1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the Year Ended December 31, 1998
BRISTOL HOTELS & RESORTS
14295 Midway Road
Addison, Texas 75001
972-391-3910
Commission File No. 1-14047
Incorporated in Delaware IRS No. 75-2754805
Former Name and Address:
Bristol Hotels & Resorts, Inc.
14295 Midway Road
Dallas, Texas 75244
---------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, Par Value $.01 per share New York Stock Exchange
The Company (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Company's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-K. Yes No X .
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the Company at March 4, 1999, was $67,871,119. Such computation excludes
10,539,929 shares held by the Company's affiliates, directors and executive
officers. At March 4, 1999, there were 17,779,515 shares of Common Stock
outstanding.
Documents Incorporated by Reference: Certain sections of the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
===============================================================================
2
PART I.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-K are forward-looking statements and
information that are based on Bristol Hotels & Resorts' (the "Company") current
views and assumptions concerning future events. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "project" and similar expressions. These statements are subject to
risks and uncertainties that could cause the Company's actual operations and
results of operations to differ materially from those reflected in such
forward-looking statements.
Forward-looking statements are not guarantees of future performance and are
subject to the Company achieving its business strategy and the costs and
expected benefits of that strategy and having sufficient cash flow and other
sources of cash to fund its lease payments, debt service requirements, working
capital needs and other significant expenditures. Forward-looking statements
are also based on what the Company anticipates future trends in the lodging
industry will be and how those will be affected by industry capacity, the
seasonal nature of the lodging industry, product demand and pricing and the
other matters referred to from time to time in the Company's filings with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly release the results of any revisions to these forward looking
statements that may be made to reflect any future events or circumstances.
ITEMS 1 & 2. BUSINESS & PROPERTIES
Bristol Hotels & Resorts is one of the leading independent operators of hotels
in North America, operating 120 hotels with approximately 32,100 rooms as of
December 31, 1998. The Company operates the largest number of Bass Hotels &
Resorts ("Bass") branded hotels in the world, including Crowne Plaza, Holiday
Inn Select, Holiday Inn and Holiday Inn Express. The Company operates 91 hotels
under Bass brands. The Company also operates 22 hotels under other hotel
brands, including Hampton Inn, Homewood Suites, Hilton, Courtyard by Marriott,
Sheraton Four Points and Fairfield Inn, five hotels under its proprietary
brands, and two non-branded hotels. The Company operates primarily full-service
hotels in the mid-priced to upscale segments of the hospitality industry and
its hotels are located in 19 of the top 25 lodging markets in the United
States.
The Company was formed on March 20, 1998 ("Inception"), and began operations as
a subsidiary of Bristol Hotel Company ("BHC" or the "Predecessor") on May 20,
1998. On July 27, 1998, BHC spun off its hotel operating business (the
"Spin-off") into the Company. The Company began trading on the New York Stock
Exchange on July 28, 1998. BHC's real estate entity then merged into FelCor
Lodging Trust Incorporated ("FelCor"). FelCor is one of the nation's largest
hotel real estate investment trusts ("REIT"), owning 190 hotels in North
America.
The Company operates 105 hotels pursuant to long-term leases from FelCor, and
manages and leases properties for other owners, such as Winston Hotels, Inc.
and Lone Star Opportunity Fund.
STRATEGIC RELATIONSHIPS
The Company is one of the leading independent operators of hotels in North
America. While the Company is not limited to the operation of hotels for any
one brand or owner, it has formed certain strategic alliances that it believes
will be important to its future success.
2
3
Bass Hotels & Resorts
In April 1997 the Predecessor acquired 60 Bass branded hotels (the "Holiday Inn
Acquisition") from Bass, and in doing so, created a significant relationship
with Bass. The Company benefits from Bass' worldwide reservation system,
Holidex, and their marketing and promotional support, as well as the
recognition value of the Bass brands. Bass is committed to enhancing the
quality of its hotel brands, thereby increasing the value they bring to
franchisees. In 1994, Bass initiated a comprehensive modernization program to
renovate and update the hotels operating under the Holiday Inn flag. To date,
franchisees have spent more than $1.5 billion towards this effort, and by the
year 2000, the Company will have overseen the investment of $400 million in the
redevelopment of the Crowne Plaza and Holiday Inn hotels that it operates. The
Company, as operator of the largest number of Bass branded hotels in the world,
has taken an active role in helping develop these standards. In December 1998
the Company's Combined Quality Index (not including the properties then
undergoing redevelopment), the standard on which Bass branded hotels are
scored, was 843 out of a possible 1000, which was higher than the average of
832 for all Bass branded hotels.
FelCor
The Company operates 105 hotels pursuant to long-term leases with FelCor,
manages one property owned by FelCor and manages an additional property owned
by a joint venture in which FelCor owns a 50% interest. This makes FelCor the
Company's largest lessor by a significant margin. This relationship is one that
the Company believes will lead to mutual growth and expansion.
Other Owners and Franchisors
While the Company enjoys the benefits of its alliances with Bass and FelCor, it
is an independent operator, and is free to pursue relationships with other
owners and franchisors. The Company operates hotels for owners such as Winston
Hotels, Inc. and Lone Star Opportunity Fund. The Company recently announced an
agreement with the Landmark Organization to manage two Hilton Garden Inns and a
265-room upscale Hilton Hotel, all of which are currently under development.
The Company is currently in discussions with Hilton Hotels Corporation and
related franchisees that could result in the addition of several Hilton branded
hotels to the Company's portfolio. The Company is having discussions with
several other owners and developers which could lead to operating agreements
for additional hotels carrying a variety of brands.
PROPERTIES
The following table sets forth certain information with respect to each hotel
leased or managed by the Company as of December 31, 1998:
NO. OF
HOTEL LOCATION ROOMS
LEASED:
------
Holiday Inn - Montgomery..................................... Montgomery, AL................... 213
Holiday Inn - Texarkana I-30................................. Texarkana, AR.................... 210
Days Inn - Flagstaff (3)..................................... 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 (1)........ Irvine, CA....................... 334
Crowne Plaza - Pleasanton.................................... Pleasanton, CA................... 244
Holiday Inn - San Diego on the Bay (2)....................... San Diego, CA.................... 600
Holiday Inn - San Jose North (1)............................. San Jose, CA..................... 305
Holiday Inn - San Francisco Financial District............... San Francisco, CA................ 565
Holiday Inn - San Francisco Fisherman's Wharf................ San Francisco, CA................ 585
Crowne Plaza - San Francisco Union Square.................... San Francisco, CA................ 403
Holiday Inn Express - Colorado Springs Central (3)........... Colorado Springs, CO............. 207
Ramada Inn - Colorado Springs North (3)...................... Colorado Springs, CO............. 220
3
4
NO. OF
HOTEL LOCATION ROOMS
LEASED (continued):
-----------------
Crowne Plaza - Hartford Downtown............................. Hartford, CT..................... 342
Holiday Inn Select - Stamford................................ Stamford, CT..................... 383
Holiday Inn - Cocoa Beach Oceanfront Resort.................. Cocoa Beach, FL.................. 500
Holiday Inn - Nikki Bird..................................... Kissimmee, FL.................... 529
Crowne Plaza - Miami International Airport................... Miami, FL........................ 304
Holiday Inn Select - Orlando International Airport........... Orlando, FL...................... 288
Holiday Inn - Orlando International Drive Resort............. Orlando, FL...................... 652
Holiday Inn - Tampa Near Busch Gardens(R)..................... 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
Crowne Plaza - Atlanta Powers Ferry.......................... 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 - Atlanta South/Jonesboro........................ Atlanta, GA...................... 180
Holiday Inn - Columbus Airport North......................... Columbus, GA..................... 223
Hampton Inn - Marietta....................................... Marietta, GA..................... 140
Hampton Inn - Davenport...................................... Davenport, IA.................... 132
Holiday Inn - Davenport...................................... Davenport, IA.................... 287
Crowne Plaza - Allerton Hotel (1)............................ Chicago, IL...................... 444
Hampton Inn - Moline......................................... Moline, IL....................... 138
Holiday Inn - Moline Airport................................. Moline, IL....................... 216
Holiday Inn Express - Moline Airport......................... Moline, IL....................... 111
Holiday Inn Express - Colby.................................. Colby, KS........................ 72
Holiday Inn - Great Bend..................................... Great Bend, KS................... 174
Hampton Inn - Hays........................................... Hays, KS......................... 117
Holiday Inn - Hays........................................... Hays, KS......................... 191
Holiday Inn - Salina......................................... Salina, KS....................... 195
Holiday Inn Express & Suites - Salina........................ Salina, KS....................... 93
Holiday Inn - New Orleans French Quarter..................... New Orleans, LA.................. 276
Holiday Inn Select - Boston Government Center................ Boston, MA....................... 303
Sheraton Four Points ........................................ Leominster, MA................... 187
Holiday Inn - Kansas City Northeast.......................... Kansas City, MO.................. 167
Holiday Inn - Westport....................................... St. Louis, MO.................... 318
Holiday Inn - Jackson Southwest.............................. Jackson, MS...................... 289
Crowne Plaza - Downtown Jackson.............................. Jackson, MS...................... 354
Hampton Inn - Jackson North.................................. Jackson, MS...................... 119
Holiday Inn Hotel & Suites - Jackson North................... Jackson, MS...................... 224
Whispering Woods Hotel and Conference Center................. Olive Branch, MS................. 181
Homewood Suites ............................................ Omaha, NE........................ 108
Hampton Inn - Omaha Central.................................. Omaha, NE........................ 132
Holiday Inn - Omaha Central.................................. Omaha, NE........................ 383
Holiday Inn - Omaha NW (1)................................... Omaha, NE........................ 213
Hampton Inn - Omaha SW....................................... Omaha, NE........................ 132
Holiday Inn Express & Suites - Omaha SW...................... Omaha, NE........................ 78
Holiday Inn - Albuquerque Mountain View...................... Albuquerque, NM.................. 360
Hampton Inn - Las Vegas...................................... Las Vegas, NV.................... 128
Crowne Plaza - Philadelphia Center City...................... Philadelphia, PA................. 445
Holiday Inn - Independence Mall.............................. Philadelphia, PA................. 364
Holiday Inn - Pittsburgh University Center................... Pittsburgh, PA................... 251
4
5
NO. OF
HOTEL LOCATION ROOMS
LEASED (continued):
-----------------
The Mills House Hotel - Charleston Holiday Inn............... Charleston, SC................... 214
Holiday Inn - Columbia Airport (3)........................... Columbia, SC..................... 148
Crowne Plaza - Greenville.................................... Greenville, SC................... 208
Holiday Inn - Knoxville Central.............................. Knoxville, TN.................... 242
Holiday Inn Select - Nashville Opryland/Airport.............. 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, TX....................... 127
Fairfield Inn - Dallas Regal Row............................. Dallas, TX....................... 204
Harvey Hotel - Dallas........................................ Dallas, TX....................... 313
Crowne Plaza - North Dallas.................................. Dallas, TX....................... 429
Crowne Plaza Suites.......................................... Dallas, TX....................... 295
Hampton - Downtown Dallas/West End........................... Dallas, TX....................... 311
Crowne Plaza - Dallas Market Center.......................... 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
Crowne Plaza - Medical Center................................ Houston, TX...................... 294
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
Holiday Inn & Suites - Houston Medical Center................ Houston, TX...................... 285
Harvey Suites - DFW Airport.................................. Irving, TX ..................... 164
Harvey Hotel - DFW Airport................................... Irving, TX....................... 506
Holiday Inn - Midland Country Villa.......................... Midland, TX...................... 250
Holiday Inn - Odessa Centre.................................. Odessa, TX....................... 245
Holiday Inn Express - Odessa Parkway......................... Odessa, TX....................... 186
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
MANAGED:
-------
Holiday Inn - Hollywood...................................... Hollywood, CA.................... 470
Holiday Inn - Woodland Hills................................. Woodland Hills, CA............... 124
Holiday Inn - San Francisco Civic Center..................... San Francisco, CA................ 393
Holiday Inn - Torrance....................................... Torrance, CA..................... 329
Capital City Hotel........................................... Washington, DC................... 208
Holiday Inn - South Bend University Area..................... South Bend, IN................... 229
Holiday Inn - Great Plains Mall Area......................... Olathe, KS....................... 148
Holiday Inn - Lexington North................................ Lexington, KY.................... 303
5
6
NO. OF
HOTEL LOCATION ROOMS
MANAGED (continued):
------------------
Chateau LeMoyne - New Orleans Holiday Inn.................... New Orleans, LA.................. 171
Holiday Inn - Cincinnati North............................... Cincinnati, OH................... 407
Hilton Meadowlands (1) (4)................................... Secaucus, NJ..................... 301
Holiday Inn - Memphis East................................... Memphis, TN...................... 243
Holiday Inn - Nashville Vanderbilt........................... Nashville, TN.................... 300
Holiday Inn - San Antonio Riverwalk.......................... San Antonio, TX.................. 313
MANAGED - 1999 ADDITIONS:
------------------------
Cambridge Inn (5)............................................ Cambridge, MA.................... 112
Hampton Inn - Sault Ste. Marie............................... Sault Ste. Marie, MI............. 82
NOTES:
-----
(1) These hotels will be converted to the Crowne Plaza brand
during 1999.
(2) These hotels will be converted to the Crowne Plaza brand
during 2000.
(3) These hotels were sold in the first quarter of 1999 and the
Company's operating leases were terminated.
(4) This management contract was converted to a lease effective
January 1, 1999.
(5) This hotel will be converted to the Holiday Inn Express brand
in 1999.
LEASES
The Company operates 106 hotels pursuant to long-term leases with property
owners, 105 of which are with FelCor. The leases are for varying terms,
generally from three to fifteen years, with renewal options. Under these
leases, the Company recognizes all revenues and substantially all expenses
associated with the hotel's operations. Typically, other than real estate
taxes, property insurance costs, depreciation, ground rent, debt service and
capital improvement costs, each of which are the owner's obligation, the
Company is required to pay all of the costs associated with operating the
hotel, such as employee-related expenses, utility costs and other hotel-based
operating expenses. Lease terms typically require the payment of a fixed
monthly base rent regardless of the performance of the hotel leased and a
variable rent based on a percentage of revenues, allowing the owner to
participate in the profitability of the hotel.
MANAGEMENT AGREEMENTS
The Company retained the management of 16 hotels at the Spin-off. In general,
the management agreements have remaining terms that range from one to 11 years
(subject to extension or renewal), and are generally cancelable under certain
conditions. The management agreements specify base fees, which are generally
based on percentages of gross revenues and, in certain cases, also provide for
incentive fees. Under these management contracts, the Company operates all
aspects of a hotel's operations. The owner of the hotel is generally
responsible for all costs, expenses and liabilities incurred in connection with
operating the hotel, including reimbursing the Company for the expenses and
salaries of all hotel employees.
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 will cease to manage the Holiday Inn - Hollywood on March 31, 1999. The
owner of five properties currently managed by the Company has notified the
Company of its intent to sell these properties, and the Company believes its
management of these hotels could terminate upon sale. Many of the Company's
management contracts require a termination payment by the owner to the Company
in the event of a termination.
6
7
The Company added to its management contract activity with the addition of
Holiday Inn in Olathe, Kansas in September 1998, and the Cambridge Inn in
Cambridge, Massachusetts and Hampton Inn in Sault Ste. Marie, Michigan in the
first quarter of 1999. In addition to its management of the Cambridge Inn, the
Company owns a 15% equity interest in the property.
FRANCHISE AGREEMENTS
As of December 31, 1998, the Company had franchise agreements (collectively,
the "Franchise Agreements") with Holiday Inns Franchising, Inc., Hampton Inn (a
division of Promus Hotels, Inc.), Days Inns of America, Inc., Marriott
International, Inc., Hilton Inns, Inc., Promus Hotels, Inc., and Ramada
Franchise Systems, Inc. Although the terms of the Franchise Agreements differ,
each requires the Company to pay a monthly royalty fee based on gross revenues
attributable to room rentals, plus marketing and reservation contributions,
which are also based on gross revenues. The terms of the Franchise Agreements
generally are between 10 and 20 years, with a substantial penalty for early
termination by the Company.
As of December 31, 1998, the Company's portfolio segregated by brands was as
follows:
NO. OF NO. OF
BRAND HOTELS ROOMS
Bass Hotels & Resorts
---------------------
Crowne Plaza 14 4,790
Holiday Inn Select 12 4,038
Holiday Inn 58 16,783
Holiday Inn Express 7 914
---- -------
91 26,525
---- -------
Marriott International
----------------------
Courtyard by Marriott 2 420
Fairfield Inn 5 931
---- -------
7 1,351
---- -------
Promus Hotels
-------------
Hampton Inn 10 1,439
Homewood Suites 1 108
---- -------
11 1,547
---- -------
Other Brands
------------
Harvey/Bristol 5 1,389
Independent 2 389
Hilton 1 301
Ramada 1 220
Sheraton Four Points 1 187
Days Inn 1 157
---- -------
11 2,643
---- -------
TOTAL PORTFOLIO 120 32,066
==== =======
REDEVELOPMENT AND REBRANDING PROGRAM
In November 1997, the Predecessor initiated a comprehensive redevelopment and
rebranding program (the "Redevelopment and Rebranding Program") which entails
exterior and interior reconstruction of and renovations to a substantial number
of the hotels acquired in the Holiday Inn Acquisition and other acquisitions in
1997 and 1998 as well as the rebranding of certain hotels operated under the
Company's own brand names. The Redevelopment and Rebranding Program is expected
to be substantially complete by the end of 1999.
7
8
In addition to the renovations, the Company expects to rebrand 20 hotels to the
Crowne Plaza or Crowne Plaza Suites brand. The Company believes the conversions
to the Crowne Plaza brand will enable the hotels to more effectively compete in
the markets in which they operate. Crowne Plaza - Philadelphia Center City, for
example, which converted to a Crowne Plaza from a Holiday Inn - Select in the
second quarter of 1998, experienced a 4.0 percentage point increase in
occupancy, a 13.7% increase in average rate, and a 20.3% increase in Revenue
Per Available Room ("RevPAR") in the fourth quarter of 1998 compared to the
same period in 1997. The Company cannot insure that all properties rebranded to
the Crowne Plaza brand will have similar results.
INFRASTRUCTURE
With the merger of the Predecessor's real estate assets into FelCor, the
Company is not involved in the ownership of hotels and is able to focus its
efforts on its key strength, the operation of hotels. The Company's senior
management team has been in place for 18 years. The Company's culture is
founded on four core philosophies which have contributed to its success:
Incredibly friendly employees
Spotlessly clean and well-maintained
hotels
Exceeding expectations at every opportunity
Doing the right thing
In order to achieve its goals, the Company has an operations-focused
infrastructure that allows it to maximize returns to hotel owners and to its
shareholders. The Company's corporate office structure is designed to allow
management teams in the hotels to focus their time and energy on maximizing
revenues and the guest service aspect of operating their hotels. Through the
centralization of routine, repetitive or specialized functions, the Company
believes it can achieve lower operating costs and superior results. Centralized
functions include the following:
Design and Construction
The Company's in-house design, construction and capital project management team
provides ongoing construction services for capital projects or redevelopments.
This team has had extensive experience in managing the redevelopment of
full-service hotels, such as the current Redevelopment and Rebranding Program
and the successful completion of the $130 million redevelopment program of the
assets acquired by the Predecessor in 1995 and 1996. The Company's Senior Vice
President of Design and Construction was responsible for the construction of
the Predecessor's original six hotels, which the Company still operates today.
Purchasing
The Company's purchasing team brings reduced costs from national purchasing
contracts for both the design and construction area and for the operating needs
of the hotels. In addition to the Company's own supplier relationships, the
Company has developed joint supplier relationships in cooperation with Bass
that provide additional cost savings. The Company's purchasing department
oversaw an annual purchasing volume in 1998 approaching $300 million.
Information Technology and Telecommunications
The Company's team of Information Technology ("IT") specialists provides
technological support to the hotels. The Company maintains a 24-hour support
desk to assist the hotels with their technological needs. The IT team is
charged with the design and implementation of a Wide Area Network, which will
enable the hotels to communicate in real time with the corporate office and
each other, improving productivity and efficiency of communication. The Telecom
Revenue and Profit Optimization Program, which focuses on maximizing profits in
the telephone departments of the hotels, an area which is often neglected in
the industry, is managed by the IT team.
8
9
The IT team is responsible for ensuring all systems at the Company's corporate
office and all property-level systems, such as reservation and front office
systems, are Year 2000 compliant. A special Year 2000 project team has been
formed. For a more thorough account of the Company's Year 2000 readiness,
please refer to Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Advertising
The Company's Predecessor began operating a full-service in-house advertising
agency in the 1980s to serve its marketing, advertising, promotional and
production requirements. This in-house team is able to provide a wide array of
advertising services, collateral production and marketing support at a
significantly lower cost than outsourced solutions.
Accounting
The Company operates centralized cash management, internal audit, accounts
payable, payroll, and general ledger processing and analysis functions that
provide accurate and timely information to hotel owners, general managers and
company management. Hotel owners and management receive both standardized and
specialized reports to provide valuable information to help maximize each
hotel's profitability.
Legal
The legal department provides support and advice to the hotels concerning
routine legal matters including vendor and service provider contracts,
franchise matters, employment issues, beverage and operating permits, as well
as questions concerning the owner/Company relationship. By providing these
services in-house, the Company maximizes cost efficiencies and allows the
hotels to focus on exceeding the guests' expectations.
Payroll and Employee Services
The Company provides on-line PeopleSoft human resources applications to hotels,
and access to a centralized call-in processing of human resource management and
reporting, allowing for a reduction of property based staff. Centralized
payroll reduces labor needed at the hotels and provides a lower processing cost
than outsourcing this function.
The Company's training professionals provide classes on an ongoing basis, such
as week-long Sales Schools, Revenue Management Schools, General Manager
Schools, and specialized Catering Sales and Meeting Services Schools.
Additionally, the Company is working with Bass to develop brand-wide training
programs which will be available to all franchisees and will help promote brand
consistency.
The Company's infrastructure provides the foundation for significant growth
without a significant cost increase. This foundation and the core philosophies
have given the Company the ability to position itself by capitalizing on its
greatest asset, its human capital.
COMPETITION
The Company competes primarily in the upscale and midscale with food and
beverage full-service segment of the lodging industry, as defined by Smith
Travel Research, a noted industry resource. Hotel chains such as Marriott,
Hyatt and Embassy Suites are direct competitors of the Company, and in each
geographic market in which the Company's hotels are located, there are other
limited-service and full-service hotels that compete with the Company's hotels.
In addition, the Company's food and beverage operations compete with local
freestanding restaurants and bars. The Company's banquet and catering
operations compete with other full-service hotels, upscale restaurants and
local country clubs for weddings, large group events and convention business.
Some of the Company's competitors have larger networks of locations and greater
financial resources than the Company. Competition in the United States lodging
industry is generally based on convenience of location, price, range of
services and guest amenities offered, plus the quality of customer
9
10
service and overall product. Newer, recently constructed hotels compete
effectively against older hotels if the older hotels are not refurbished on a
regular basis. While newer limited-service hotels do not compete directly with
the Company's larger full-service hotels, they do provide alternatives for
guests who do not need the amenities of a full-service hotel.
THE LODGING INDUSTRY
The lodging industry has shown significant improvement, having recovered from
the severe supply and demand disparity and recession that plagued the industry
throughout the late 1980s and early 1990s. The industry broke even in 1992 and
returned to profitability in 1993, having recorded six consecutive years of
unprofitable operations prior to 1992. According to PricewaterhouseCoopers
estimates, the lodging industry is expected to report a record $18.9 billion in
profits in 1998, an 11.2% improvement over the previous high of $17.0 billion
in 1997. Profitability is projected to continue at record levels through the
PricewaterhouseCoopers forecast period of 2001. More productive and lean, the
lodging industry has taken advantage of yield management systems to maximize
room rate and occupancy. Occupancy increased from 62.7% in 1992 to 63.9% in
1998, an increase of 1.2 percentage points ("pp"). Room rates, however, have
increased from $59.62 to $78.67 during the same period, a 32.0% increase or
4.7% per annum. With the increases, room rates have surpassed the consumer
price index (CPI) every year since 1994.
While new development increased the room supply in 1998 by 4.0%, it should be
noted that most of the development occurred in the extended-stay and
limited-service sectors. Also, most of the new construction occurred in
suburban and secondary market locations. The full-service sector and urban
market locations were largely spared from overbuilding. The Company believes
that future construction activity will slow as a result of the lack of
available capital and availability of existing full-service properties for sale
at a discount to replacement cost. Evidence of this is the cancellation of
projects planned by several publicly traded lodging companies, as well as a
reduction in estimated new construction in 1999. According to PaineWebber,
87,000 new hotel rooms will open in the U.S. in 1999, representing supply
growth of only 2.3%, as opposed to earlier projections of 150,000 new hotel
rooms. New construction in 2000 is expected to be even less than 1999. The
reduction in room starts should return the industry to more favorable
supply-demand conditions.
With an increase in supply of 4.0% in 1998, the industry continued to raise
rates above the CPI level. According to PricewaterhouseCoopers, rates increased
4.5%, from $75.26 in 1997 to $78.67 in 1998. Occupancy dipped 0.6 pp, from
64.5% to 63.9% during the same period. The resulting RevPAR statistic increased
3.6%, from $48.54 in 1997 to $50.27 in 1998. The two largest RevPAR increases
in 1998 came from the upscale and midprice with food and beverage segments,
segments which are representative of a majority of the Company's portfolio.
RevPAR for the upscale segment increased 4.5 % to $66.28 in 1998, while the
midprice with food and beverage segment increased 3.9% to $40.86 for the same
period. The performance of these two segments is due to rate increases, as
opposed to occupancy increases. The upper upscale segment reported the greatest
increase in rate in 1998, increasing 5.9% to $138.48. The upper upscale segment
rate was 1.5 times the upscale segment rate of $93.22 and 2.1 times the
midprice with food and beverage segment rate of $67.31. It is management's
belief that many business travelers and groups who frequent the upper upscale
segment (which includes Hilton, Hyatt, and Marriott) will be priced out of
these hotels and will turn their business to the upscale and midprice with food
and beverage segments. The Company is poised to reap the benefits, having
redeveloped many of its full-service properties to "like-new" status. The
Company believes it can provide the same level of service, facilities, and
amenities that many upper upscale segment guests desire at a better price-value
relationship. For a discussion of the Company's operating statistics, please
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EMPLOYEES
As of December 31, 1998, the Company employed approximately 14,000 employees,
including 311 at the Company's corporate office. Approximately 2,000 employees
at 13 of the Company's hotels are represented by a labor union.
Management believes that ongoing labor relations are favorable.
10
11
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings arising in the normal
course of business. The Company believes that the ultimate outcome of such
proceedings will not have a material adverse effect on the results of
operations or financial condition of the Company; however, there can be no
assurance that this will be the case.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of 1998.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "BH" and began trading on July 28, 1998. The range of the high
and low sales price of the Company's Common Stock as reported on the NYSE
Composite Tape for each of the quarters during the period July 28, 1998,
through December 31, 1998, is set forth below:
High Low
---- ---
July 28 - September 30, 1998.................. $ 7.750 $ 4.375
Fourth quarter 1998........................... $ 6.125 $ 3.250
On March 4, 1999, the last reported sale price of the Common Stock on the NYSE
was $9.38. As of March 4, 1999, the Company had 278 stockholders of record. The
Company believes the number of beneficial owners of its Common Stock to be
approximately 2,750.
The Company has not paid any cash dividends on its Common Stock and does not
presently intend to do so in the foreseeable future.
11
12
PART II.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data for the
Company for the period from Inception (March 20, 1998) through December 31,
1998, and for the Predecessor (and its predecessor, Harvey Hotel Companies) for
the following periods: January 1 through July 27, 1998, years ended December
31, 1997 and 1996, eleven months ended December 31, 1995, one month ended
January 31, 1995, and year ended December 31, 1994. The selected balance sheet
data is presented for the Company as of December 31, 1998, and the Predecessor
(and its predecessor, Harvey Hotel Companies) as of December 31, 1994 through
1997. The selected financial data set forth below are qualified in their
entirety by, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
12
13
BRISTOL HOTELS & RESORTS
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Inception
(March 20, 1998) -
December 31, 1998
-----------------
OPERATING DATA:
REVENUE:
Rooms ............................................. $ 217,236
Food, beverage and other .......................... 77,682
---------
Total revenue ........................... 294,918
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms .......................................... 64,427
Food, beverage and other ....................... 50,854
Undistributed operating expenses:
Administration and general, marketing .......... 49,374
Property operating costs ....................... 28,163
Tenant lease expense ........................... 87,925
Depreciation and amortization .................. 1,027
Corporate expense .............................. 9,407
---------
Operating income ........................ 3,741
Other (income) expense:
Interest, net ..................................... (689)
Income taxes ...................................... 1,785
---------
Net income ............................................. $ 2,645
=========
Diluted earnings per common and common equivalent share:
Net income ........................................ $ 0.27
Weighted average number of common and
common equivalent shares outstanding - diluted ...... 9,952
BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 24,916
Property and equipment, net ....................... 5,889
Total assets ...................................... 105,522
Stockholders' equity .............................. 35,409
13
14
BRISTOL HOTEL COMPANY (PREDECESSOR)
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended Eleven Months Ended
December 31, December 31,
January 1, 1998 ---------------- -------------------
to July 27, 1998 1997 1996 1995
---------------- ---- ---- ----
OPERATING DATA:
REVENUE:
Rooms ....................................... $ 308,638 $ 377,380 $ 149,794 $ 115,771
Food, beverage and other .................... 95,372 127,138 62,046 49,424
--------- --------- --------- ---------
Total revenue .................... 404,010 504,518 211,840 165,195
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms ................................ 89,721 105,063 37,706 32,692
Food, beverage and other ............. 60,175 79,092 35,810 31,376
Undistributed operating expenses:
Administration and general,
marketing ......................... 70,686 78,694 33,821 28,254
Property operating costs ............. 65,907 79,633 28,402 24,738
Depreciation and amortization ........ 34,300 39,690 18,377 13,505
Corporate expense .................... 27,676 24,450 10,958 8,035
--------- --------- --------- ---------
Operating income ................. 55,545 97,896 46,766 26,595
--------- --------- --------- ---------
Other (income) expenses:
Interest expense ..................... 30,892 44,591 18,616 18,374
Other non-operating expenses ......... -- -- -- 430
Equity in income of joint ventures ... (783) (1,916) -- --
Income taxes ......................... 10,175 22,007 10,401 2,822
--------- --------- --------- ---------
Income before extraordinary item ............ 15,261 33,214 17,749 4,969
Extraordinary loss on early extinguishment
of debt, net of income taxes ............. (25,689) (12,741) -- (1,908)
--------- --------- --------- ---------
Net income (loss) ........................... $ (10,428) $ 20,473 $ 17,749 $ 3,061
========= ========= ========= =========
Diluted earnings (loss) per common and common
equivalent share:
Income before extraordinary item ..... $ 0.34 $ 0.87 $ 0.70 $ 0.28
Net income (loss) .................... $ (0.23) $ 0.53 $ 0.70 $ 0.17
Weighted average number of common
and common equivalent shares
outstanding - diluted ....................... 45,194 38,332 25,526 17,909
14
15
BRISTOL HOTEL COMPANY (PREDECESSOR)
SELECTED HISTORICAL FINANCIAL DATA (CONTINUED)
(DOLLARS IN THOUSANDS)
December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 86,167 $ 4,666 $ 7,906
Property and equipment, net...... 1,439,167 552,564 470,705
Total assets..................... 1,666,638 592,788 512,901
Long-term debt including
current portion............... 717,319 232,694 170,544
Stockholders' equity............. 648,794 252,157 236,122
15
16
HARVEY HOTEL COMPANIES (PREDECESSOR)
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
MONTH ENDED YEAR ENDED
JANUARY 31, 1995 DECEMBER 31, 1994
---------------- -----------------
OPERATING DATA:
REVENUE:
Rooms .................................. $ 4,006 $ 44,972
Food, beverage and other ............... 1,937 25,379
-------- --------
Total revenue .......................... 5,943 70,351
-------- --------
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms .................................. 1,124 10,344
Food, beverage and other ............... 1,055 14,835
Undistributed operating expenses:
Administrative and general, marketing... 579 11,369
Property operating costs ............... 629 10,563
Depreciation ........................... 309 4,041
Corporate expense ...................... 315 3,761
-------- --------
Operating income ................... 1,932 15,438
-------- --------
Other (income) expenses:
Interest expense, net .................. 652 7,631
Other non-operating income ............. -- (337)
-------- --------
Income before extraordinary item .......... 1,280 8,144
Extraordinary gain on debt forgiveness .... -- 1,989
-------- --------
Net income ................................ $ 1,280 $ 10,133
======== ========
DECEMBER 31, 1994
-----------------
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 4,118
Property and equipment, net............................. 80,635
Total assets............................................ 109,874
Long-term debt, including current portion............... 114,054
Equity.................................................. (11,988)
16
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
BRISTOL HOTELS & RESORTS
The Company's results of operations from Inception (March 20, 1998) through
December 31, 1998, include the operations of the Hampton Inn - Las Vegas from
May 20, 1998, and the operations for the assets acquired in the Spin-off,
including the FelCor leases, from July 28, 1998. The Company conducted no
operations from March 20, 1998, through May 19, 1998. Therefore, the operating
results of the Company for the period from Inception through December 31, 1998,
are not indicative of its future performance.
BRISTOL HOTEL COMPANY
Results of operations for the year ended December 31, 1997, include the 36
original hotels owned by BHC as of January 1, 1996 (the "Original Bristol
Portfolio"), Holiday Inn - Plano, the Allerton (as of January 31, 1997), eight
months of operations for the 45 hotels acquired in the Holiday Inn Acquisition
on April 28, 1997 (the "Holiday Inn Assets"), as well as eight months of
management of the 15 hotels under management contracts. Results of operations
for the period January 1, 1998, through July 27, 1998, include the properties
listed above, as well as the Holiday Inn - San Jose North, the Holiday Inn -
Philadelphia Independence Mall, and the Holiday Inn - St. Louis for the entire
period, the Sheraton Four Points - Leominster as of April 21, 1998, and the
Hampton Inn - Las Vegas as of May 20, 1998, (collectively, the "Single Asset
Acquisitions"), and the 20 hotels acquired on April 30, 1998 ("the Omaha
Acquisition").
REDEVELOPMENT AND REBRANDING PROGRAM
The Redevelopment and Rebranding Program started by BHC in November 1997 and
continued by the Company impacted both the Company's and BHC's 1998 operating
results. The Redevelopment and Rebranding Program entails exterior and interior
reconstruction of and renovations to a substantial number of the Holiday Inn
Assets and the Single Asset Acquisitions as well as the rebranding of certain
hotels operated under the Company's own brand names. In addition to the
renovations, the Company expects to rebrand 20 hotels to the Crowne Plaza or
Crowne Plaza Suites brand by 2000. The Company believes the conversions to the
Crowne Plaza brand will enable the hotels to more effectively compete in the
markets in which they operate. In 1998, the rebranding of eleven hotels,
totaling 3,614 rooms, to the Crowne Plaza or Crowne Plaza Suites brand was
completed. In total 28 hotels with 9,867 rooms were undergoing redevelopment
during 1998, of which the redevelopment and/or rebranding of 22 hotels
containing 7,056 rooms was completed by December 31, 1998. The Redevelopment
and Rebranding Program is expected to be substantially complete by the end of
1999.
STATISTICAL SUMMARY
The following statistical information is presented on a pro forma basis, as if
the Holiday Inn Acquisition and the Omaha Acquisition had occurred on January 1
of each period presented and is adjusted to remove the effect of period to
period exchange rate fluctuations for the Canadian assets.
Pro forma Average Daily Rate ("ADR") and occupancy for the year ended December
31, 1998, were $81.47 and 66.4%, respectively, compared to $75.25 and 69.6% for
the year ended December 31, 1997. ADR increased 8.3% compared to 1997, and the
3.2 pp decrease in occupancy is primarily due to the disruptions to the hotels
during the Redevelopment and Rebranding Program. Pro forma RevPAR was $54.10
for the year ended December 31, 1998, compared to $52.39 for the same period in
1997. This 3.3% increase is primarily attributable to general market
conditions, the Company's management expertise and the strength of the Holiday
Inn brand name and reservation system, offset by the disruptions caused by the
Redevelopment and Rebranding
17
18
Program. During the year ended December 31, 1998, 3.7% of total available
rooms, totaling 386,684 room nights, were out of service as a result of the
Redevelopment and Rebranding Program. Without the effect of the properties
under redevelopment, pro forma ADR, occupancy and RevPAR for the year ended
December 31, 1998, were $78.81, 66.5% and $52.39 compared to $73.54, 67.7% and
$49.80 for the same period in 1997, resulting in an increase in ADR and RevPAR
of 7.2% and 5.2%, respectively, and a decrease of 1.2 pp in occupancy.
Excluding the properties under redevelopment during the period and the assets
targeted for sale, ADR, occupancy and RevPAR were $79.96, 67.6% and $54.02,
respectively, for the year ended December 31, 1998, and $74.52, 68.7% and
$51.23, respectively, for the same period in 1997, resulting in a 7.3% and 5.5%
increase in ADR and RevPAR, respectively, and a 1.2 pp decrease in occupancy.
RESULTS OF OPERATIONS
BRISTOL HOTELS & RESORTS
Period from Inception (March 20, 1998) through December 31, 1998
Rooms revenue was $217.2 million for the period from March 20, 1998, through
December 31, 1998, respectively. This amount is primarily related to operations
for the five months after the Spin-off. Rooms profit margin was 70.3% for the
period. Approximately 60% of the Company's room revenue was generated from
individual business and leisure customers.
Food and beverage revenue was $58.4 million for the period ended December 31,
1998. Food and beverage profit margin was 23.8% for the period. The Company
generated approximately 61.5% of its food and beverage revenue from its banquet
and catering operations.
Management fee income was $2.4 million for the period ended December 31, 1998.
At year end, the Company had 14 management contracts, one of which converted to
a lease effective January 1, 1999. The Company has been advised by certain
owners of their intention to sell properties that are currently managed by the
Company. If a property is sold, the related management contract would likely be
terminated.
Construction management fees for the period ended December 31, 1998, were $2.1
million. The construction management fees are charged by the Company to the
hotel owners for purchasing and project management services provided by the
Company for construction projects (including the Redevelopment and Rebranding
Program), calculated as a percent of the total project costs.
Property occupancy costs include normal hotel operating costs, but do not
include property taxes, ground rent and property insurance. Under the terms of
the leases, these costs are borne by the property owner. Property occupancy
costs were $28.2 million for the period ended December 31, 1998. Of this
amount, approximately $13.5 million were related to utility costs.
Corporate expense was $9.4 million for the period ended December 31, 1998. This
amount relates to the period July 28, 1998, through December 31, 1998, and
includes the costs of the Company's corporate office support functions
described previously, public company costs such as stock exchange fees and SEC
filing costs, and costs related to corporate development and analysis of growth
opportunities.
Tenant lease expense for the period ended December 31, 1998, was $87.9 million.
This amount represents lease payments to property owners (primarily FelCor)
under long-term lease agreements.
Depreciation and amortization was $1.0 million for the period ending December
31, 1998, relating primarily to the property and equipment in the Company's
corporate office, including the Company's investment in centralized information
technology.
EBITDA (earnings before interest, taxes, depreciation and amortization) was
$4.8 million for the period. EBITDA margin (EBITDA divided by total revenues)
was 1.7% for the period ended December 31, 1998. Included in EBITDA is the
reversal of $963,000 of 401(k) discretionary matching contribution expense
accrued by the Predecessor. Net income was $2.6 million for the period from
Inception through December 31, 1998.
18
19
BRISTOL HOTELS & RESORTS (CONTINUED)
Period from July 28, 1998, through December 31, 1998
Until the Spin-off, the Company had no material operations. Therefore, the
Company believes that the following presentation of its results of operations
from July 28, 1998, through December 31, 1998, is more indicative of the
Company's performance (in thousands, except per share amounts):
JULY 28, 1998 -
DECEMBER 31, 1998
(UNAUDITED)
REVENUE
Rooms ...................................... $217,026
Food and beverage .......................... 58,389
Management fees ............................ 2,408
Construction management fees ............... 2,095
Other ...................................... 14,861
--------
Total revenue ................... 294,779
--------
OPERATING COSTS AND EXPENSES
Departmental expenses:
Rooms .................................. 64,348
Food and beverage ...................... 44,509
Other operating departments ............ 6,342
Undistributed operating expenses:
Administrative and general ............. 27,269
Marketing .............................. 22,046
Property occupancy costs ............... 28,129
Tenant lease expense ................... 87,765
Depreciation and amortization .......... 1,027
Corporate expense ...................... 9,407
--------
Operating income ............................... 3,937
Interest income, net ........................... 608
--------
Income before income taxes ..................... 4,545
Provision for income taxes ..................... 1,785
--------
NET INCOME ..................................... $ 2,760
========
Earnings per common and common equivalent share:
Net income:
Basic .................................. $ 0.16
Diluted ................................ 0.15
Weighted average number of common and common
equivalent shares outstanding:
Basic .................................. 17,778
Diluted ................................ 17,920
19
20
BRISTOL HOTEL COMPANY (PREDECESSOR)
January 1, 1998, through July 27, 1998,
Compared to Year Ended December 31, 1997
Rooms revenue for the period ended July 27, 1998, was $308.6 million compared
to $377.4 million for the year ended December 31, 1997. The pro rata increase
is primarily due to the addition of the Holiday Inn Assets, the Single Asset
Acquisitions and the Omaha Acquisition from their respective acquisition dates.
Rooms profit margin was 70.9% for the period ended July 27, 1998, compared to
72.2% for the year ended December 31, 1997. The slight decrease is attributable
to higher franchise costs due to the rebranding of certain hotels in the
Original Bristol Portfolio to Holiday Inn and Crowne Plaza brands in 1998, as
well as the lower margins for properties under redevelopment during the period.
Food and beverage revenue was $69.0 million for the period ended July 27, 1998,
compared to $92.6 million for the year ended December 31, 1997. Food and
beverage profit margin was 20.7% for the period ended July 27, 1998, compared
to 24.7% for the year ended December 31, 1997.
Property occupancy costs for the period ended July 27, 1998, were $65.9 million
compared to $79.6 million for the year ended December 31, 1997. The pro rata
increase is due to the increased number of hotels owned by BHC during the
period, and higher property tax and land rent related to those assets.
Gross operating margin was 29.1% for the period ended July 27, 1998, compared
to 32.1% for the year ended December 31, 1997. The 3.0 pp decrease is primarily
due to the declines in departmental margins and higher operating costs related
to property taxes and land rentals.
Corporate expenses were $27.7 million for the period ended July 27, 1998,
compared to $24.5 million for the year ended December 31, 1997. Approximately
$10.5 million of this pro rata increase is attributable to one-time
professional fees of approximately $6.2 million and other costs, including
transfer taxes and SEC filing fees, of $4.3 million related to the FelCor
merger, offset by $3.1 million of one-time costs incurred in 1997 related to
the Holiday Inn Acquisition.
Interest expense was $30.9 million for the period ended July 27, 1998, compared
to $44.6 million for the year ended December 31, 1997. The pro rata increase is
due to borrowings for the Holiday Inn Acquisition, as well as debt assumed
related to the Omaha Acquisition and other debt incurred under the $120 million
interim credit facility with FelCor.
Depreciation and amortization was $34.3 million for the period ended July 27,
1998, compared to $39.7 million for the year ended December 31, 1997. The pro
rata increase is due to the Holiday Inn, Omaha and Single Asset Acquisitions.
The Predecessor incurred extraordinary losses of $25.7 million and $12.7
million (net of tax) during the period January 1, 1998, through July 27, 1998,
and the year ended December 31, 1997, respectively, related to early debt
retirements.
Because of the factors discussed above, net loss for the period ended July 27,
1998, was $10.4 million, compared to net income of $20.5 million for the year
ended December 31, 1997.
BRISTOL HOTEL COMPANY (PREDECESSOR)
Year Ended December 31, 1997,
Compared With Year Ended December 31, 1996
Total revenue increased 138.2% to $504.5 million for the year ended December
31, 1997, as compared to 1996 as a result of the inclusion of the Holiday Inn
Assets and the 1997 Single Asset Acquisitions from their respective acquisition
dates and the improved operating performance of the Original Bristol Portfolio.
RevPAR for the Original Bristol Portfolio was $47.53 for the year ended
December 31, 1997, compared to $43.92 for 1996, representing an 8.2% increase.
The improvement in RevPAR is primarily attributable to the successful
20
21
repositioning and/or redevelopment of several hotels in the Original Bristol
Portfolio. Occupancy and ADR for the Original Bristol Portfolio was 70.0% and
$67.91, respectively, for the year ended December 31, 1997, compared to 64.4%
and $68.21, respectively, for 1996. The change from 1996 to 1997 was also
impacted by nonrecurring items in 1996 including the Atlanta Olympics and the
renovations of the certain hotels in the Original Bristol Portfolio. The
Atlanta Olympics had a positive impact on results in 1996 due to the 100%
occupancy experienced by the ten Atlanta hotels in the Original Bristol
Portfolio during the 20 days of the Olympic games. Results for 1996 were also
impacted by the renovations of 13 hotels in the Original Bristol Portfolio
throughout the year.
Rooms revenue as a percent of total revenue was 74.8% for the year ended
December 31, 1997, as compared to 70.7% for the year ended December 31, 1996,
resulting from the Holiday Inn Assets having proportionally lower food and
beverage business than the Original Bristol Portfolio. This is also evidenced
by the 151.9% increase in rooms revenue for the year ended December 31, 1997,
compared to the same period in 1996 as compared to a 108.8% increase in food
and beverage revenue.
Food and beverage revenue increased primarily due to the increase in the number
of hotels and also due to higher food and beverage revenues for the Original
Bristol Portfolio. Food and beverage revenue for the Original Bristol Portfolio
for the year ended December 31, 1997, was $51.6 million, representing a 12%
increase over 1996. This increase is primarily attributable to the effective
redevelopment of several hotels in the Original Bristol Portfolio.
The increase in management fees relates primarily to the addition of the 15
management contracts acquired in the Holiday Inn Acquisition offset by the loss
of two management agreements previously held by Bristol in 1996.
Gross operating margin (consisting of total revenue less department expenses,
administrative and general, marketing and property operating costs divided by
total revenue) was 32.1% for the year ended December 31, 1997, compared to
35.9% for the year ended December 31, 1996. The 3.8 pp decrease in gross
operating margin is primarily attributable to declines in departmental
operating margins and higher property operating costs related to property taxes
and land rentals. Declines in departmental margins relate primarily to the
integration of the Holiday Inn Assets and the 1997 Single Asset Acquisitions,
which have had historically lower margins. Property tax increases relate to
increased valuations as a result of the significant capital improvements for
several hotels in the Original Bristol Portfolio as well as an increase in tax
rates for certain hotels. Increased land rentals relate to the Holiday Inn
Assets having a proportionately higher number of ground leases than the
Original Bristol Portfolio.
Depreciation and amortization increased $21.3 million for the year ended
December 31, 1997, compared to 1996 as a result of the Holiday Inn Acquisition
and the 1997 Single Asset Acquisitions. Depreciation expense also increased as
a result of the substantial capital improvements at several hotels in the
Original Bristol Portfolio.
Corporate expenses for the year ended December 31, 1997, were $24.5 million
compared to $11.0 million for 1996. Approximately $3.1 million of the increase
relates to one-time costs incurred during the second quarter of 1997 for the
closing and integration of the Holiday Inn Acquisition. The remaining increase
relates primarily to the increase in the number of corporate employees and
related costs and increased travel expenses as a result of the acquisition.
Interest expense for the year ended December 31, 1997, increased $26.0 million
to $44.6 million primarily as a result of additional debt incurred to finance
the Holiday Inn Acquisition as well as borrowings increasing ratably in 1996 to
fund acquisitions and certain redevelopment costs.
Equity in income of joint ventures of $1.9 million for the year ended December
31, 1997, represents the Company's 50% interest in the earnings of the three
joint ventures acquired in the Holiday Inn Acquisition.
As a result of the factors described above, income before extraordinary items
increased 87.1% to $33.2 million for the year ended December 31, 1997, compared
to the year ended 1996 and diluted earnings per share increased 24.3% to $0.87
for the year ended December 31, 1997, compared to $0.70 for 1996. Recurring
21
22
earnings for the year ended December 31, 1997, of $35.1 million, which exclude
the extraordinary item of $12.7 million and the one-time costs related to the
Holiday Inn Acquisition ($1.8 million, net of tax), represents a 138.8%
increase over recurring earnings for the year ended December 31, 1996, of $14.7
million, which excludes a one-time gain related to the sale of marketable
securities ($0.3 million, net of tax), the positive impact of the Atlanta
Olympics ($2.2 million, net of tax), and the litigation settlement gain ($0.6
million, net of tax). Recurring diluted earnings per share of $0.92 for the
year ended December 31, 1997, represents a 58.6% improvement over 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash flow from
operations and borrowings under the $40 million revolving credit facility with
Bankers Trust Company (the "Credit Facility"). The Company had approximately
$23.1 million of cash at Spin-off and approximately $24.9 million of cash as of
December 31, 1998. The Company believes that it currently requires
approximately $10 million to $15 million of cash to fund the day-to-day working
capital needs of the Company.
The Company's cash flows are sensitive to the performance of the leased and
managed properties. For managed properties, the Company's cash flows are
principally tied to changes in the gross revenues of the properties. For leased
properties, the Company is impacted both by changes in gross revenues as well
as changes in operating expenses and rent expense. Rent expense is paid
principally as a percentage of gross revenues and is largely tied to room
revenue volume. Room revenue increases or decreases caused by changes in room
rates have only a minor impact on operating expenses, as compared to revenue
increases or decreases generated by changes in occupancy, which also can
produce significant changes in operating costs. As a result, the Company's cash
flows are more directly impacted by revenue increases or decreases caused by
changes in average room rates. Increased revenues caused by increases in
occupancy levels could have little impact on the Company's cash flows or could
actually reduce cash flow if the incremental business is not sold at
sufficiently high average room rates.
The $40 million of commitments under the Credit Facility may be used for
working capital and other general corporate purposes. Additionally, a sub-limit
of up to $20 million of such commitments is available to issue letters of
credit to secure the Company's obligations under the leases with FelCor and
other owners, subject to the reduction of such sub-limit to reflect the
Company's achievement of liquid net worth requirements related to such leases.
Concurrently with the Spin-off, a letter of credit for $20 million was issued
to FelCor to secure the Company's obligations under the leases. This amount may
be adjusted from time to time pursuant to the liquid net worth requirements
described above. As of December 31, 1998, the letter of credit amount
outstanding was $15.9 million.
As of December 31, 1998, the Company had a $9.1 million promissory note from
FelCor (the "FelCor Note") which is due upon five days' demand. The Company
made partial demand on this note and on February 1, 1999, received $5.0 million
cash against the note. The remaining $4.1 million can be used by the Company
for working capital or other purposes.
The Company is actively pursuing opportunities for growth and anticipates
adding to its leasehold and management portfolio, both through its relationship
with FelCor, as well as working with other REITs and individual property owners
who could benefit from the Company's services. The Company began management of
the Holiday Inn in Olathe, Kansas in September, 1998, the Hampton Inn in Sault
St. Marie, Michigan in March 1999, and has announced agreements to manage two
Hilton Garden Inns and a 265-room upscale Hilton Hotel, all of which are
currently under development, for the Landmark Organization. The development of
these properties will be completed during 1999 and 2000.
It is possible that some new management contracts or leases could require a
small capital investment on the part of the Company. The Company may also
purchase hotel leases or management contracts from third parties. If such an
investment is necessary, the Company believes it has adequate capital resources
including cash on hand, availability under the Credit Facility and the FelCor
Note to fund these opportunities for the immediate future. The Company acquired
a 15% joint venture interest and the management of the Cambridge Inn in
Cambridge, Massachusetts in January 1999.
22
23
The Company is continuously exploring opportunities for increasing efficiency
at the hotels and the corporate office. Some of these opportunities could
require small capital investments by the Company to achieve the targeted
savings. The Company plans to install approximately $3.5 million of
energy-saving devices throughout the leased hotels during 1999. Additionally,
the Company expects to incur up to $2.8 million of information technology
improvement costs in the Company's corporate office in the next fiscal year,
primarily related to the development and installation of the Company's Wide
Area Network which will improve productivity and ease communication between the
corporate office and the hotels. The Company believes that it has adequate
capital resources to fund its growth opportunities for the immediate future.
SEASONALITY
The lodging industry is affected by seasonal patterns. At most of the Company's
hotels, demand is higher in the second and third quarters than during the
remainder of the year. The Company's results are also impacted during periods
of renovation when rooms are placed out of service. The Company expects to have
approximately 292,646 room nights out of service in 1999 in conjunction with
the Redevelopment and Rebranding Program, consisting of: 154,826 in the first
quarter; 60,952 in the second quarter; 20,129 in the third quarter; and 56,739
in the fourth quarter.
INFLATION
The Company is impacted by inflation in both the general price movement of
certain costs of the operations of its hotels and in the ability to increase
the rates charged to its guests for rooms, food and beverage and other
services.
Many of the costs of operating the hotels can be fixed for certain periods of
time, reducing the short-term effects of changes in the rate of inflation. Room
rates, which are set on a daily basis, can be rapidly changed to meet changes
in inflation rates as well as other changing market conditions. The Company
believes that given the favorable demand/supply balance in the hotel segments
in which it operates, increases in inflation from today's relatively low rates
will not have an adverse impact on profits generated by the Company's hotels.
Changes in the rate of inflation could impact the level of short-term interest
rates. The Company does not anticipate a significant increase or decrease in
the level of short-term interest rates, and, since the Company has no floating
rate debt currently outstanding, the Company does not believe that it has any
significant exposure should a rise in market interest rates occur.
YEAR 2000 READINESS
In order to fully comprehend the Year 2000 problem and how it will impact the
Company's operations, the Company has established a Year 2000 Readiness Program
(the "Program"). The Program contemplates the completion of the following
steps: Awareness, Inventory, Assessment, Planning & Scheduling, Test Compliance
& Functionality, Replace/Upgrade, and finally, Implementation/Contingency
Planning. As of March 4, 1999 the Company has completed the Program through the
Test Compliance & Functionality stage, and has commenced the Replace/Upgrade
stage with pilot implementation beginning in March 1999. The Company expects
that the entire Program will be completed by the beginning of fourth quarter of
1999.
During the third quarter of 1998, the Company completed its evaluation and
technical inventory of the Company's corporate office and all of the
property-level systems which might be impacted by the Year 2000 problem. The
Company has secured the resources and scheduled the remedy of each of those
systems that it has identified as having potential Year 2000 issues. The
Company has also established a contingency plan for the centralized computer
operating systems, which has been tested and is in a state of readiness.
The Company continues to evaluate non-information technology systems such as
embedded chip mechanical/engineering systems, energy management systems, and
security systems. As of March 4, 1999, the Company has completed the embedded
system inventory at 100 hotels and has not identified any embedded system
issues. This inventory is expected to be completed for the remaining hotels by
the end of the first quarter of 1999. Based on current results and other
factors, the Company does not anticipate finding
23
24
any material embedded system issues in critical systems at any of the hotels.
The Company is also working closely with its franchisors to ensure readiness.
Each of these franchisors indicated to the Company that their reservation
systems would be Year 2000 ready by January 31, 1999; however, the Company has
received no verification that the remediation of these systems has been
completed. The franchisors have indicated to the Company that they are
establishing contingency plans to address any potential Year 2000 readiness
issues.
The Company is continuing to survey its vendors and service providers to
determine Year 2000 readiness. As of March 4, 1999, the Company's primary
vendors and service providers have indicated that they will be Year 2000
compliant; however, there is no assurance that all of the Company's vendors and
service providers will be ready.
Contingency Plans
The Company has established a contingency plan and disaster recovery procedure
for the centralized computer operating systems, located in the Company's
corporate office, which has been tested and which the Company believes is in a
state of readiness. The Company's franchisors have also provided the hotels
with materials identifying contingency plans for major property-level system
outages and force majeure type events. Non-franchised properties are provided
this information by the Company. Additionally, each franchisor is creating
checklists and procedures for their licensed hotels which will address problems
arising from Year 2000 related outages with the franchise specific systems. The
Company is also establishing plans and procedures to train and prepare primary
staff to address operational and systemic issues arising from the Year 2000
problem. The Company contemplates that these tools and training will be
completed by the beginning of the fourth quarter 1999.
Costs
The Company is working with FelCor and its other owners to remedy the
property-level non-compliant systems identified. In particular, the Company has
prepared and presented a budget to FelCor, which has been approved, setting out
the anticipated costs and timeline for the remedy to make the properties Year
2000 compliant. While most of the costs associated with the remedy to the
FelCor properties will be borne by FelCor, it is anticipated that the Company
will bear approximately $650,000 of the cost, including the Company's portion
of the costs of software, hardware and internal employees dedicated to the
Program. For each of its other property owners, the Company has presented a
1999 capital budget including presentations of Year 2000 remedy costs. The
third-party owners are contractually obligated to bear the full amount of this
cost. Other than those specified above, the Company is not aware of any
additional costs that it will bear to remedy the Year 2000 problems
company-wide.
Risks
The Company cannot predict the actual effects to it of the Year 2000 problem,
which depends on numerous factors including whether significant third parties
properly and timely remedy the Year 2000 issue, and whether broad-based or
systemic failures occur (including disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services or failures in financial transactions or payment processing systems
such as credit cards), as well as the severity and duration of any such
failures. There can be no assurances that Year 2000 remediation by third
parties will be properly and timely completed, and failure to do so may have a
material adverse effect on the Company, its business and its financial
condition. Further, the Company may have no option but to remain with a vendor
who cannot assure Year 2000 readiness if an alternative source is not available
at commercially reasonable terms. The Company's Year 2000 Readiness Program is
expected to reduce the level of uncertainty about the Year 2000 problem.
24
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial information is included on the pages indicated and is
incorporated into this item by reference:
Page
----
Report of Independent Public Accountants........................... F-1
Bristol Hotels & Resorts
Consolidated Statement of Income................................... F-2
Consolidated Balance Sheet......................................... F-3
Consolidated Statement of Cash Flows............................... F-4
Consolidated Statement of Changes in Stockholders' Equity.......... F-5
Notes to Consolidated Financial Statements......................... F-6
Bristol Hotel Company (Predecessor)
Consolidated Statements of Operations.............................. F-19
Consolidated Balance Sheet......................................... F-20
Consolidated Statements of Cash Flows.............................. F-21
Consolidated Statements of Changes in Stockholders' Equity......... F-23
Consolidated Statements of Comprehensive Income (Loss)............. F-24
Notes to Consolidated Financial Statements......................... F-25
25
26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
The information called for by Items 10-13 is incorporated by reference to the
sections of the Company's Proxy Statement for its 1999 Annual Meeting of
Stockholders (to be filed pursuant to Regulation 14A not later than 120 days
after the close of the fiscal year).
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORT ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1. The financial statements as set forth under Item 8 are filed as part
of this report.
2. All financial statement schedules are omitted as they are either not
applicable or the required information is included in the financial
statements or the notes thereto.
3. The list of exhibits contained in the Index to Exhibits is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None.
26
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this Form 10-K to be signed on its behalf by
the undersigned; thereunto duly authorized, on this 25th day of March, 1999.
BRISTOL HOTELS & RESORTS
BY: /s/ John D. Bailey
------------------------------
John D. Bailey
Vice President, Controller and
Chief Accounting Officer
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has
been signed below by the following persons in the capacities and on the dates
indicated.
Signatures Title
---------- -----
/s/ J. Peter Kline Chairman of the Board of Directors and
--------------------------------------- Chief Executive Officer
J. Peter Kline
/s/ John A. Beckert
---------------------------------------
John A. Beckert President and Chief Operating Officer; Director
/s/ Jeffrey P. Mayer
---------------------------------------
Jeffrey P. Mayer Executive Vice President and
Chief Financial Officer
/s/ John D. Bailey
---------------------------------------
John D. Bailey Vice President, Controller and
Chief Accounting Officer
/s/ David A. Dittman
---------------------------------------
David A. Dittman Director
/s/ Kurt C. Read
---------------------------------------
Kurt C. Read Director
/s/ Thomas R. Oliver
---------------------------------------
Thomas R. Oliver Director
/s/ Reginald K. Brack, Jr.
---------------------------------------
Reginald K. Brack, Jr. Director
/s/ Robert A. Whitman
---------------------------------------
Robert A. Whitman Director
/s/ James J. Pinto
---------------------------------------
James J. Pinto Director
27
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Bristol Hotels & Resorts:
We have audited the accompanying consolidated balance sheet of Bristol Hotels &
Resorts (a Delaware corporation) as of December 31, 1998, and the related
consolidated statements of income, cash flows and changes in stockholders'
equity for the period from inception (March 20, 1998) through December 31,
1998. We have also audited the accompanying consolidated balance sheet of
Bristol Hotel Company (the Company's predecessor, a former Delaware
corporation) as of December 31, 1997, and the related consolidated statements
of operations, cash flows, changes in stockholders' equity and comprehensive
income (loss) for the period from January 1, 1998 through July 27, 1998, and
for the years ended December 31, 1997 and 1996. 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 Hotels & Resorts as of
December 31, 1998, and the results of its operations and its cash flows for the
period from inception (March 20, 1998) through December 31, 1998; and the
financial position of Bristol Hotel Company (the Company's predecessor) as of
December 31, 1997, and the results of its operations and its cash flows for the
period from January 1, 1998, through July 27, 1998, and for the years ended
December 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 5, 1999
F-1
29
BRISTOL HOTELS & RESORTS
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (MARCH 20, 1998)
THROUGH DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUE
Rooms ...................................... $217,236
Food and beverage .......................... 58,391
Management fees ............................ 2,408
Construction management fees ............... 2,095
Other ...................................... 14,788
--------
Total revenue ................... 294,918
--------
OPERATING COSTS AND EXPENSES
Departmental expenses:
Rooms .................................. 64,427
Food and beverage ...................... 44,509
Other operating departments ............ 6,345
Undistributed operating expenses:
Administrative and general ............. 26,917
Marketing .............................. 22,457
Property occupancy costs ............... 28,163
Tenant lease expense ................... 87,925
Depreciation and amortization .......... 1,027
Corporate expense ...................... 9,407
--------
Operating income ............................... 3,741
Interest income, net ........................... 689
--------
Income before income taxes ..................... 4,430
Provision for income taxes ..................... 1,785
--------
NET INCOME ..................................... $ 2,645
========
Earnings per common and common equivalent share:
Net income:
Basic .................................. $ 0.27
Diluted ................................ 0.27
Weighted average number of common and common
equivalent shares outstanding:
Basic .................................. 9,788
Diluted ................................ 9,952
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
30
BRISTOL HOTELS & RESORTS
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents ................................................... $ 24,916
Accounts receivable (net of allowance of $643) .............................. 35,329
Inventory ................................................................... 9,612
Note receivable - FelCor .................................................... 9,100
Prepaid rent ................................................................ 11,042
Deposits and other current assets ........................................... 6,144
---------
Total current assets ................................................. 96,143
Property and equipment (net of accumulated depreciation of $1,759) .............. 5,889
Investment in management contracts (net of accumulated amortization of $2,429)... 1,962
Deferred charges and other non-current assets
(net of accumulated amortization of $115) .................................... 1,528
---------
Total assets ......................................................... $ 105,522
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ....................................... $ 48,486
Accrued occupancy, sales and use tax ........................................ 6,512
Accrued insurance ........................................................... 6,511
Advance deposits ............................................................ 1,653
---------
Total current liabilities ............................................ 63,162
Deferred income taxes ........................................................... 1,376
Other liabilities ............................................................... 5,575
---------
Total liabilities .................................................... 70,113
---------
Common stock ($.01 par value; 100,000,000 shares
authorized, 31,957,919 shares issued,
17,778,315 shares outstanding) .............................................. 228
Additional paid-in capital ...................................................... 57,160
Retained earnings ............................................................... 2,645
Foreign currency translation adjustment ......................................... 12
Treasury stock, at cost (5,065,409 shares) ...................................... (24,636)
---------
Total stockholders' equity ........................................... 35,409
---------
Total liabilities and stockholders' equity ........................... $ 105,522
=========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
31
BRISTOL HOTELS & RESORTS
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 20, 1998)
THROUGH DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 2,645
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ....................... 1,027
Amortization of deferred financing fees ............. 115
Non-cash portion of foreign currency translation .... 12
Compensation expense recognized for employee
stock options .................................... 139
Changes in working capital .............................. (9,026)
Decrease in restricted cash ............................. 907
Deferred tax provision .................................. 510
Increase in other liabilities ........................... 2,918
--------
Cash used in operating activities ................ (753)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to property and equipment .................. (285)
--------
Cash used in investing activities ................ (285)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from Predecessor at Spin-off .............. 48,988
Decrease in deferred charges and other non-current assets 282
Proceeds from employee stock purchase plan .............. 1,538
Proceeds from exercise of employee stock options ........ 960
Repurchase of shares from Bass plc ...................... (25,814)
--------
Cash provided by financing activities ............ 25,954
--------
Net increase in cash and cash equivalents ................... 24,916
Cash and cash equivalents at beginning of period ............ --
--------
Cash and cash equivalents at end of period .................. $ 24,916
========
Supplemental cash flow information:
Interest paid ........................................... $ --
========
Income taxes paid ....................................... $ 785
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
32
BRISTOL HOTELS & RESORTS
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MARCH 20, 1998)
THROUGH DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOREIGN
COMMON ADDITIONAL CURRENCY
-------------------- PAID-IN TREASURY TRANSLATION RETAINED
SHARES AMOUNT CAPITAL STOCK ADJUSTMENT EARNINGS TOTAL
-------- -------- ------- ----- ----------- --------- -----
Balance at Inception......................... 1,000 $ -- $ 1 $ -- $ -- $ -- $ 1
Spin-off dividend......................... 22,616,453 226 55,702 -- -- -- 55,928
Bass stock repurchase..................... (5,307,351) -- -- (25,814) -- -- (25,814)
Employee stock purchase plan,
net of repurchases..................... 241,158 -- 360 1,178 -- -- 1,538
Employee stock options exercised.......... 227,055 2 958 -- -- -- 960
Employee stock option expense............. -- -- 139 -- -- -- 139
Foreign currency translation adjustment... -- -- -- -- 12 -- 12
Net income................................ -- -- -- -- -- 2,645 2,645
----------- --------- --------- --------- --------- ------- --------
Balance at December 31, 1998................. 17,778,315 $ 228 $ 57,160 $ (24,636) $ 12 $ 2,645 $ 35,409
=========== ========= ========= ========== ========= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
33
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Bristol Hotels & Resorts (together with its subsidiaries, the
"Company") is a Delaware corporation which was incorporated on March
20, 1998 ("Inception"), and began operations on May 20, 1998, as a
subsidiary of Bristol Hotel Company ("BHC" or "Predecessor"). The
Company was spun off (the "Spin-off") from BHC in connection with the
merger of BHC with FelCor Lodging Trust Incorporated ("FelCor") on
July 27, 1998 (the "FelCor Merger"), and began trading on July 28,
1998, as a separate publicly traded company.
The Company is one of the leading independent hotel operating
companies in the United States operating 120 primarily full-service
hotels (as of December 31, 1998) in the upscale and midscale segments
of the hotel industry containing approximately 32,100 rooms, of which
105 hotels are operated under the long-term leases with FelCor. The
Company operates hotels in 27 states, Canada and the District of
Columbia, with 30 hotels in Texas, 12 hotels in California and 10
hotels in Georgia. The Company operates the largest number of Bass
Hotels & Resorts (with its affiliates, collectively "Bass") branded
hotels in the world, including Crowne Plaza, Holiday Inn, Holiday Inn
Select and Holiday Inn Express hotels. The Company also operates 22
hotels under other hotel brands, including Sheraton Four Points,
Hilton, Hampton Inn, Homewood Suites, Courtyard by Marriott and
Fairfield Inn.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The financial statements of the Company as of December 31, 1998,
reflect its operations from May 20, 1998, through December 1998. The
Company had no operations from March 20, 1998, through May 19, 1998;
operations began on May 20, 1998, with the lease of the Hampton Inn -
Las Vegas. Prior to July 28, 1998, the Company's sole asset was the
leasehold interest in the Hampton Inn - Las Vegas; therefore, the
results of operations presented in the Company's consolidated
statement of income for the period from Inception through December 31,
1998, are not, in the opinion of management, indicative of the future
results of operations of the Company.
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.
ACCOUNTS RECEIVABLE
Accounts receivable in the balance sheet are expected to be collected
within one year and are net of estimated uncollectible amounts of
$643,000 at December 31, 1998.
F-6
34
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED 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.
PREPAID RENT
The Company is required to prepay each month's base rent on the last
day of the prior month. Any adjustments to this amount are paid in
arrears. As of December 31, 1998, prepaid rent was $11.0 million.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of leasehold improvements,
computer equipment and furniture and fixtures at the Company's
corporate office and uniforms at the hotels.
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:
Furniture, fixtures and equipment 3-15 years
Automobiles and trucks 5 years
Leasehold improvements Lease term or useful life,
whichever is less
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 line
of credit. The amounts reported in the balance sheet at December 31,
1998 are net of accumulated amortization of $115,000.
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Position 98-5, "Accounting for
Start-up Costs" ("SOP 98-5"). SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs. It
requires costs of start-up activities and organization costs to be
expensed as incurred. In accordance with SOP 98-5, the Company
expensed all organizational costs related to the spin-off as incurred,
and therefore, does not believe that this SOP has had any impact on
the financial results of the Company.
F-7
35
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS (continued)
The Company has adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The objective
of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive income
is the total of net income and all other non-owner changes in a
company's equity. Due to the Company's Canadian operations, it engaged
in transactions involving foreign currency resulting in translation
adjustments of approximately $12,000 for the period from May 20, 1998,
through December 31, 1998, which the Company believes is immaterial
and does not require separate financial statement presentation.
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires an enterprise to report
financial information about its reportable operating segments, which
are defined as components of a business for which separate financial
information is evaluated regularly by the chief decision maker in
allocating resources and assessing performance. The Company does not
prepare such information for internal use, since it analyzes the
performance of and allocates resources to each hotel individually. The
Company's management has determined that it operates one line of
business and it would be impracticable to report segment information.
Therefore, the adoption of SFAS 131 has no impact on the Company's
financial statements.
FOREIGN CURRENCY TRANSACTIONS
The Company operates 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 $4,000 for the period May 20
through December 31, 1998. 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, 1998, were $12,000.
INCOME TAXES
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.
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. Weighted average shares is calculated
using the treasury stock method, giving effect to the common
equivalent shares outstanding as of December 31, 1998. The common
equivalent shares include employee 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 Statement
of Financial
F-8
36
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (continued)
Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"), which
calls for both basic and diluted weighted average share presentation.
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.
3. FELCOR MERGER AND THE SPIN-OFF
On July 27, 1998, BHC's hotel operating business was spun off as a
separate publicly traded company, Bristol Hotels & Resorts (the
Company). The FelCor Merger was consummated following the Spin-off.
In the Spin-off, BHC stockholders received one common share of the
Company for every two of their BHC common shares. In the FelCor
Merger, BHC stockholders received 0.685 FelCor common shares for each
of their existing BHC common shares. As a result of these
transactions, former BHC stockholders own all of the Company's equity
and 44% of FelCor's outstanding common equity. The Spin-off was
taxable to BHC and its stockholders, while the FelCor Merger was
tax-free to FelCor and BHC stockholders.
Each of the BHC hotels acquired by FelCor in the FelCor Merger are
leased to and operated by the Company. The Company and FelCor are
separately owned and managed, but are expected to work together in the
acquisition and leasing of additional hotels.
The assets spun off to the Company by the Predecessor, net of the cash
used to repurchase the Bass shares, consisted of (in thousands):
Cash............................................. $ 48,988
Less - Cash used for Bass shares repurchase...... (25,814)
--------------
Net cash to Company.............................. 23,174
Non-cash assets.................................. 75,834
Liabilities...................................... (68,894)
--------------
Net assets received from Predecessor............. $ 30,114
=============
4. FELCOR LEASES
Of the 120 hotels operated by the Company, 105 are subject to
long-term leases with FelCor. The principal terms of the FelCor leases
are summarized below, although certain terms vary from hotel to hotel.
TERM
The leases are for initial terms of three to fifteen years, with
renewal options on the same terms for a total of 15 years. If a lease
has been extended to 15 years, the Company may renew the lease for an
additional five years at then current market rates.
F-9
37
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FELCOR LEASES (CONTINUED)
RENT
The Company will pay rent equal to the greater of base rent or
percentage rent. The percentage rent is based on specified percentages
of various revenue streams. Those percentages will vary within the
following ranges:
Room Revenues: 0% to 10% up to a revenue
breakpoint amount specified
for each hotel, then 70% above
such breakpoint
Food and Beverage Revenues: 5% to 25%
Other Revenues: Varying percentages depending
on the nature and source of
such revenues
The base rent and the thresholds for computing percentage rent under
the leases will be adjusted annually to reflect changes in the
Consumer Price Index. While rental payments are made monthly, rent is
calculated on a quarterly basis. Rent may be re-negotiated if there
are material changes in the markets in which the Company operates. The
room revenue percentages for 1999 have been amended to include a third
breakpoint amount for each hotel, after which the lease payment amount
would be 60% of room revenues after such third breakpoint.
The Company paid $87.4 million to FelCor from July 28, 1998, through
December 31, 1998. Of this amount, $54.8 million was base rent, and
$32.6 million was percentage rent above the base amount.
Future minimum (base) rental payments under the FelCor leases are as
follows (in thousands):
Year Ended December 31,
-----------------------
1999................................... $ 154,206
2000................................... 154,206
2001................................... 154,206
2002................................... 153,843
2003................................... 153,843
Thereafter................................ 726,559
------------
$ 1,496,863
============
TERMINATION
Upon the sale of a property to a third party, FelCor may terminate the
lease. The Company would be entitled to damages upon any termination
to which it did not consent consisting of a monthly payment equal to
one-twelfth of 75% of the cash flow derived from the lease for the
prior twelve months. The payment, for the majority of the assets,
would be due for a period equal to the remainder of the lease term for
the terminated lease. For five hotels acquired by FelCor which were
available for sale at December 31, 1998, the termination payments are
calculated at variable percentages during the lease term and will be
paid over the remaining term of these five year leases, subject to
certain restrictions. Four of these properties were sold by FelCor
subsequent to year end.
A lease may also be terminated by FelCor if the Company fails to
satisfy certain performance targets, liquid net worth tests, defaults
under a franchise agreement or upon a change in control of the
Company. Either party may terminate upon a breach by the other party
of the agreements under the lease.
F-10
38
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FELCOR LEASES (CONTINUED)
INSURANCE, PROPERTY TAXES AND GROUND LEASES
FelCor will pay all real estate and personal property taxes (other
than with respect to personal property of the Company), property
insurance premiums and ground lease payments on the leased hotels. The
Company will pay for all liability insurance on the leased hotels,
which includes extended coverage, comprehensive general public
liability, workers' compensation and other insurance appropriate and
customary for properties similar to the leased hotels.
5. FELCOR NOTE RECEIVABLE
Pursuant to the terms of the Spin-off Agreement, the Company's net
worth was to be $30 million at the Spin-off. The difference between
the net assets and liabilities transferred to the Company and the $30
million net worth requirement was due from FelCor. This amount, net of
settlements between the Company and FelCor in the interim period, was
$9.1 million, for which FelCor executed a promissory note to the
Company. The note bears interest at a monthly LIBOR rate plus 150
basis points (7.14% as of December 31, 1998), and is due upon five
days' notice from the Company. If FelCor were to fail to pay, the
Company has the right to offset the amount due against rent payments
due to FelCor. On February 1, 1999, the Company requested and received
$5.0 million of this note amount.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
Leasehold improvements................ $ 818
Furniture, fixtures and equipment..... 6,830
---------
7,648
Less accumulated depreciation......... (1,759)
---------
Total.................... $ 5,889
=========
7. LONG-TERM DEBT
In connection with the Spin-off, the Company entered into a $40
million revolving credit facility (the "Credit Facility"), with
Bankers Trust Company. The Credit Facility is secured by essentially
all of the Company's assets, including the stock of its subsidiaries
and their rights under the leases with FelCor. Borrowings under the
Credit Facility bear interest at a rate of LIBOR plus 1.875% or a base
rate plus 0.875% and will mature in July 1999, with two one-year
extension options. The $40 million of commitments under the Credit
Facility may be used for working capital and other general corporate
purposes.
A sub-limit of up to $20 million of such commitments is available to
issue letters of credit to secure the Company's obligations under the
leases with FelCor and other owners, subject to the reduction of such
sub-limit to reflect the achievement of liquid net worth requirements
related to such leases. The Company will pay a fee of 1.875% annually
on the maximum amount which may be drawn under each letter of credit
issued. The letter of credit sub-limit under the Credit Facility has a
one-year term without renewal options. As of December 31, 1998, a
letter of credit for $15.9 million was outstanding to FelCor to secure
the Company's obligations under the leases.
F-11
39
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Components of income tax expense from continuing operations for the
period from July 28, 1998, through December 31, 1998, consists of the
following (in thousands):
Federal:
Current................................ $ 516
Deferred............................... 749
State:
Current................................ 102
Deferred............................... 148
Canada:
Current................................ 270
Deferred............................... --
--------------
$ 1,785
==============
The Company estimates that its effective tax rate for 1998
approximated 39.85%. The actual income tax expense for the period from
July 28,1998, through December 31, 1998, 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... 35.00%
State income taxes, net of federal benefit and
permanent differences................................. 3.55%
Effect of higher Canadian tax rates...................... 1.30%
------
39.85%
======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
1998 are as follows (in thousands):
Purchase accounting adjustments to management
contracts and depreciable assets.................. $ 1,596
Other................................................ 263
----------
Gross deferred tax liabilities............... 1,859
----------
Accrued reserves..................................... 483
----------
Gross deferred tax asset..................... 483
----------
Net deferred tax liability................... $ 1,376
==========
The gross deferred tax liabilities relate principally to the temporary
differences caused by the purchase accounting adjustments recorded as
a result of the combination of Harvey Hotel Company, Ltd. and its
affiliated businesses and United Inns, Inc. (the predecessors to BHC)
and BHC's acquisition of hotels, management contracts and other
interests from Holiday Corporation (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 transactions discussed
above. 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. The reversal of these
temporary differences will result in the Company recording a credit to
deferred tax expense for the tax effect of these differences.
F-12
40
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
Accounts payable .................................. $ 5,952
Accrued payroll, payroll taxes and benefits......... 20,425
Accrued rent........................................ 8,498
Accrued utility costs............................... 3,395
Accrued franchise fees.............................. 1,957
Accrued hotel operating expenses.................... 4,547
Other............................................... 3,712
--------
$ 48,486
========
10. STOCKHOLDERS' EQUITY
NON-EMPLOYEE DIRECTOR OPTIONS
The Company instituted the Non-Employee Directors Stock Option Plan
(the "Plan") on July 27, 1998, and assumed the Predecessor's Amended
Stock Option Plan for Non-Employee Directors. Only directors who are
(i) not employees of the Company; or (ii) do not beneficially own, or
are an employee of an entity which beneficially owns 9% or more of the
outstanding common shares of the Company, are eligible under the Plan
(an "Eligible Director"). On the later of the date upon which an
Eligible Director became a director or the effective date of the Plan,
each receives an initial option to purchase 25,000 shares of Common
Stock at an exercise price equal to the market value on the date of
grant. The initial option becomes exercisable 34% at the first next
annual stockholders' meeting at which the individual remains a
director, and 33% at each of the next two consecutive annual
stockholders' meetings which the individual remains a director.
Thereafter, the Directors' Plan Committee may, but is not obligated
to, annually grant each Eligible Director an option to purchase up to
25,000 shares of Common Stock which becomes exercisable as determined
by the Directors' Plan Committee. As of December 31, 1998, a total of
101,250 options had been granted to the three Eligible Directors on
the board, including those issued under the Predecessor's plan, 23,775
of which are currently exercisable.
The Company, on behalf of its Non-Employee Directors, filed an
amendment to the Form 3's filed on August 5, 1998 reflecting the
granting of stock options pursuant to the Non-Employee Directors Stock
Option Plan.
EMPLOYEE OPTIONS
Under the Company's 1998 Equity Incentive Plan and the Predecessor's
Amended and Restated 1995 Equity Incentive Plan, which was assumed by
the Company, the Company may award options to purchase the Company's
stock to eligible officers and employees. 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 609,258
employee options outstanding at December 31, 1998, including those
issued under the Predecessor's plan, of which 117,769 were
exercisable.
F-13
41
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
TREASURY STOCK
Immediately after the Spin-off, the Company purchased 5.3 million
shares of its stock held by affiliates of Bass, in order to assure
FelCor's compliance with certain REIT ownership requirements. The
purchase price for these shares was $25.8 million ($4.86 per share),
and was funded from cash contributed by BHC to the Company for this
purpose. The repurchased shares are classified as treasury shares on
the Company's balance sheet.
STOCK PURCHASE PLAN
In order to encourage broader ownership of the Company by providing a
means for eligible employees and directors of the Company to acquire
shares of Company stock, the Company formed the 1998 Bristol Hotels &
Resorts Stock Purchase Plan. On July 28, 1998, eligible employees and
directors purchased 241,158 shares of the Company's stock at $6.38 per
share. The shares were issued from treasury stock.
SFAS 123 DISCLOSURE
The Company accounts 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.
However, had compensation cost for these plans been determined
consistent with the method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Company's net income and earnings per share would have been
reduced to the following pro forma amounts (dollars in thousands,
except per share amounts):
Net income As reported $ 2,645
Pro forma 2,623
Basic EPS As reported 0.27
Pro forma 0.27
Diluted EPS As reported 0.27
Pro forma 0.27
F-14
42
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock option plan at December
31, 1998, and changes during the period July 28,1998, through December
31, 1998, is presented in the table and narrative below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding at July 28,1998 ............ 927,820 $ 4.41
Options granted ........................ 75,000 6.88
Options exercised ...................... (227,055) 2.53
Options expired ........................ (65,257) 4.71
-------- --------
Options outstanding at
December 31,1998 .................... 710,508 $ 5.24
======== ========
Options exercisable at
December 31,1998 .................... 141,544 $ 5.85
======== ========
Weighted average fair value
of options granted at date of issue $ 2.40
========
The 710,508 options outstanding at December 31, 1998, have exercise
prices between $2.51 and $8.50 with a weighted average exercise price
of $5.24 and a weighted average remaining contractual life of 7.2
years. At December 31, 1998, 141,544 of these options (with a weighted
average exercise price of $5.85) are exercisable.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for the grant in 1998: risk-free
interest rate of 5.49%; no expected dividend yields; expected lives of
7.2 years; expected volatility of 33.75%.
11. EARNINGS PER SHARE
The Company computes net income per share in accordance with SFAS 128.
Under SFAS 128, net income per share ("basic EPS") is computed by
dividing net earnings by the weighted average number of shares of
common stock outstanding during the period. The Company calculates net
income per share, assuming dilution ("diluted EPS"), assuming all
outstanding options to purchase common stock have been exercised at
the beginning of the year (or the time of issuance, if later). The
dilutive effect of the outstanding options is reflected by application
of the treasury stock method, whereby the proceeds from the exercised
options are assumed to be used to purchase common stock at the average
market price during the period. The following table reconciles the
computation of basic EPS to diluted EPS:
PER SHARE
NET INCOME SHARES AMOUNT
-------------- ------ ------
($ IN THOUSANDS)
Inception through December 31, 1998:
Net income per share............................ $ 2,645 9,787,535 $ 0.27
Effect of options............................... -- 164,020 --
---------- ------------ -------
Net income per share, assuming dilution......... $ 2,645 9,951,555 $ 0.27
========== ============ =======
F-15
43
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. OPERATING LEASES
The Company leases certain hotel space to third-party vendors. Future
minimum rentals to be received under non-cancelable operating leases
that have initial or remaining lease terms in excess of one year are
as follows (in thousands):
Year Ended December 31,
-----------------------
1999.................................. $ 2,166
2000.................................. 1,549
2001.................................. 1,316
2002.................................. 1,110
2003.................................. 891
Thereafter............................... 3,377
--------
$ 10,409
========
13. MANAGEMENT CONTRACTS
The Company retained the management of 16 hotels at Spin-off. The
basis in these contracts at July 28, 1998, was $2.1 million and is
being amortized on a straight-line basis over the remaining lives of
the agreements. The amortization of the purchase price recorded from
July 28, 1998, through December 31, 1998, was $99,000. Management fee
income was $2.4 million in the period from July 28, 1998, through
December 31, 1998. 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
will cease to manage the Holiday Inn - Hollywood on March 31, 1999.
The owner of five properties currently managed by the Company has
notified the Company of its intent to sell these properties, and the
Company believes its management of these hotels could terminate upon
sale.
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. All employees
have been eligible for participation in the benefits provided through
the Trust. The Company provided $4.9 million related to these benefits
for the period from Inception through December 31, 1998.
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 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 401(k) Plan; however, only
the first 6% of pretax income is subject to matching by the Company.
The Company automatically makes matching contributions of 50% of the
employees' matchable contributions and may elect to make matching
contributions of up to an additional 50% of the employees' matchable
contributions subject to certain performance measures of the Company.
The Company provided for automatic matching contributions for the
period from Inception through December 31, 1998, totaling $1.0
million. The Company determined that it did not meet the performance
criteria necessary to make the discretionary 50% match contribution.
F-16
44
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BENEFITS (CONTINUED)
Therefore, the Company accrued no amounts during the period from
Inception to December 31, 1998, and reversed all amounts accrued by
the Predecessor for the period from January 1, 1998, through July 27,
1998, resulting in a reversal of expense of $963,000 during the
period.
15. COMMITMENTS AND CONTINGENCIES
Substantially all of the Company's hotel properties are 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., Promus Hotels, Inc., Hilton Inns, Inc., Hampton
Inn (a division of Promus Hotels, Inc.), Ramada Franchise Systems,
Inc. and Days Inns of America, 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 2018, and generally may not be terminated
without the payment of substantial fees. Franchise marketing and
royalty fees of $12.5 million were paid during the period from
Inception through December 31, 1998.
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, which would
be paid by the property owner.
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.
16. RELATED PARTY TRANSACTIONS
The Company and Bass entered into a hotel properties agreement (the
"Hotel Properties Agreement"). The Hotel Properties Agreement requires
that the Company must enter into standard franchise agreements for
hotels having an specified aggregate number of rooms by the following
dates: 3,000 rooms by April 1, 2001; 5,200 rooms by April 1, 2002; and
a total of 8,700 new Holiday Inn branded rooms by April 1, 2003. If
the Company fails to meet these thresholds by the required dates, the
Company could pay a monthly fee equal to $73.50 per room below the
threshold amount, until the Company meets the applicable threshold or
until March 31, 2006. Additionally, the Company has a right of first
refusal on any entity or other interest meeting certain criteria that
Bass wishes to acquire or develop, subject to certain limitations. The
above provisions of the Hotel Properties Agreement will expire the
earlier of (i) the date that Bass terminates its obligation upon six
months notice at any time after October 28, 1998, or (ii) the date
that Bass no longer holds a controlling interest in the franchisor of
the Holiday Inn brands.
F-17
45
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has agreed to enter into Franchise Agreements with Bass
pursuant to which certain properties will be rebranded to Holiday Inn
brands, subject to normal franchising procedures. Franchise fees for
these rebranded hotels will equal 1% in 1998, 3% in 1999 and 5% in
2000. Amounts paid to Bass pursuant to Franchise Agreements and
related marketing, advertising and reservation services were $18.0
million, including $11.2 million for franchise royalty and marketing
fees and $2.3 million of frequent guest program fees for the period
from Inception through December 31, 1998.
17. FAIR VALUE
The Company has estimated the fair value of its financial instruments
at December 31, 1998, 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 the fair values.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited consolidated quarterly results of operations for the
Company are as follows (in thousands, except per share amounts):
Inception - Third Fourth
June 30, 1998 Quarter Quarter
------------- ------- --------
Revenues................................. $ 132 $ 121,126 $ 173,660
Operating income (loss).................. (59) 2,041 1,759
Net income (loss) ....................... (59) 1,176 1,528
Earnings per common share:
Net income:
Basic............................. n/a $ 0.09 $ 0.09
Diluted........................... n/a $ 0.09 $ 0.09
Weighted average number of common
and common equivalent shares:
Basic............................. n/a 12,753 17,778
Diluted........................... n/a 12,921 17,909
Earnings per share and weighted average shares for the period from
Inception through June 30, 1998 are not presented. Prior to the
Spin-off, the Company was a wholly owned subsidiary of the
Predecessor.
Earnings per common share amounts and weighted average number of
common and common equivalent shares have been calculated in accordance
with SFAS 128. The sum of the earnings per common share for the
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.
F-18
46
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
REVENUE:
Rooms ............................................. $ 308,638 $ 377,380 $ 149,794
Food and beverage ................................. 68,999 92,596 44,344
Management fees ................................... 3,538 4,948 2,513
Other ............................................. 22,835 29,594 15,189
--------- --------- ---------
Total revenue .......................... 404,010 504,518 211,840
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms ......................................... 89,721 105,063 37,706
Food and beverage ............................. 54,751 69,766 31,282
Other ......................................... 5,424 9,326 4,528
Undistributed operating expenses:
Administrative and general .................... 41,517 44,255 18,266
Marketing ..................................... 29,169 34,439 15,555
Property operating costs ...................... 35,306 44,303 17,499
Property taxes, rent and insurance ............ 30,601 35,330 10,903
Depreciation and amortization ................. 34,300 39,690 18,377
Corporate expense ............................. 27,676 24,450 10,958
--------- --------- ---------
Operating income ...................................... 55,545 97,896 46,766
--------- --------- ---------
Other (income) expense:
Interest expense .................................. 30,892 44,591 18,616
Equity in income of joint ventures ................ (783) (1,916) --
--------- --------- ---------
Income before income taxes and extraordinary items .... 25,436 55,221 28,150
Income taxes .......................................... 10,175 22,007 10,401
--------- --------- --------
Income before extraordinary items ..................... 15,261 33,214 17,749
Extraordinary loss on early extinguishment
of debt, net of tax ............................... (25,689) (12,741) --
--------- --------- ---------
Net income (loss) ..................................... $ (10,428) $ 20,473 $ 17,749
========= ========= =========
Earnings (loss) per common and common equivalent share:
Income before extraordinary item:
Basic ......................................... $ 0.34 $ 0.89 $ 0.71
Diluted ....................................... $ 0.34 $ 0.87 $ 0.70
Net income (loss):
Basic ......................................... $ (0.23) $ 0.55 $ 0.71
Diluted ....................................... $ (0.23) $ 0.53 $ 0.70
Weighted average number of common and common
equivalent shares outstanding:
Basic ............................................. 44,380 37,359 24,849
Diluted ........................................... 45,194 38,332 25,526
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
47
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
December 31,
ASSETS 1997
------------
Current assets
Cash and cash equivalents ................................................. $ 86,167
Accounts receivable (net of allowance of $2,259) .......................... 31,305
Inventory ................................................................. 8,286
Deposits .................................................................. 7,569
Other current assets ...................................................... 1,729
----------
Total current assets ........................................... 135,056
----------
Property and equipment (net of accumulated depreciation of $76,172) ........... 1,439,167
Other assets
Restricted cash ........................................................... 9,283
Investments in joint ventures (net of accumulated amortization of $308) ... 12,396
Goodwill (net of accumulated amortization of $891) ........................ 52,773
Deferred charges and other non-current assets (net of
accumulated amortization of $1,965) ................................... 17,963
----------
Total assets ................................................... $1,666,638
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt ......................................... $ 8,455
Accounts payable and accrued expenses ..................................... 27,366
Accrued construction costs ................................................ 1,330
Accrued property, sales and use taxes ..................................... 15,911
Accrued insurance reserves ................................................ 9,530
Advance deposits .......................................................... 1,156
----------
Total current liabilities ...................................... 63,748
----------
Long-term debt, excluding current portion ..................................... 708,864
Deferred income taxes ......................................................... 242,530
Other liabilities ............................................................. 2,702
----------
Total liabilities .............................................. 1,017,844
----------
Common stock ($.01 par value; 150,000,000 shares authorized,
45,734,472 shares issued and 43,641,401 shares outstanding) ................ 436
Additional paid-in capital .................................................... 606,935
Other accumulated comprehensive income ........................................ 286
Retained earnings ............................................................. 41,137
----------
Total stockholders' equity ..................................... 648,794
----------
Total liabilities and stockholders' equity ..................... $1,666,638
==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
48
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ (10,428) $ 20,473 $ 17,749
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.............................. 34,300 39,690 18,377
Amortization of deferred financing fees.................... 1,609 2,749 2,062
Equity in earnings of joint ventures....................... 616 (1,399) --
Compensation expense recognized for
employee stock options.................................. 130 410 216
Unrealized gain on marketable securities................... -- (378)
Non-cash portion of extraordinary item, net of tax......... 5,095 11,009 --
Non-cash portion of foreign currency translation........... 1,276 -- --
Changes in assets and liabilities:
Changes in working capital................................. 5,791 1,645 (684)
Decrease (increase) in restricted cash..................... 1,263 (6,214) (2,449)
Distributions from joint ventures.......................... 90 650 --
Increase (decrease) in other liabilities................... (785) 217 (460)
Deferred tax provision..................................... 1,143 5,805 6,171
----------- ----------- ----------
Net cash provided by operating activities............... 40,100 75,035 40,604
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to property and equipment......................... (102,283) (54,071) (93,936)
Purchases of property and equipment, net
of associated debt.......................................... (9,000) (86,977) (6,300)
Sales of property and equipment................................ 4,750 -- --
Holiday Inn Acquisition, net of costs.......................... -- (400,159) --
Omaha Acquisition, net of assumed debt......................... (20,043) -- --
HI-Thomas Circle Settlement.................................... 4,100 -- --
Sales of marketable securities................................. -- -- 726
----------- ----------- ----------
Net cash used in investing activities................... (122,476) (541,207) (99,510)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Nomura Credit Facility........................... -- 600,000 --
Proceeds from New Credit Facility.............................. -- 560,000 --
Repayment of New Credit Facility............................... -- (560,000) --
Paydown of Senior Notes........................................ (30,000) (40,000) --
Proceeds from Offering, net of costs........................... -- 107,852 --
Early extinguishment of long-term debt......................... -- (133,540) --
Repayment of debt assumed in Omaha Acquisition................. (25,329) -- --
Borrowings under FelCor Facility............................... 120,000 -- --
Proceeds from BT Loan.......................................... 490,000 -- --
Repayment of Nomura Credit Facility............................ (455,000) -- --
Proceeds from exercise of employee stock options............... 1,633 -- --
Principal payments and extinguishment of long-term debt........ (13,508) (7,058) (4,826)
Proceeds from issuance of long-term debt....................... -- 43,410 66,976
Payment of offering costs...................................... -- -- (1,342)
Increase in deferred charges and other non-current assets...... (4,021) (22,991) (5,142)
----------- ----------- ----------
Net cash provided by financing activities............... 83,775 547,673 55,666
----------- ----------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
49
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents............... $ 1,399 $ 81,501 $ (3,240)
Cash and cash equivalents at beginning of period................... 86,167 4,666 7,906
----------- ----------- ----------
Cash and cash equivalents at end of period......................... $ 87,566 $ 86,167 $ 4,666
=========== =========== ==========
Supplemental cash flow information:
Interest paid.................................................. $ 28,955 $ 39,706 $ 17,696
=========== =========== ==========
Income taxes paid.............................................. $ 6,524 $ 10,942 $ 3,543
=========== =========== ==========
Non-cash investing and financing activities:
Debt assumed to acquire property and equipment................. $ 15,125 $ 21,813 $ --
=========== =========== ==========
Sale of non-hotel properties for assumption of liabilities..... $ -- $ -- $ --
=========== =========== ==========
Purchase of minority interest for common stock................. $ -- $ -- $ --
=========== =========== ==========
Common stock issued in Holiday Inn Acquisition..................... $ -- $ 267,967 $ --
=========== =========== ==========
Common stock issued in Omaha Acquisition........................... $ 40,000 $ -- $ --
=========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
50
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OTHER
COMMON STOCK ADDITIONAL UNREALIZED ACCUMULATED
--------------------- PAID-IN GAIN (LOSS) COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL ON SECURITIES INCOME EARNINGS TOTAL
-------- -------- ---------- ------------- ------------ ---------- -----
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
adjustment........................ -- -- -- -- 286 -- 286
Net income........................... -- -- -- -- -- 20,473 20,473
----------- ---------- --------- ----------- ----------- --------- -----------
Balance at December 31, 1997............ 43,641,401 436 606,935 -- 286 41,137 648,794
Employee stock options............... -- -- 130 -- -- -- 130
Exercise of employee stock options 165,000 2 1,631 -- -- -- 1,633
Issuance of stock in Omaha
Acquisition....................... 1,428,571 14 39,986 -- -- -- 40,000
Foreign currency translation
adjustment........................ -- -- -- -- 1,276 -- 1,276
Net loss............................. -- -- -- -- -- (10,428) (10,428)
----------- ---------- --------- ----------- ----------- ---------- ------------
Balance at July 27, 1998................ 45,234,972 $ 452 $ 648,682 $ -- $ 1,562 $ 30,709 $ 681,405
=========== ========== ========= =========== =========== ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
51
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
Net income (loss)..................................... $ (10,428) $ 20,473 $ 17,749
Other items of comprehensive earnings:
Cumulative foreign currency translation
adjustments................................... 1,276 286 --
----------- ------------ ------------
Comprehensive income (loss)........................... $ (9,152) $ 20,759 $ 17,749
=========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
52
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Bristol Hotel Company (the "BHC" or "Predecessor") is a Delaware
corporation which was incorporated in November 1994 and began
operations after the acquisitions of Harvey Hotel Company, Ltd. and
its subsidiaries. As of July 27, 1998, BHC owned 107 hotels and
managed 16 additional hotels, one of which was owned by joint ventures
in which BHC owned a 50% interest. The properties, which contain
approximately 32,700 rooms, are located in 27 states, the District of
Columbia and Canada. BHC acquired the ownership and/or management of
60 of these properties on April 28, 1997 (the "Holiday Inn
Acquisition").
On July 27, 1998, BHC's hotel operating business was spun off (the
"Spin-off") as a separate publicly traded company, Bristol Hotels &
Resorts ("BH&R"). Prior to the Spin-off, BH&R was a wholly owned
subsidiary of the Company. Following the Spin-off, BHC merged (the
"FelCor Merger") with FelCor Lodging Trust Incorporated ("FelCor").
The accompanying consolidated statements of operations, cash flows,
changes in stockholders' equity and comprehensive income (loss) for
the period from January 1, 1998, through July 27, 1998, are presented
as if the FelCor Merger and the Spin-off had not occurred. Therefore,
the effect of the gain on the Spin-off is not reflected in these
financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of BHC and its subsidiaries up to the date of the FelCor
Merger. The results of operations of the hotels acquired during the
period are included in the Predecessor's financial statements from the
date of acquisition. 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.
ACCOUNTS RECEIVABLE
Accounts receivable in the balance sheet are net of estimated
uncollectible amounts of $2,259,000 at December 31, 1997.
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 NON-CURRENT ASSETS
Deferred charges and other non-current assets consist primarily of
financing costs which are amortized over the life of the related loan.
The amounts reported in the balance sheet at December 31, 1997, are
net of accumulated amortization of $1,965,000.
F-25
53
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The Predecessor records acquisitions 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 period January 1, 1998, through July 27, 1998, and the year
ended December 31, 1997, was $6.4 million and $1.6 million,
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:
Buildings 35-40 years
Furniture, fixtures and equipment 3-15 years
Automobiles and trucks 5 years
Leasehold improvements Lease term or useful life,
whichever is less
Depreciation and amortization expense recorded for the period ended
July 27, 1998 and the years ended December 31, 1997 and 1996 was $34.3
million, $39.7 million, and $18.4 million, respectively.
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 Predecessor 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,
and as tax and insurance payments are made and improvements are
completed, the Predecessor is reimbursed from the reserves.
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
The Predecessor adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The objective
of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of
the period other than transactions with owners. Due to the Company's
Canadian operations, it engaged in transactions involving foreign
currency resulting in translation adjustments of approximately $1.6
million and $286,000 for the period January 1, 1998, through July 27,
1998, and the year ended December 31, 1997, respectively, which
resulted in a comprehensive loss of $9.2 million for the period
January 1, 1998, through July 27, 1998, and comprehensive income of
$20.8 million for the year ended December 31, 1997.
FOREIGN CURRENCY TRANSACTIONS
The Predecessor operates six hotels in Canada for which results of
operations are maintained in Canadian dollars and translated using
average exchange rates during the period. Currency transaction gains
and losses are included in net income and were a gain of $265,000 and
a loss of $303,000 for the period January 1, 1998, through July 27,
1998, and the year ended December 31, 1997, respectively. Assets and
liabilities are translated to U.S. dollars using the exchange rate in
effect at the balance sheet date. Cumulative currency translation
gains included in stockholders' equity at July 27, 1998, and December
31, 1997, were $1.6 million and $286,000, respectively.
F-26
54
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Predecessor accounts for income taxes under the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities using currently enacted tax rates
in effect for the years in which the differences are expected to
reverse.
EARNINGS PER SHARE
Earnings per share ("EPS") is determined by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during the year. All weighted average share and per share
data presented are calculated in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128"), which calls for both basic and diluted weighted average share
presentation. Weighted average shares is calculated using the treasury
stock method, giving effect to the common equivalent shares
outstanding as of July 27, 1998, and December 31, 1997 and 1996. The
common equivalent shares include officer and director stock options
which have been deemed exercised at the issue date using the treasury
method for the purposes of computing earnings per share. The
Predecessor has no other potentially dilutive securities.
The following table reconciles the computation of basic EPS to diluted
EPS:
PER SHARE
NET INCOME SHARES AMOUNT
--------------- ------ -------
($ in thousands)
For the period January 1, 1998, through
July 27, 1998:
Income before extraordinary item per share......... $ 15,261 44,379,739 $ 0.34
Effect of options.................................. - 814,744
---------- --------------
Income before extraordinary item per
share, assuming dilution........................ $ 15,261 45,194,483 $ 0.34
========== ==============
Net loss per share................................. $ (10,428) 44,379,739 $ (0.23)
Effect of options.................................. - 814,744
---------- --------------
Net loss per share, assuming dilution.............. $ (10,428) 45,194,483 $ (0.23)
=========== ==============
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
========== ==============
F-27
55
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (continued)
PER SHARE
NET INCOME SHARES AMOUNT
--------------- ------ -------
($ in thousands)
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
========== ==============
Earnings per share have been retroactively adjusted for the effect of
stock splits.
USE OF ESTIMATES
The Predecessor 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
Predecessor have been reclassified to conform to the current
presentation.
3. FELCOR MERGER AND THE SPIN-OFF
On July 27, 1998, the Predecessor's hotel operating business was spun
off as a separate publicly traded company, Bristol Hotels & Resorts.
The FelCor Merger was consummated following the Spin-off.
In the Spin-off, the Predecessor's stockholders received one common
share of BH&R stock for every two of their shares in the Predecessor.
In the FelCor Merger, the Predecessor's stockholders received 0.685
FelCor common shares for each of their existing shares in the
Predecessor. As a result of these transactions, former stockholders of
the Predecessor own all of BH&R's equity and 44% of FelCor's
outstanding common equity. The Spin-off was taxable to the Predecessor
and its stockholders, while the FelCor Merger was tax-free to FelCor
and Predecessor's stockholders.
After the FelCor Merger, all of Predecessor's hotels acquired by
FelCor are leased to and operated by BH&R.
F-28
56
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FELCOR MERGER AND THE SPIN-OFF (CONTINUED)
The assets spun off to BH&R by the Predecessor subsequent to July 27,
1998 consisted of (in thousands):
Cash........................................ $ 48,988
Non-cash assets............................. 75,834
Liabilities................................. (94,708)
--------------
Net assets to BH&R.......................... $ 30,114
=============
4. ACQUISITIONS
Holiday Inn Acquisition
On April 28, 1997, the Predecessor 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 Predecessor 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 Predecessor paid $398 million in cash and
issued 9,361,308 shares (pre-Stock Split) of its common stock. The
acquisition was 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.
Omaha Acquisition
On April 30, 1998, the Predecessor acquired 20 Midwestern hotels (the
"Omaha Acquisition"). The total consideration for these assets was
$40.4 million of assumed debt (of which $25.3 million was paid off at
closing), $20 million in cash and 1.43 million shares of the
Predecessor's common stock. The portfolio consists of nine
full-service Holiday Inns; five Holiday Inn 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 pro forma impact of this acquisition is not
material to the Predecessor's financial statements. BHC funded the
cash portion of the purchase price with borrowings under the FelCor
Facility (as defined in Note 6).
F-29
57
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
Single-Asset Acquisitions
Owned Hotels
The Predecessor completed the following single-asset acquisitions:
Date Number Purchase Debt
Acquired Location of Rooms Price Assumed
-------- -------- -------- -------- -------
April 1998 Leominster, MA 187 $ 9.0 million $ --
December 1997 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 444 $ 35.00 million $ --
May 1996 Plano, TX 161 $ 6.30 million $ --
(1) The Holiday Inn - San Jose North was previously owned by a
joint venture in which the Predecessor owned a 50% interest.
The Predecessor purchased the remaining 50% interest in the
venture for $4.25 million and, concurrent with the
acquisition, repaid all outstanding debt associated with the
property of $25.7 million.
Management Contracts and Leased Hotels
The Predecessor began operating the following hotels during 1998:
Number Managed/
Date Location of Rooms Leased
---- -------- -------- -------
May 1998 Secaucus, NJ 301 Managed
May 1998 Las Vegas, NV 128 Leased
5. PROPERTY AND EQUIPMENT
The Predecessor's properties are predominantly full-service hotels
that operate in the upscale and midprice with food and beverage
segments of the lodging industry under franchise agreements primarily
with Holiday Inn. The Predecessor maintained a geographically diverse
portfolio of hotels to offset the effects of regional economic cycles.
As of July 27, 1998, the Predecessor operated properties in 27 states,
the District of Columbia and Canada, including 13 hotels in
California, 11 in Georgia, 30 in Texas, six in Florida, and six in
Canada.
On June 9, 1998, the Predecessor sold the Holiday Inn - Winter Park
for $4.75 million cash.
As a result of the FelCor Merger, all of the Predecessor's hotels were
owned by FelCor subsequent to July 27, 1998.
6. LONG-TERM DEBT
The Predecessor obtained the financing for the Holiday Inn Acquisition
in 1997 under a 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
F-30
58
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
million and to fund the cash portion of the Holiday Inn Acquisition
and related closing costs. The Predecessor repaid $108 million of
borrowings from the New Credit Facility in May 1997 with proceeds from
the Offering (as defined in Note 9). The Predecessor 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 Predecessor incurred $479,000 of prepayment penalties
and wrote off $1.7 million in deferred financing costs.
On October 28, 1997, the Predecessor completed the refinancing of the
existing $560 million New Credit Facility. The new financing (the
"Nomura Credit Facility") 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. The
Predecessor 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 Predecessor prepaid $40 million of its 11.22% Senior Secured Notes
(the "Senior Notes") in December 1997. In conjunction with the
prepayment, the Predecessor amended the Senior Note indenture to allow
for a more flexible prepayment schedule. The Predecessor 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.
On April 21, 1998, the Predecessor entered into an interim credit
facility with FelCor pursuant to which the Predecessor could borrow up
to $120 million (the "FelCor Facility"). The FelCor Facility bears
interest at a rate of LIBOR plus 2% and matures on December 31, 2003.
As of July 27, 1998, the Predecessor had borrowed the entire $120
million available under this credit facility.
On May 11, 1998, the Predecessor refinanced $455 million of the Nomura
Credit Facility with a new $455 million loan from Bankers Trust
Company (the "BT Loan"). The BT Loan is secured by a pledge of stock
in the subsidiaries of BHC, bears interest at LIBOR plus 1-3/4% and
matures on May 11, 2001. The Predecessor incurred approximately $33.1
million in yield maintenance costs and prepayment penalties related to
the payoff of the existing facility which, along with $6.9 million of
deferred financing charges, resulted in an extraordinary loss of $40.1
million ($24.0 million, net of tax) in 1998. On July 24, 1998, the
Predecessor amended the BT Loan to provide for additional borrowing of
$35 million from Bankers Trust.
On June 15, 1998, the Predecessor prepaid the remaining $30 million of
its Senior Notes, and recognized an extraordinary loss of $2.8 million
($1.7 million, net of tax). The Predecessor paid $1.2 million in
prepayment penalties and wrote-off $1.6 million of deferred financing
fees and unamortized discount related to the Senior Notes.
As discussed in Note 13, portions of the mortgage loans associated
with three of the Predecessor's properties have been allocated to a
third party.
F-31
59
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Components of income tax expense from continuing operations for the
period from January 1, 1998, through July 27, 1998, and the years
ended December 31, 1997 and 1996, consist of the following (in
thousands):
1998 1997 1996
----------- ----------- -----------
Federal:
Current..................................... $ 4,797 $ 12,683 $ 4,486
Deferred.................................... 3,631 4,637 5,301
State:
Current..................................... 866 1,837 282
Deferred.................................... 655 509 332
Canada:
Current..................................... 226 1,618 --
Deferred.................................... -- 723 --
----------- ----------- -----------
$ 10,175 $ 22,007 $ 10,401
=========== =========== ===========
Components of income tax benefit from extraordinary items for the
period from January 1, 1998, through July 27, 1998, and the year ended
December 31, 1997, consist of the following (in thousands):
1998 1997
-------------- -------------
Federal:
Current.................................... $ 13,422 $ 7,358
Deferred................................... -- --
State:
Current.................................... 2,422 1,098
Deferred................................... -- --
Canada:
Current.................................... 1,281 --
Deferred................................... -- --
-------------- -------------
$ 17,125 $ 8,456
============== =============
The Predecessor estimates that its effective tax rate for 1998
approximated 41.24%. The actual income tax expense for the period from
January 1, 1998, through July 27, 1998, 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................... 35.00%
State income taxes, net of federal benefit
and permanent differences............................................. 5.17%
Effect of higher Canadian tax rates...................................... 1.07%
---------
41.24%
=========
F-32
60
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31, 1997
-----------------
Accounts payable.............................................. $ 2,921
Accrued payroll, payroll taxes and benefits................... 15,480
Accrued interest.............................................. 3,738
Accrued Holiday Inn Acquisition
costs/conversion costs..................................... 1,104
Other......................................................... 4,123
------------
$ 27,366
============
9. STOCKHOLDERS' EQUITY
On May 16, 1997, the Predecessor issued 2,750,000 (pre-Stock Split)
shares of its common stock at a price of $36 per share (the
"Offering"). The Predecessor 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).
On June 23, 1997, the Predecessor'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.
NON-EMPLOYEE DIRECTOR OPTIONS
The Predecessor instituted a Stock Option Plan for Non-Employee
Directors in 1995. Only members of the board who are not employees of
the Predecessor 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
July 27, 1998, a total of 52,500 options had been granted to the three
Eligible Directors on the board, 32,550 of which are currently
exercisable.
EMPLOYEE OPTIONS
Under the Amended and Restated 1995 Equity Incentive Plan, the
Predecessor could award options to purchase the Predecessor's stock to
participating officers and employees. 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
F-33
61
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE OPTIONS (continued)
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 1,803,141 employee options outstanding at July 27, 1998, of
which 597,900 were exercisable.
SFAS 123 DISCLOSURE
The Predecessor accounts 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 Predecessor's stock at the
date of the grant over the amount the employee must pay to acquire the
stock.
However, had compensation cost for these plans been determined
consistent with the method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Predecessor's net income (loss) and earnings (loss) per
share would have been reduced to the following pro forma amounts
(dollars in thousands, except per share amounts):
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
Net income (loss) As reported $ (10,428) $ 20,473 $ 17,749
Pro forma (11,435) 19,060 16,865
Basic EPS As reported (0.23) 0.55 0.71
Pro forma (0.26) 0.51 0.68
Diluted EPS As reported (0.23) 0.53 0.70
Pro forma (0.26) 0.50 0.67
A summary of the status of the Predecessor's stock option plan at July
27, 1998, December 31, 1997 and 1996, and changes during the period
from January 1, 1998, through July 27, 1998, and the years ended
December 31, 1997 and 1996, are presented in the table and narrative
below:
1998 1997 1996
------------------------ ------------------------ -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------------------------ --------------------------
Outstanding at January 1.............. 2,121,941 $ 14.10 1,613,363 $ 10.57 1,190,766 $ 8.41
Options granted....................... -- -- 520,400 25.06 435,000 16.39
Options exercised..................... (165,000) 9.18 (6,929) 16.47 -- --
Options expired....................... (101,300) 12.25 (4,893) 9.78 (12,403) 8.33
---------- -------- --------- -------- ----------- --------
Options outstanding at
period end......................... 1,855,641 $ 14.64 2,121,941 $ 14.10 1,613,363 $ 10.57
========= ======== ========= ======== ========= ========
Options exercisable at
period end......................... 630,450 $ 11.03 107,850 $ 16.60 5,100 $ 15.00
========= ======== ========= ========= ========= ========
Weighted average fair value of
options granted at issue date..... $ -- $ 14.23 $ 10.22
======== ========= ========
F-34
62
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
The 1,855,641 options outstanding at July 27, 1998, have exercise
prices between $8.33 and $28.25 (pre-merger) with a weighted average
exercise price of $14.64 and a weighted average remaining contractual
life of 7.6 years. At July 27, 1998, 630,450 of these options (with a
weighted average exercise price of $11.03) 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 and 1996:
risk-free interest rates from 5.99% to 7.04%; no expected dividend
yields; expected lives of one to nine years; and expected volatility
of 33.75%.
10. MANAGEMENT CONTRACTS
The Predecessor acquired the management of 15 hotels in the Holiday
Inn Acquisition, three of which were owned by joint ventures in which
the Predecessor 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 for the period January 1, 1998, through July
27, 1998, and the year ended December 31, 1997, was $1.5 million and
$878,000, respectively.
Management fee income for the period January 1, 1998, through July 27,
1998 and the years ended December 31, 1997 and 1996, was $3.5 million,
$4.9 million, and $2.5 million, respectively. 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 Predecessor cannot guarantee
that it will continue to manage these properties to the contract
expiration date.
11. INVESTMENTS IN JOINT VENTURES
The Predecessor 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 $45,000 and $308,000 was recorded in the
period January 1, 1998, through July 27, 1998, and the year ended
December 31, 1997. The Predecessor purchased its joint venture
partner's interest in Milpitas Joint Venture during 1997.
On July 24, 1998, in settlement of a dispute with its joint venture
partner, the Predecessor sold its 50% interest in the HI - Thomas
Circle Joint Venture to an affiliate of John Hancock Life Insurance
Company, its joint venture partner, for $4.1 million, resulting in a
loss of $664,000. The Predecessor continued to manage the property for
the owner.
12. BENEFITS
Health (including fully insured term life and accidental death and
dismemberment), dental and disability coverage is provided to the
Predecessor's employees through the Welfare Benefit Trust (the
"Trust"). The Predecessor maintains varying levels of stop-loss and
umbrella insurance policies to limit the Predecessor'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
F-35
63
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. BENEFITS (CONTINUED)
April 1, 1995, all employees have been eligible for participation in
the benefits provided through the Trust. The Predecessor provided $5.4
million, $6.1 million and $2.9 million related to these benefits for
period January 1, 1998, through July 27, 1998, and the years ended
December 31, 1997 and 1996, respectively.
The Predecessor 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 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 401(k) Plan;
however, only the first 6% of pretax income is subject to matching by
the Predecessor. Effective January 1, 1998, the Predecessor
automatically makes matching contributions of up to 50% of the
employees' matchable contributions, and may elect to make matching
contributions of an additional 50% of the employees' matchable
contributions, subject to certain performance measures of the
Predecessor. The Predecessor provided for matching contributions for
period January 1, 1998, through July 27, 1998, and the years ended
December 31, 1997 and 1996, totaling $2.5 million, $1.5 million and
$135,000, respectively.
13. COMMITMENTS AND CONTINGENCIES
Substantially all of the Predecessor's hotel properties are operated
pursuant to franchise or license agreements ("Franchise Agreements"),
primarily with Holiday Inn Franchising, Inc. or its affiliates. The
Predecessor also operates hotels under franchise agreements with
Marriott International, Inc., Hampton Inn (a division of Promus
Hotels, Inc.), Ramada Franchise Systems, Inc., Days Inns of America,
Inc., Promus Hotels, Inc. and Hilton Inns, 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 2018, and generally may not be
terminated without the payment of substantial fees. Franchise fees of
$18.0 million, $19.5 million and $4.1 million were paid during the
period January 1, 1998, through July 27, 1998, and 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 Predecessor 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
Predecessor's financial position or results of operations.
All of the owned hotels of the Predecessor 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 Predecessor's hotels have been inspected to
determine the presence of asbestos-containing materials ("ACM's").
While ACM's are present in certain of the Predecessor's properties,
operations and maintenance programs for maintaining such ACM's have
F-36
64
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
Predecessor'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 Predecessor 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 Predecessor remains contingently
liable for the environmental costs associated with the properties. At
such time that the Predecessor determines that it is not probable that
HH Land Company will fully pay the remediation costs related to the
disposed properties, the Predecessor will recognize such liabilities.
The Predecessor leases the land underlying several of its hotels under
various long-term leases through the year 2063. Lease payments under
the agreements were $9.4 million, $11.0 million and $2.6 million for
the period January 1 through July 27, 1998, and the years ended
December 31, 1997 and 1996, respectively.
The Predecessor and H. K. Huie, Jr., representing various land
ventures, are co-borrowers of funds secured by Harvey Hotel - DFW
Airport, Harvey Hotel - Dallas, Crowne Plaza Suites - Dallas, and the
various related land parcels. The Predecessor 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):
December 31, 1997
---------------------
Amount
Total Allocated
Debt to Huie
----- ---------
Harvey Hotel - DFW Airport.............. $ 24,275 $ 5,762
Harvey Hotel - Dallas................... 7,442 1,802
Crowne Plaza Suites - Dallas............ 19,378 4,298
The Predecessor is jointly and severally liable in the event of
nonpayment by Mr. Huie of the debt allocated. The allocated amounts
have not been reflected in the consolidated financial statements of
the Predecessor. However, the Predecessor 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.
F-37
65
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS
Concurrently with the Holiday Inn Acquisition, the Predecessor 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 Predecessor 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 Predecessor's owned, leased and managed hotels be
operated under a Holiday Inn brand, subject to certain limitations and
approvals. Additionally, the Predecessor 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. 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.
The Predecessor 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 $27.1 million and $21.8
million in for the period January 1, 1998, through July 27, 1998, and
the year ended December 31, 1997, including $18.1 million and $17.6
million for franchise royalty and marketing fees.
15. FAIR VALUE
The Predecessor 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 the 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.
F-38
66
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited consolidated quarterly results of operations for the
Predecessor are as follows (in thousands, except per share amounts):
1998
--------------------------------------
FIRST SECOND JULY 1 -
QUARTER QUARTER JULY 27
--------- --------- ----------
Revenues........................................... $ 158,802 $ 182,159 $ 63,049
Operating income (loss)............................ 30,897 36,778 (12,130)
Income before extraordinary item................... 11,362 15,028 (11,129)
Net income (loss) ................................. 11,362 (10,661) (11,129)
Earnings (loss) per common share:
Income (loss) before extraordinary item:
Basic....................................... $ 0.26 $ 0.34 $ (0.25)
Diluted..................................... $ 0.26 $ 0.33 $ (0.24)
Net income (loss):
Basic....................................... $ 0.26 $ (0.24) $ (0.25)
Diluted..................................... $ 0.26 $ (0.23) $ (0.24)
Weighted average number of common and
common equivalent shares:
Basic.......................................... 43,719 44,780 45,235
Diluted........................................ 44,535 45,606 46,013
1997
-------------------------------------------------
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 (loss) per common share:
Income 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....................................... 24,849 37,041 43,635 43,636
Diluted..................................... 25,797 37,998 44,643 44,629
1996
-------------------------------------------------
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
Net income ........................................ 3,863 4,375 6,835 2,676
Earnings per common share:
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....................................... 24,849 24,849 24,849 24,849
Diluted..................................... 25,511 25,553 25,531 25,524
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.
F-39
67
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
2.1 Spin-Off Agreement among the Company, the Predecessor and Bristol
Hotel Management Corporation (incorporated by reference to Exhibit 2.1
of the Company's Registration Statement on Form 10 [Commission File
No. 1-14047]).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form 10 [Commission File No. 1-14047]).
3.3 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.4 of the Company's Registration Statement on Form 10
[Commission File No. 1-14047]).
4.1 Registration Rights Agreement among the Company, Bass America Inc.,
Holiday Corporation and United/Harvey Holdings (incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on
Form 10 [Commission File No. 1-14047]).
4.2 Form of Stockholders' Agreement among the Company, Holiday
Corporation, Bass America Inc., Bass plc and United/Harvey Holdings
(incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form 10 [Commission File No. 1-14047]).
9.1 Voting and Cooperation Agreement among FelCor, the Predecessor, Bass
America Inc., Holiday Corporation and United/Harvey Holdings
(incorporated by reference to Exhibit 9.1 of the Company's
Registration Statement on Form 10 [Commission File No. 1-14047]).
10.1 1998 Bristol Hotels & Resorts Stock Purchase Plan (incorporated by
reference to Exhibit 99.1 of the Company's Registration Statement on
Form S-8 [333-58519] dated July 6, 1998).
10.2 Master Hotel Agreement among the Company, FelCor and FelCor Suites
Limited Partnership (incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form 10 [Commission File No.
1-14047]).
10.3 Hotel Properties Agreement between Holiday Hospitality and the Company
(incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement on Form 10 [Commission File No. 1-14047]).
10.4 Employment Agreement between the Company and J. Peter Kline
(incorporated by reference to Exhibit 10.12 to the Annual Report on
Form 10-K of Bristol Hotel Company filed with the SEC on March 30,
1998).
10.5 Employment Agreement with John A. Beckert (incorporated by reference
to Exhibit 10.13 to the Annual Report on Form 10-K of Bristol Hotel
Company filed with the SEC on March 30, 1998).
10.6 1998 Equity Incentive Plan (incorporated by reference to Exhibit 10.5
of the Company's Registration Statement on Form 10 [Commission File
No. 1-14047])
68
Exhibit
No. Description
- ------- -----------
10.7 1998 Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit 10.5 of the Company's Registration Statement on
Form 10 [Commission File No. 1-14047]).
10.8 Credit Agreement dated as of July 28, 1998 between the Company, the
Lenders and Bankers Trust Company as arranging agent and
administrative agent (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
10.9 Form of Lease Agreement between the Company and FelCor.
10.10 Amended and Restated 1995 Equity Incentive Plan (incorporated by
reference to Exhibit 10.15 of the Predecessor's Form S-4).
10.11 Stock Option Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.16 of the Predecessor's Form S-4).
11.1 Computation of earnings per common share of the Company.
11.2 Computation of earnings per common share of the Predecessor.
21.1 List of subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial data schedule.