns 86 hotels and
manages 15 additional hotels, two of which are owned by joint ventures in
which the Company owns a 50% interest. The properties, which contain
approximately 28,800 rooms, are located in 22 states, the District of
Columbia and Canada. The Company acquired the ownership and/or
management of 60 of these properties on April 28, 1997 (the "Holiday Inn
Acquisition"). The Combination and the Holiday Inn Acquisition are more
fully described in Note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. The combined financial statements
of the Predecessor include the accounts of Harvey Hotel Company and
related entities, all of which were under common control. The owners of
these entities combined their interests for the purpose of forming a new
entity which was acquired by the Company. The accounts of United Inns
and its subsidiaries are included from February 1, 1995, the date of
acquisition. The results of operations of the hotels acquired in the
Holiday Inn Acquisition have been included in the Company's financial
statements since April 28, 1997. All significant intercompany accounts
and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include unrestricted cash in banks and cash on
hand. Liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
TRADING SECURITIES
Marketable securities consist primarily of equity securities and mutual
fund shares. Equity securities have been classified as either: (i)
available-for-sale, which are reported at fair value, with net unrealized
gains and losses excluded from earnings and reported as a separate
component of changes in equity; or (ii) trading securities, which are
reported at fair value, with unrealized holding gains and losses for
trading securities included in earnings. At December 31, 1997 and 1996,
all marketable securities owned by the Company were classified as trading
securities.
ACCOUNTS RECEIVABLE
Accounts receivable in the balance sheets are expected to be collected
within one year and are net of estimated uncollectible amounts of
$2,259,000 and $344,000, at December 31, 1997 and 1996, respectively.
Valuation and qualifying accounts consist of allowance for doubtful
accounts as follows (in thousands):
Write-Off of
Balance at Charged to Amounts Balance at
Beginning Costs and Previously End of
of Period Expenses Reserved Period
---------- ---------- ------------ ----------
Company
Year ended December 31, 1997 ................. $ 344 $ 2,306 $ (391) $ 2,259
Year ended December 31, 1996 ................. 620 251 (527) 344
Eleven months ended December 31, 1995 ........ 221 796 (397) 620
F-8
13
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory, consisting primarily of food and beverage products as well as
consumable supplies, is carried at the lower of cost or market. Cost is
determined on the first-in, first-out basis.
DEFERRED CHARGES AND OTHER NONCURRENT ASSETS
Deferred charges and other noncurrent assets consist primarily of
financing costs which are amortized over the life of the related loan.
The amounts reported in the balance sheets at December 31, 1997 and 1996,
are net of accumulated amortization of $1,965,000 and $2,144,000,
respectively.
PROPERTY AND EQUIPMENT
The Company recorded the Combination and the Holiday Inn Acquisition on
the basis of an allocation of the purchase price based on the fair market
value of the assets acquired at the date of acquisition. Subsequent
additions and improvements are capitalized at their cost, including
interest costs associated with the renovation of certain hotels.
Interest capitalized during the years ended December 31, 1997 and 1996
was $1,628,000 and $2,100,000, respectively.
The cost of normal repairs and maintenance that does not significantly
extend the life of the property and equipment is expensed as incurred.
Depreciation is computed on a straight-line method over the estimated
useful lives of the assets, as follows:
BRISTOL HOTEL COMPANY HARVEY HOTEL COMPANIES
--------------------- ----------------------
Buildings 35-40 years 31-35 years
Furniture, fixtures and equipment 3-15 years 7 years
Automobiles and trucks 3 years 3 years
Leasehold improvements Lease term or useful Lease term or useful
life, whichever is less life, whichever is less
Depreciation and amortization expense recorded for the years ended
December 31, 1997 and 1996, and the eleven months ended December 31,
1995 was $39.7 million, $18.4 million, and $13.5 million, respectively.
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for Impairment of Long- Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"). As of December 31, 1997 and
1996, no impairment losses have been incurred. The assets, which were
classified as available for sale as of December 31, 1996, were
reclassified to held and used in the second quarter of 1997.
RESTRICTED CASH
Restricted cash consists of (i) funds placed in reserve for the
replacement of furniture, fixtures and equipment, and (ii) tax and
insurance reserves. The Company is required to deposit monthly with
various lenders amounts of three to four percent of hotel revenues for
replacement reserves plus the tax and insurance escrow. As tax and
insurance payments are made and improvements are completed, the Company
is reimbursed from the reserves.
F-9
14
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") was issued. Under SFAS 128, basic
earnings per share ("EPS") is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the
period. SFAS 128 replaces fully diluted EPS, which the Company was not
previously required to report, with EPS, assuming dilution ("diluted
EPS"). The Company calculates diluted EPS assuming all outstanding
options to purchase common stock have been exercised at the beginning of
the year (or the time of issuance, if later). The dilutive effect of the
outstanding options is reflected by application of the treasury stock
method, whereby the proceeds from the exercised options are assumed to be
used to purchase common stock at the average market price during the
period. The Company adopted SFAS 128 effective December 15, 1997. All
prior period EPS data have been restated. The effect of this accounting
change on previously reported EPS data is not significant. The following
table reconciles the computation of basic EPS to diluted EPS:
PER SHARE
NET EARNINGS SHARES AMOUNT
------------ ---------- ---------
($ in thousands)
For the year ended December 31, 1997:
Income before extraordinary item
per share ............................... $ 33,214 37,359,364 $ 0.89
Effect of options .......................... -- 972,938
---------- ----------
Income before extraordinary item per
share, assuming dilution ................ $ 33,214 38,332,302 $ 0.87
========== ==========
Net income per share ....................... $ 20,473 37,359,364 $ 0.55
Effect of options .......................... -- 972,938
---------- ----------
Net income per share, assuming dilution .... $ 20,473 38,332,302 $ 0.53
========== ==========
For the year ended December 31, 1996:
Income before extraordinary item
per share ............................... $ 17,749 24,848,760 $ 0.71
Effect of options .......................... -- 677,653
---------- ----------
Income before extraordinary item per
share, assuming dilution ................ $ 17,749 25,526,413 $ 0.70
========== ==========
Net income per share ....................... $ 17,749 24,848,760 $ 0.71
Effect of options .......................... -- 677,653
---------- ----------
Net income per share, assuming dilution .... $ 17,749 25,526,413 $ 0.70
========== ==========
For the 11 months ended December 31, 1995:
Income before extraordinary item
per share ............................... $ 4,969 17,857,936 $ 0.28
Effect of options .......................... -- 51,019
---------- ----------
Income before extraordinary item per
share, assuming dilution ................ $ 4,969 17,908,955 $ 0.28
========== ==========
Net income per share ....................... $ 3,061 17,857,936 $ 0.17
Effect of options .......................... -- 51,019
---------- ----------
Net income per share, assuming dilution .... $ 3,061 17,908,955 $ 0.17
========== ==========
Earnings per share have been retroactively adjusted for the effect of stock
splits.
F-10
15
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSACTIONS
As part of the Holiday Inn Acquisition, the Company acquired six hotels
in Canada. Results of operations for those hotels are maintained in
Canadian dollars and translated using average exchange rates during the
period. Currency transaction losses are included in net income and were
$303,000 for the year ended December 31, 1997. Assets and liabilities
are translated to U.S. dollars using the exchange rate in effect at the
balance sheet date. Resulting translation adjustments are reflected in
stockholders' equity as a cumulative foreign currency translation
adjustment. Cumulative currency translation gains included in
stockholders' equity at December 31, 1997 were $286,000.
INCOME TAXES
Company
The Company accounts for income taxes under the Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement
and tax basis of assets and liabilities using currently enacted tax
rates in effect for the years in which the differences are expected
to reverse.
Predecessor
Harvey Hotel Company and related entities are partnership or
S-Corporation entities, and income or loss for federal income tax
purposes is allocated to the individual partners or shareholders.
Accordingly, no recognition has been given to income taxes in the
combined financial statements. However, pro forma income tax
expense, at an effective rate of 34%, has been included in the
combined statements of income in order to reflect the impact on the
income of Harvey Hotel Companies.
Harvey Hotel Corporation accounted for the tax effect of net income
or loss in accordance with SFAS 109. However, because of the
changes in ownership (see Note 1), realization of the benefit of the
accumulated losses is uncertain and, therefore, has not been
recorded in the combined financial statements.
EARNINGS PER SHARE
Earnings per share is determined by dividing net income by the weighted
average number of common and common equivalent shares outstanding during
the year. The 1995 weighted average shares outstanding has been
calculated using the treasury stock method and as if Holdings' shares of
1,768,000 (see Note 3) had been outstanding since February 1, 1995. The
1997 and 1996 weighted average shares is calculated using the treasury
stock method, giving effect to the common equivalent shares outstanding
as of December 31, 1997 and 1996. The common equivalent shares include
officer and director stock options which have been deemed exercised at
the issue date using the treasury method for the purposes of computing
earnings per share. The Company has no other potentially dilutive
securities.
All weighted average share and per share data presented are calculated in
accordance with SFAS 128, which calls for both basic and diluted weighted
average share presentation. All prior period amounts have been restated
in accordance with SFAS 128. The Company believes that there has been no
impact on its financial statements from the implementation of SFAS 128,
as the weighted average shares previously used in calculating earnings
per share are the same as the diluted weighted average shares calculated
under SFAS 128.
F-11
16
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (continued)
On June 23, 1997, the Company's Board of Directors declared a
three-for-two stock split, effective in the form of a stock dividend for
shareholders of record June 30, 1997, which was distributed July 15, 1997
(the "Stock Split"). All per share data and the average common and
common equivalent shares issued and outstanding have been adjusted to
reflect the Stock Split for all periods presented.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions relating to
the reporting of assets and liabilities, the disclosure of contingent
assets and liabilities and the reported amounts of revenues and expenses
to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain financial statement items from the prior years for the Company
and the Predecessor have been reclassified to conform with the current
presentation.
3. ACQUISITIONS
UNITED INNS ACQUISITION
On January 27, 1995, United/Harvey Holdings L.P. ("Holdings") acquired
the common stock of United Inns for an aggregate purchase price of $67
million plus the assumption of United Inns' liabilities. The acquisition
was accounted for as a purchase and the purchase price was allocated to
the net assets acquired. Under the acquisition agreement, Holdings,
Harvey Hotel Companies, H. K. Huie, Jr., the Harvey Management Equity
Holders and the other parties thereto, the following occurred: (1)
Holdings contributed to the Company all of the outstanding capital stock
of United Inns, approximately $15.1 million in cash and certain cash
advances previously made for the benefit of Harvey Hotel Companies in
exchange for an aggregate of 68.1% of the Company's Common Stock; (2) the
Harvey Management Equity Holders collectively contributed to the Company
46.4% of the outstanding partnership interests in Harvey Hotel Companies
in exchange for an aggregate of 20.6% of the Company's Common Stock; and
(3) Mr. Huie contributed 25.3% of his 50.6% outstanding partnership
interest in Harvey Hotel Companies for 11.3% of the Company's Common
Stock. In addition, Mr. Huie and two of his daughters sold to the
Company approximately 27.3% of the outstanding partnership interests in
Harvey Hotel Companies for approximately $15.1 million in cash plus
interest.
As a result of these transactions, Holdings, Mr. Huie and the Harvey
Management Equity Holders became the stockholders of the Company, the
Company became the sole stockholder of United Inns, the Company became
the indirect owner of 99% of the outstanding partnership interests in
Harvey Hotel Companies, and in connection therewith, a wholly owned
subsidiary of the Company became the managing general partner of Harvey
Hotel Companies. Subsequently, one of Mr. Huie's daughters, who did not
participate in the Combination, sold her 1.0% limited partnership
interest in Harvey Hotel Companies (See Note 15).
The aggregate purchase price for Harvey Hotel Companies of $55 million in
stock and cash including the interests contributed by the Harvey
Management Equity Holders and Mr. Huie has been allocated, along with
acquisition costs of $1 million, to the net assets acquired. The net
assets contributed were valued at their estimated fair value on the basis
of an independent valuation performed by Holdings and as a result of the
cash paid for the 27.3% owned by Mr. Huie and his two daughters. The
excess of the purchase price over the net assets acquired of $71.5
million was principally allocated to land and buildings in accordance
with the purchase method of accounting.
F-12
17
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
UNITED INNS ACQUISITION (continued)
The consolidated statements of income for the Company includes the
results of operations for United Inns from February 1, 1995.
The following unaudited pro forma summary presents the combined results
of Harvey Hotel Companies as if United Inns had been acquired at the
beginning of 1995. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the
results of operations that would actually have resulted had the
acquisition been in effect on the date indicated (in thousands):
(Unaudited)
Month Ended
January 31, 1995
----------------
Total revenues ................................. $13,142
Net income after extraordinary gain and
pro forma income tax expense ................ $ 1,111
HOLIDAY INN ACQUISITION
On April 28, 1997, the Company acquired the ownership of 45 full-service
Holiday Inns and the management of an additional 15 Holiday Inn
properties, three of which were owned by joint ventures in which the
Company acquired a 50% interest (the owned hotels, management contracts
and joint venture interests, collectively referred to as the "Holiday Inn
Assets"). As consideration for the Holiday Inn Acquisition, the Company
paid $398 million in cash and issued 9,381,308 shares (pre-Stock Split)
of its common stock. The acquisition has been accounted for as a
purchase and the results of operations of the Holiday Inn Assets have
been included in the consolidated financial statements since April 28,
1997. The purchase price, including liabilities assumed in the
acquisition (principally deferred tax liabilities) was allocated to the
assets acquired, based upon their fair market values. The excess of the
purchase price over the estimated fair market value of the net assets
acquired was recorded as goodwill and is being amortized over 40 years.
The following unaudited pro forma summary presents the results of the
Company as if the Holiday Inn Acquisition and related refinancing
pursuant to the New Credit Facility (see Note 6) had occurred at the
beginning of 1996. The pro forma results have been prepared for
comparative purposes only and are not indicative of the results of
operations that would have occurred had the Holiday Inn Acquisition
occurred on the date indicated.
(Unaudited)
1997 1996
-------- --------
(in thousands)
Total revenues ................................. $626,047 $571,876
Income before extraordinary item ............... $ 41,165 $ 31,981
Net income ..................................... $ 29,762 $ 31,981
F-13
18
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
OTHER ACQUISITIONS
In addition to the Holiday Inn Acquisition, the Company completed the
following single-asset acquisitions in 1997 and 1996:
Mortgage
Date Number Purchase Debt
Acquired Location of Rooms Price Assumed
-------- -------- -------- -------- --------
December 1997 Milpitas (San Jose), CA 305 $ 4.25 million(1) $ --
December 1997 Philadelphia, PA 364 $25.50 million $13.4 million
October 1997 St. Louis, MO 318 $18.00 million $ 8.4 million
January 1997 Chicago, IL 378 $35.00 million $ --
May 1996 Plano, TX 161 $ 6.30 million $ --
(1) The Holiday Inn - Milpitas was previously owned by a joint venture
in which the Company owned a 50% interest. The Company purchased
the remaining 50% interest in the venture for $4.25 million and,
concurrently with the acquisition, repaid all outstanding debt
associated with the property of $25.7 million.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31, 1997 December 31, 1996
----------------- -----------------
Land ....................................... $ 169,611 $ 50,528
Buildings .................................. 1,152,383 406,682
Furniture, fixtures and equipment .......... 162,045 74,827
----------- -----------
1,484,039 532,037
Less accumulated depreciation .......... (76,172) (26,091)
----------- -----------
1,407,867 505,946
Assets held for sale (net of accumulated
depreciation of $0 and $4,980) ....... -- 38,279
Construction in progress ................... 31,300 8,339
----------- -----------
$ 1,439,167 $ 552,564
=========== ===========
The Company's properties are predominantly full-service hotels that
operate in the upscale and mid-price with food and beverage segments of
the lodging industry under franchise agreements primarily with Holiday
Inn. The Company seeks to maintain a geographically diverse portfolio of
hotels to offset the effects of regional economic cycles. The Company
operates properties in 22 states, the District of Columbia and Canada,
including 13 hotels in California, 11 in Georgia, 27 in Texas, seven in
Florida, and six in Canada.
During fiscal year 1996, the Company classified certain limited-service
hotels as assets held for sale pursuant to the provisions of SFAS 121.
During 1997, the Company reclassified these assets as held and used,
therefore recording depreciation expense on these assets. The results of
operations for these limited-service properties included in the income
statement for the years ended December 31, 1997, 1996 and 1995 were (in
thousands):
Year Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Total revenues ......................... $ 13,464 $ 16,398 $ 14,552
Operating income ....................... 2,186 5,580 4,020
F-14
19
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. MARKETABLE SECURITIES
In 1995, the Company classified certain equity securities as
Available-for-Sale Securities (per Statement of Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and Equity
Securities"). Unrealized gains were reported as a separate component of
stockholders' equity. In May 1996, management resolved to sell the
equity securities, and accordingly, the securities were reclassified as
Trading Securities and an unrealized gain of approximately $450,000 was
recorded in earnings in 1996. These securities were sold in August 1996.
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 31, 1997 December 31, 1996
----------------- -----------------
Senior Notes
11.22% due December 18, 2000 (net of discount) ........ $ 29,469 $ 68,340
Mortgage loans
Fixed rate:
7.66% due October 27, 2009 ......................... 455,000 --
7.458% due November 11, 2007 ....................... 144,834 --
8% due December 31, 2002 ........................... 40,263 42,126
8.55% due January 11, 2016 ......................... 14,324 14,626
9% due October 1, 2005 ............................. 13,401 --
9.5% due August 1, 2005 ............................ 8,366 --
Non-interest bearing due December 31, 2002 ......... 7,950 9,086
7.25% due September 30, 1997 ....................... -- 8,110
Variable rate:
7.75% Senior Term Facility due December 18, 1998 ... -- 66,976
10.26% due January 31, 2000 ........................ -- 9,300
10.25% due December 31, 1999 ....................... -- 6,899
8.5% due September 30, 1997 ........................ -- 1,500
Other long-term debt ...................................... 345 4,329
Capital leases ............................................ 3,367 1,402
----------------- -----------------
717,319 232,694
Less current portion .................................. (8,455) (15,769)
----------------- -----------------
Long-term debt, excluding current portion ... $ 708,864 $ 216,925
================= =================
The mortgages are amortized using varying methods as provided in the
individual debt agreements. Substantially all of the Company's properties
and equipment are pledged as collateral on mortgage obligations.
The Company obtained the financing for the Holiday Inn Acquisition under
a new senior term facility which provided for up to $560 million
aggregate amount of term loan borrowings (the "New Credit Facility").
The New Credit Facility was utilized to repay existing debt of
approximately $134 million, to fund the cash portion of the Holiday Inn
Acquisition and related closing costs. The Company repaid $108 million
of borrowings from the New Credit Facility in May 1997 with proceeds from
the Offering (as defined in Note 10). The treatment of the extraordinary
costs related to the repayment of debt is more fully described in Note 8.
On October 28, 1997, the Company completed the refinancing of the existing
$560 million New Credit Facility. The new financing (the "Refinancing")
has two tranches: (a) $145 million at a fixed interest rate of 7.458%, a
term of 10 years, and secured by 15 hotel properties; and, (b) $455
million at a fixed interest rate of 7.66%, a term of 12 years, and secured
by 62 hotel properties.
F-15
20
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The Company prepaid $40 million of its 11.22% Senior Secured Notes (the
"Senior Notes") in December 1997. In conjunction with the prepayment,
the Company amended the Senior Note indenture to allow for a more
flexible prepayment schedule. In connection with the Refinancing,
Bristol Hotel Operating Company, a wholly owned subsidiary of the
Company, became a joint and several guarantor of the Senior Notes
along with Bristol Hotel Asset Company.
As discussed in Note 15, portions of the mortgage loans associated with
three of the Company's properties have been allocated to a third party.
The aggregate maturities of long-term debt for the five years subsequent
to December 31, 1997, are as follows (in thousands):
Year ended December 31,
1998 ........................ $ 8,455
1999 ........................ 8,387
2000 ........................ 38,421
2001 ........................ 9,146
2002 ........................ 34,230
Thereafter ............. 618,680
--------
$717,319
========
7. INCOME TAXES
Components of income tax expense from continuing operations for the years
ended December 31, 1997 and 1996 and the eleven months ended December 31,
1995, consist of the following (in thousands):
1997 1996 1995
-------- -------- --------
Federal:
Current......... $ 12,683 $ 4,486 $ 3,245
Deferred........ 4,637 5,301 (579)
State:
Current......... 1,837 282 190
Deferred........ 509 332 (34)
Canada:
Current......... 1,618 -- --
Deferred........ 723 -- --
-------- -------- --------
$ 22,007 $ 10,401 $ 2,822
======== ======== ========
Components of income tax benefit from extraordinary items for the years
ended December 31, 1997 and 1996, consist of the following (in
thousands):
1997 1996
-------- --------
Federal:
Current ............................ $ 7,358 $ --
Deferred ........................... -- --
State:
Current ............................ 1,098 --
Deferred ........................... -- --
-------- --------
$ 8,456 $ --
======== ========
F-16
21
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The Company estimates that its effective tax rate for 1997 approximated
39.9%. The actual income tax expense for the year ended December 31,
1997, is computed by applying the U. S. federal statutory income tax
rate, adjusted as follows:
Income tax expense at the U. S. federal statutory rate ................... 35.0%
State income taxes, net of federal benefit ............................... 3.6%
Permanent differences and effect of higher Canadian tax rates ............ 1.3%
----
39.9%
====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997
and December 31, 1996, are as follows (in thousands):
1997 1996
-------- --------
Purchase accounting adjustments to
land and building ............................... $248,866 $ 85,134
Other .............................................. 994 --
-------- --------
Gross deferred tax liabilities ................. 249,860 85,134
-------- --------
Tax credit and NOL carryforwards ................... 4,011 5,502
Accrued reserves ................................... 1,823 2,192
Other .............................................. 1,496 1,821
-------- --------
Gross deferred tax asset ........................... 7,330 9,515
Valuation allowance ................................ -- --
-------- --------
Deferred tax asset ................................. 7,330 9,515
-------- --------
Net deferred tax liability ..................... $242,530 $ 75,619
======== ========
The gross deferred tax liabilities relate principally to the temporary
differences caused by the purchase accounting adjustments recorded as a
result of the Combination and the Holiday Inn Acquisition. For financial
reporting purposes, the transactions were recorded under the principles
of purchase accounting and, accordingly, the basis of the assets have
been adjusted to fair market value. For tax reporting purposes, the
transactions resulted in the bases of the assets and liabilities being
carried forward at their adjusted bases with some adjustment for certain
gains recognized on the acquisition. This differing treatment has
created book bases in excess of tax bases and, accordingly, the related
deferred tax liabilities associated with these differences have been
recorded. As the Company depreciates and amortizes the bases of its
assets for book and tax purposes, it will record an expense for
depreciation and amortization in excess of that claimed for tax purposes.
This reversal of the temporary differences established through purchase
accounting will result in the Company recording a credit to deferred tax
expense for the tax effect of these differences.
The remaining deferred tax assets are expected to be realized in future
periods through use of existing tax NOL and tax credit carryforwards.
F-17
22
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
For federal tax reporting purposes, net operating losses of $8,988,000
and tax credits of $657,000 generated by United Inns and Harvey Hotel
Corporation in prior years are available to be carried forward to periods
expiring as follows (in thousands):
Year of Expiration Federal NOL Tax Credits
------------------ ----------- -----------
2001 ................... $ -- $ 142
2002 ................... -- 154
2003 ................... -- 158
2004 ................... -- 103
2005 ................... 3,924 58
2006 to 2010 ............... 5,064 42
----------- -----------
$ 8,988 $ 657
=========== ===========
The losses and credits are subject to an annual loss limitation
equivalent of approximately $4.8 million due to the changes in ownership
of United Inns and Harvey Hotel Corporation which occurred in 1995.
These carryforwards are further limited as they were incurred prior to
the ownership of United Inns and Harvey Hotel Corporation by the Company.
Accordingly, these carryforwards are available only to offset income and
taxes associated with the operations of the hotels that generated them.
8. EXTRAORDINARY ITEMS
On April 28, 1997, the Company recognized an extraordinary loss of $2.2
million ($1.3 million, net of tax) related to the early extinguishment of
debt with proceeds from the New Credit Facility. The Company incurred
$479,000 of prepayment penalties and wrote off $1.7 million in deferred
financing costs.
The Company refinanced the New Credit Facility in October 1997 and
recognized an extraordinary loss of $14.0 million ($8.4 million, net of
tax) related to the early extinguishment of the New Credit Facility. The
loss on extinguishment reflects the write-off of deferred financing fees
related to the New Credit Facility.
The Company prepaid a portion of its Senior Notes on December 16, 1997.
The Company prepaid $40 million of principal, and recognized an
extraordinary loss of $5.0 million ($3.0 million, net of tax). The
extraordinary loss reflects the $2.4 million in prepayment penalties paid
by the Company for the Senior Notes, as well as the write-off of
approximately $2.6 million of deferred financing fees and discount on the
Senior Notes.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Accounts payable ..................................... $ 2,921 $ 1,689
Accrued payroll, payroll taxes and benefits .......... 15,480 5,208
Accrued interest ..................................... 3,738 993
Accrued hotel operating expenses ..................... 1,405 858
Accrued Holiday Inn Acquisition
costs/conversion costs ........................... 1,104 --
Other ................................................ 2,718 1,878
----------------- -----------------
$ 27,366 $ 10,626
================= =================
F-18
23
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY
On April 28, 1997, the Company's shareholders voted to amend the
Company's certificate of incorporation to increase the number of
authorized shares of common stock from 75,000,000 to 150,000,000. As
part of the consideration for the Holiday Inn Acquisition, the Company
issued 9,381,308 shares (pre-split) of its common stock.
On May 16, 1997, the Company issued 2,750,000 (pre-Stock Split) shares of
its common stock at a price of $36 per share (the "Offering"). The
Company issued an additional 412,500 shares (pre-Stock Split) on May 28,
1997, pursuant to an over-allotment agreement with the underwriters of
the Offering. Proceeds from the issuances were approximately $108
million (net of costs of $6.3 million).
NON-EMPLOYEE DIRECTOR OPTIONS
The Company instituted a Stock Option Plan for Non-Employee Directors
(the "Director Plan") in 1995. Only members of the board who are not
employees of the Company or an employee of a 10% beneficial owner or an
affiliate thereof will be eligible for option grants thereunder (an
"Eligible Director"). An Eligible Director receives an option to
purchase 7,500 shares of Common Stock at an exercise price equal to the
market value on the date the individual becomes a director, and those
options shall become exercisable 34% at the first next annual
shareholders' meeting at which the individual is a director, and 33% at
each of the next two consecutive years during which the individual is a
director. In addition, the Eligible Director will receive options to
purchase 7,500 shares at each annual meeting during which the individual
is a director, exercisable on the date of the next annual shareholders'
meeting at which the individual is a director. As of December 31, 1997,
a total of 52,500 options had been granted to the three Eligible
Directors on the board, 25,050 of which are currently exercisable.
EMPLOYEE OPTIONS
Under the Amended and Restated 1995 Equity Incentive Plan, the Company
may award to participating officers and employees, options to purchase
the Company's stock. Employee stock options may be granted to officers
and employees with an exercise price generally not less than the fair
market value of the common stock at the date of grant. Options expire at
10 years from date of grant. Options issued prior to December 31, 1995,
have cliff vesting from 1998 - 2000 and options issued on or after
January 1, 1996, vest ratably over a four- or five-year period from the
date of the grant. There were 2,069,441 employee options outstanding at
December 31, 1997, of which 82,800 were exercisable.
SFAS 123 DISCLOSURE
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), effective for fiscal years
beginning after December 15, 1995. SFAS 123 encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Pronouncement Bulletin Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the market price of the Company's stock at the date of the grant over the
amount the employee must pay to acquire the stock. The Company,
therefore, does not believe that the implementation of SFAS 123 has had a
material adverse impact on the Company's financial position or results of
operations.
F-19
24
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
SFAS 123 DISCLOSURE (continued)
However, had compensation cost for these plans been determined consistent
with the method of SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts
(dollars in thousands):
YEAR ENDED YEAR ENDED ELEVEN MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -------------------
Net Income As Reported $ 20,473 $ 17,749 $ 3,061
Pro Forma 19,060 16,865 2,621
Basic EPS As Reported 0.55 0.71 0.17
Pro Forma 0.51 0.68 0.15
Diluted EPS As Reported 0.53 0.70 0.17
Pro Forma 0.50 0.67 0.15
A summary of the status of the Company's stock option plan at December
31, 1997, 1996 and 1995, (adjusted for Stock Split) and changes during
the years then ended is presented in the table and narrative below:
1997 1996 1995
--------------------------- --------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ---------------- ---------- ----------------
Outstanding at January 1 ... 1,613,363 $ 10.57 1,190,766 $ 8.41 -- $ --
Options granted ............ 520,400 25.06 435,000 16.39 1,190,766 8.41
Options exercised .......... (6,929) 16.47 -- -- --
Options expired ............ (4,893) 9.78 (12,403) 8.33 -- --
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding at
December 31 ............. 2,121,941 $ 14.10 1,613,363 $ 10.57 1,190,766 $ 8.41
========== ========== ========== ========== ========== ==========
Options exercisable at
December 31 ............. 107,850 $ 16.60 5,100 $ 15.00 -- --
========== ========== ========== ========== ========== ==========
Weighted average fair value
of options .............. $ 7.82 $ 5.76 $ 4.11
========== ========== ==========
The 2,121,941 options outstanding at December 31, 1997, have exercise
prices between $8.33 and $28.25 with a weighted average exercise price of
$14.10 and a weighted average remaining contractual life of 8.1 years.
At December 31, 1997, 107,850 of these options (with a weighted average
exercise price of $16.60) are exercisable.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995;
risk-free interest rates from 5.30% to 7.04%; no expected dividend
yields; expected lives of one to seven years; expected volatility of
33.37%.
F-20
25
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. OPERATING LEASES
The Company leases certain land, office space and equipment under
noncancellable operating lease commitments. Minimum rentals due under
these agreements for the next five years and thereafter are as follows
(in thousands):
Year Ended December 31,
1998 ..................... $ 11,933
1999 ..................... 11,976
2000 ..................... 12,046
2001 ..................... 12,029
2002 ..................... 11,887
Thereafter .................. 216,075
---------
$ 275,946
=========
Leases include long-term ground leases for certain hotels, generally with
renewal options. Certain leases contain provisions for the payment of
contingent rentals based on a percentage of sales.
The Company leases certain hotel space to third-party vendors. Future
minimum rentals to be received under noncancellable operating leases that
have initial or remaining lease terms in excess of one year are as
follows (in thousands):
Year Ended December 31,
1998 ..................... $ 3,582
1999 ..................... 3,562
2000 ..................... 3,289
2001 ..................... 3,116
2002 ..................... 2,720
Thereafter .................. 13,868
----------
$ 30,137
==========
12. MANAGEMENT CONTRACTS
The Company acquired the management of 15 hotels in the Holiday Inn
Acquisition, three of which were owned by joint ventures in which the
Company owned a 50% interest. The purchase price allocated to these
contracts at April 28, 1997 was $4.4 million and is being amortized on a
straight-line basis over the remaining lives of the agreements, which
range from one to 11 years. The amortization of the purchase price
recorded in 1997 was $878,000. Management fee income was $4.9 million in
1997, $2.5 million in 1996, and $1.4 million in 1995. These management
contracts may contain provisions which allow the third- party owner to
terminate the contract for such reasons as sale of the property, for
cause or without cause. Therefore, the Company cannot guarantee that it
will continue to manage these properties to the contract expiration date.
The Company acquired the remaining 50% interest in one of the joint
ventures in which it was a partner in December 1997. (See Note 13.)
13. INVESTMENTS IN JOINT VENTURES
The Company acquired 50% interests in three joint ventures in the Holiday
Inn Acquisition. The purchase price allocated to these joint ventures
was approximately $12 million and is being amortized on a straight-line
basis over the estimated life of the assets acquired. Amortization
expense of $308,000 was recorded in 1997.
F-21
26
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. INVESTMENTS IN JOINT VENTURES (CONTINUED)
On December 11, 1997, the Company acquired the remaining 50% interest in
the Milpitas Joint Venture for $4.25 million. Concurrently with the
acquisition, the Company paid off all outstanding debt related to the
property of $25.7 million. None of the original $12 million purchase
price allocated to the joint ventures in the Holiday Inn Acquisition was
attributed to the Milpitas Joint Venture.
14. BENEFITS
Health (including fully insured term life and accidental death and
dismemberment), dental and disability coverage is provided to the
Company's employees through the Welfare Benefit Trust (the "Trust"). The
Company maintains varying levels of stop-loss and umbrella insurance
policies to limit the Company's per occurrence and aggregate liability in
any given year. Actual claims and premiums on stop-loss insurance,
medical and disability policies are paid from the Trust. The Trust is
funded through a combination of employer and employee contributions. The
Trust also pays work-related injury claims which are funded by the
employer for its employees in Texas. Since April 1, 1995, all employees
have been eligible for participation in the benefits provided through the
Trust. The Company provided $6.1 million and $2.9 million related to
these benefits for the years ended December 31, 1997 and 1996,
respectively.
The Company offers a Profit Sharing Plan and Trust ("401(k) Plan") to
certain employees. The 401(k) Plan is designed to be a qualified trust
under Section 401(a) of the Internal Revenue Code. Under the 401(k)
Plan, eligible employees are allowed to defer up to 16% of their income
on a pretax basis through contributions to the Plan; however, only the
first 6% of pretax income is subject to matching by the Company. The
Company may elect to make matching contributions of up to 50% of the
employees' matchable contributions subject to certain performance
measures of the Company. The Company provided for matching contributions
for the years ended December 31, 1997 and 1996 totaling $1.5 million and
$135,000, respectively.
15. COMMITMENTS AND CONTINGENCIES
Substantially all of the Company's hotel properties are (or will be in
the next year) operated pursuant to franchise or license agreements
("Franchise Agreements"), primarily with Holiday Inn Franchising, Inc. or
its affiliates. The Company also operates hotels under franchise
agreements with Marriott International, Inc., Hampton Inn (a division of
Promus Hotels, Inc.), Ramada Franchise Systems, Inc. and Days Inn Inc. of
America Franchising Inc. The Franchise Agreements generally require the
payment of a monthly royalty fee based on gross room revenue and various
other fees associated with certain marketing or advertising and
centralized reservation services, also generally based on gross room
revenues. The Franchise Agreements have various durations through the
year 2017, and generally may not be terminated without the payment of
substantial fees. Franchise fees of $19.5 million and $4.1 million were
paid during the years ending December 31, 1997 and 1996, respectively.
The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the
hotels which are established by the franchisors to maintain uniformity in
the system created by each such franchisor. Such standards generally
regulate the appearance of the hotel, quality and type of goods and
services offered, signage and protection of trademarks. Compliance with
such standards may from time to time require significant expenditures for
capital improvements.
The Company is currently involved in certain guest and customer claims,
employee wage claims and other disputes arising in the ordinary course of
business. In the opinion of management, the pending litigation will not
have a materially adverse effect on the Company's financial position or
results of operations.
In connection with the administration of the Dallas County Probate Court
of the estate of the deceased wife of H.K. Huie, Jr., one of Mr. Huie's
daughters (the "Plaintiff"), alleged self dealing and breach of duty and
F-22
27
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
trust by Mr. Huie as executor and testamentary trustee under his wife's
will and in connection with his actions as the managing general partner
of Harvey Hotel Company and related partnerships and ventures (the
"Probate Proceeding"). Several of the Company's officers and certain
subsidiaries were also named defendants in the Probate Proceeding. In
November 1995, the Company and the Plaintiff entered into a settlement
agreement and release (the "Settlement Agreement") pursuant to which
Plaintiff agreed to release the Company, including its subsidiaries, from
the lawsuit. Pursuant to the Settlement Agreement, the Company paid an
aggregate of $2.4 million for the Plaintiff's 1% interest in Harvey Hotel
Company and a full release from all claims and causes of action.
However, at that time, the named officers remained defendants in the
Probate Proceeding. In the summer of 1996, during continuing mediation
with the officers, the Plaintiff threatened the Company with further
action, claiming fraud and misrepresentation in the negotiation of the
November 1995 Settlement Agreement. In August 1996, there was a final
resolution of the Probate Proceeding, a result of which the Company paid
an additional $0.75 million for the full satisfaction of all claims and
causes of action which could be asserted against the Company, its
subsidiaries or its officers. The Company had reserved $1.65 million for
this litigation. As a result, the Company recognized $0.9 million ($0.6
million after tax) as other income during the third quarter of 1996.
On March 28, 1997, the Company paid approximately $663,000 to the State
of Tennessee Department of Revenue in full settlement of all claims for
franchise and excise tax related to United Inns, Inc.
All of the owned hotels of the Company have undergone Phase I
environmental assessments which generally provide a physical inspection
and data base search but not soil or groundwater analysis. In addition,
most of the Company's hotels have been inspected to determine the
presence of asbestos-containing materials ("ACM's"). While ACM's are
present in certain of the Company's properties, operations and
maintenance programs for maintaining such ACM's have been implemented, or
the ACM's have been scheduled to be or have been abated, at such hotels.
None of the environmental assessments conducted to date have revealed any
environmental condition that management believes would have a material
adverse effect on the Company's business, assets or results of
operations, nor is management aware of any such condition. However, it is
possible that these assessments have not revealed all potential
environmental liabilities or that there are material environmental
liabilities of which management is not aware.
In September 1995, the Company disposed of certain of its non-hotel
properties to HH Land Company, L.P. ("HH Land Company"). Upon
acquisition of the non-hotel properties, HH Land Company assumed all
liabilities associated with the non-hotel properties through a formal
indemnification agreement, including environmental liabilities associated
with the properties. The Company remains contingently liable for the
environmental costs associated with the properties. At such time that the
Company determines that it is not probable that HH Land Company will
fully pay the remediation costs related to the disposed properties, the
Company will recognize such liabilities.
The Company leases the land underlying several of its hotels under
various long-term leases through the year 2063. Lease payments under the
agreements were $11.0 million and $2.6 million in 1997 and 1996,
respectively.
F-23
28
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company and Mr. Huie, representing various land ventures, are
co-borrowers of funds secured by Harvey Hotel - DFW Airport, Harvey Hotel
- Dallas, Bristol Suites, and the various related land parcels. The
Company and Mr. Huie agreed to an assignment of the debt to the various
unrelated land ventures resulting in the assignment of 23.73%, 24.24% and
22.18% of the debt associated with the borrowings for each property,
respectively. The related land parcels underlying each hotel are owned
by Mr. Huie through the land ventures. The total debt and the amount
allocated to Mr. Huie are as follows (in thousands):
1997 1996
-------------------- --------------------
Total Allocated Total Allocated
Debt to Huie Debt to Huie
--------- --------- --------- ---------
Harvey Hotel - DFW Airport ......... $ 24,275 $ 5,762 $ 25,581 $ 6,071
Harvey Hotel - Dallas .............. 7,442 1,802 7,600 1,843
Bristol Suites ..................... 19,378 4,298 20,756 4,604
The Company is jointly and severally liable in the event of nonpayment by
Mr. Huie of the debt allocated. For December 31, 1997 and 1996, the
allocated amounts have not been reflected in the consolidated financial
statements of the Company. However, the Company does not record interest
expense on the allocated debt because payments made to Mr. Huie are
appropriately recorded as rental expense under the related land leases.
The land parcels at the respective hotels are security for the additional
liability.
16. RELATED PARTY TRANSACTIONS
HOTEL PROPERTIES AGREEMENT
Concurrently with the Holiday Inn Acquisition, the Company, and Holiday
Corporation and its affiliates (collectively, "HC") entered into a hotel
properties agreement (the "Hotel Properties Agreement"). Pursuant to the
Hotel Properties Agreement, the Company will offer to HC the opportunity
to enter into a standard HC franchise agreement for each hotel that
Bristol acquires, manages or develops that meets specified criteria. The
Hotel Properties Agreement requires that 85% of the rooms in the
Company's owned, leased and managed hotels be operated under a Holiday
Inn brand, subject to certain limitations and approvals. The above
provisions of the Hotel Properties Agreement will expire the earlier of
(i) the date that HC terminates its obligation at any time following 24
months after the Holiday Inn Acquisition (the "Holiday Notice") or (ii)
the date that HC no longer holds a controlling interest in the franchisor
of the Holiday Inn brands.
Additionally, the Company has a right of first refusal on any entity or
other interest meeting certain criteria that HC wishes to acquire or
develop, subject to certain limitations. HC can terminate its obligation
under this provision in accordance with the Holiday Notice.
The Company has agreed to enter into Franchise Agreements with HC
pursuant to which certain Bristol properties will be rebranded to Holiday
Inn brands, subject to normal franchising procedures. Franchise fees for
these rebranded hotels will equal 0% of room revenue for 1997, 1% in
1998, 3% in 1999 and 5% in 2000. Amounts paid to HC pursuant to
Franchise Agreements and related marketing, advertising and reservation
services were $21.8 million in 1997, including $13.1 million for
franchise royalty fees and $4.5 million of franchise marketing fees.
F-24
29
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
16. RELATED PARTY TRANSACTIONS (CONTINUED)
INTERIM SERVICES AGREEMENT
The Company entered into an interim services agreement (the "ISA
Agreement") with Holiday Hospitality Corporation ("HHC") for HHC to
provide certain accounting, payroll, employee benefit, training,
treasury, management information and construction and design services to
Bristol for a transition period following the Holiday Inn Acquisition.
In consideration for such services, the Company reimbursed HHC for the
estimated cost incurred in connection with providing the services,
totaling $1.3 million for the year ended December 31, 1997. The ISA
Agreement expired in October 1997.
17. FAIR VALUE
The Company has estimated the fair value of its financial instruments at
December 31, 1997 and 1996, as required by Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments." The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are reasonable
estimates of their fair values. Marketable securities are carried at
fair value, which is determined based upon quoted market prices. The
carrying values of variable and fixed rate debt are reasonable estimates
of their fair values.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited consolidated quarterly results of operations for the
Company and the unaudited combined quarterly results of operations for
the Predecessor are as follows (in thousands):
1995
---------------------------------------------------------------------
HARVEY HOTEL BRISTOL HOTEL COMPANY
COMPANIES FEBRUARY TO SECOND THIRD FOURTH
JANUARY 1995 MARCH QUARTER QUARTER QUARTER
------------ ------------- ------------ ------------ ------------
Revenues ...................................... $ 5,943 $ 29,910 $ 43,040 $ 46,205 $ 46,040
Operating income .............................. 1,932 6,221 8,016 5,484 6,874
Income (loss) before extraordinary item ....... 1,280 2,268 2,056 (290) 935
Net income (loss) ............................. 1,280 2,268 2,056 (290) (973)
Earnings per common share:
Income (loss) before extraordinary item:
Basic .................................. -- $ 0.13 $ 0.12 $ (0.02) $ 0.05
Diluted ................................ -- $ 0.13 $ 0.12 $ (0.02) $ 0.05
Net income (loss):
Basic .................................. -- $ 0.13 $ 0.12 $ (0.02) $ (0.05)
Diluted ................................ -- $ 0.13 $ 0.12 $ (0.02) $ (0.05)
Weighted average number of common and
common equivalent shares:
Basic .................................. -- 17,436,267 17,436,267 17,436,267 18,967,108
Diluted ................................ . -- 17,460,202 17,479,061 17,479,953 19,050,967
F-25
30
BRISTOL HOTEL COMPANY
HARVEY HOTEL COMPANIES (PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
--------------------------------------------------
BRISTOL HOTEL COMPANY
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
Revenues ..................................... $ 49,677 $ 51,237 $ 58,571 $ 52,355
Operating income ............................. 10,318 11,282 16,073 9,093
Income before extraordinary item ............. 3,863 4,375 6,835 2,676
Net income ................................... 3,863 4,375 6,835 2,676
Earnings per common share:
Income before extraordinary item:
Basic .................................. $ 0.16 $ 0.18 $ 0.28 $ 0.11
Diluted ................................ $ 0.15 $ 0.17 $ 0.27 $ 0.10
Net income:
Basic .................................. $ 0.16 $ 0.18 $ 0.28 $ 0.11
Diluted ................................ $ 0.15 $ 0.17 $ 0.27 $ 0.10
Weighted average number of common and
common equivalent shares:
Basic ..................................... 24,848,760 24,848,760 24,848,760 24,848,760
Diluted ................................... 25,511,455 25,552,515 25,530,737 25,524,361
1997
------------------------------------------------------
BRISTOL HOTEL COMPANY
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Revenues ..................................... $ 58,261 $ 131,615 $ 163,005 $ 151,637
Operating income ............................. 13,301 26,909 32,252 25,434
Income before extraordinary item ............. 4,410 9,622 12,066 7,116
Net income (loss) ............................ 4,410 8,284 12,066 (4,287)
Earnings per common share:
Income (loss) before extraordinary item:
Basic .................................. $ 0.18 $ 0.26 $ 0.28 $ 0.16
Diluted ................................ $ 0.17 $ 0.25 $ 0.27 $ 0.16
Net income (loss):
Basic .................................. $ 0.18 $ 0.22 $ 0.28 $ (0.10)
Diluted ................................ $ 0.17 $ 0.22 $ 0.27 $ (0.10)
Weighted average number of common and
common equivalent shares:
Basic ..................................... 24,848,760 37,041,425 43,635,401 43,636,444
Diluted ................................... 25,796,808 37,997,744 44,643,133 44,629,022
Earnings per common share amounts and weighted average number of common
and common equivalent shares have been retroactively adjusted to reflect
the July 15, 1997 Stock Split and calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." The sum of the earnings (loss) per common share for the four
quarters differs from the annual earnings per common share due to the
required method of computing the weighted average number of shares in
the respective periods.
19. SUBSEQUENT EVENT - OMAHA ACQUISITION
On February 2, 1998, the Company announced that it had entered into a
definitive agreement to acquire 20 midwestern hotels. Under the
transaction, the Company will acquire by merger Omaha Hotel, Inc. and
will purchase an individual hotel. The total consideration for these
assets is as follows: $19.1 million in cash, $40.9 million of assumed
debt and 1.43 million shares of the Company's common stock. The
portfolio consists of nine full-service Holiday Inns, five Holiday Inns
Express hotels, five Hampton Inns and one Homewood Suites with locations
in Omaha, Nebraska; Moline, Illinois; Davenport, Iowa; central Kansas
and Midland/Odessa, Texas. The acquisition is anticipated to close in
April 1998.
20. SUBSEQUENT EVENT - PROPOSED MERGER
On March 24, 1998, the Company announced a proposed merger with FelCor
Suite Hotels, Inc. ("FelCor"), subject to approval by shareholders of
both companies and final documentation. Under the terms of the proposed
merger, FelCor will acquire the real estate holdings and associated debt
of the Company in return for 31.7 million shares of newly issued FelCor
stock. Prior to the merger, the Company will spin off, as a taxable
dividend, all of its non-real estate holdings into a newly formed public
company to be known as Bristol Hotels & Resorts, Inc. ("New Bristol").
Each of the Company's outstanding common shares will be exchanged for
.685 shares of FelCor common stock. In addition, Bristol shareholders
will receive a taxable distribution of one share of New Bristol common
stock for each share of Bristol.
The merger is expected to close by the end of June 1998.
F-26
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FELCOR SUITE HOTELS INC.
Date: April 21, 1998 By: /s/ Lawrence D. Robinson
------------------------------
Lawrence D. Robinson
Senior Vice President, General Counsel
and Secretary
32
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBITS
------- --------
2.1 Agreement and Plan of Merger by and between FelCor Suite Hotels,
Inc. and Bristol Hotel Company dated as of March 23, 1998
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Price Waterhouse LLP