<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 14, 1997
------------------------------------------------
Date of Report (Date of earliest event reported)
BRISTOL HOTEL COMPANY
14285 Midway Road, Suite 300
Dallas, Texas 75244
972-788-0001
Commission File No. 1-14062
Incorporated in Delaware IRS No. 75-2584227
Not applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
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<PAGE> 2
This Current Report on Form 8-K/A amends and restates in its entirety the
Current Report on Form 8-K filed by Bristol Hotel Company on March 14, 1997.
ITEM 5. OTHER EVENTS
Bristol Hotel Company (the "Parent Company") is the issuer of its 11.22%
Senior Notes due 2000 in the original principal amount of $70 million (the
"Senior Notes"). The Senior Notes are guaranteed by Bristol Hotel Asset
Company (the "Company"), a wholly owned subsidiary of the Parent Company. The
audited financial statements of Bristol Hotel Asset Company for the year ended
December 31, 1996 and the eleven months ended December 31, 1995 are attached as
Exhibit 99.1 hereto.
ITEM 7. FINANCIAL STATEMENT AND EXHIBITS.
Exhibit 99.1 Audited financial statements of Bristol Hotel Asset Company.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
BRISTOL HOTEL COMPANY
BY: /s/ Jeffrey P. Mayer
-----------------------------------
Jeffrey P. Mayer
Senior Vice President and Chief
Financial Officer
2
<PAGE> 3
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
99.1 Audited financial statements of Bristol Hotel Asset Company.
</TABLE>
3
<PAGE> 1
EXHIBIT 99.1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Reports of Independent Public Accountants . . . . . . . . . . . . 5
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 7
Consolidated Statements of Income . . . . . . . . . . . . . . . . 8
Consolidated Statements of Changes in Stockholder's Equity . . . . 9
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 10
Notes to Consolidated Financial Statements . . . . . . . . . . . . 12
</TABLE>
4
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Bristol Hotel Asset Company
We have audited the accompanying consolidated balance sheet of Bristol Hotel
Asset Company (a Delaware corporation) as of December 31, 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bristol Hotel Asset Company as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 11, 1997
5
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Bristol Hotel Asset Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in equity and of cash flows for
Bristol Hotel Asset ("Company"), present fairly, in all material respects, the
financial position of the Company at December 31, 1995 and the results of their
operations and their cash flows for the eleven months ended December 31, 1995,
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
February 23, 1996
6
<PAGE> 4
BRISTOL HOTEL ASSET COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 4,666 $ 7,906
Marketable securities . . . . . . . . . . . . . . . . . . 116 726
Accounts receivable (net of allowance of $344 and $620) . 10,501 10,959
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 3,320 2,880
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 5,404 7,604
Other current assets . . . . . . . . . . . . . . . . . . . 950 2,057
---------- ---------
Total current assets . . . . . . . . . . . . . . . . . . 24,957 32,132
---------- ---------
Property and equipment (net of accumulated depreciation of
$31,071 and $13,462) . . . . . . . . . . . . . . . . . 552,564 470,705
Other assets:
Restricted cash . . . . . . . . . . . . . . . . . . . . . 3,069 620
Deferred charges and other noncurrent assets (net of
accumulated amortization of $1,093 and $82) . . . . . . 8,174 4,353
---------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 588,764 $ 507,810
========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . $ 15,769 $ 6,582
Accounts payable and accrued expenses . . . . . . . . . . 13,765 16,911
Accrued construction costs . . . . . . . . . . . . . . . . 4,797 4,457
Accrued property, sales and use taxes . . . . . . . . . . 7,346 6,110
Accrued insurance . . . . . . . . . . . . . . . . . . . . 6,920 6,014
Advance deposits . . . . . . . . . . . . . . . . . . . . . 278 304
---------- ---------
Total current liabilities . . . . . . . . . . . . . . . 48,875 40,378
---------- ---------
Long-term debt, excluding current portion . . . . . . . . . . 148,585 96,062
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 75,619 69,448
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 2,351 2,811
---------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . 275,430 208,699
---------- ---------
Common stock . . . . . . . . . . . . . . . . . . . . . . . . -- --
Additional paid-in capital . . . . . . . . . . . . . . . . . 286,465 295,608
Unrealized gain on marketable securities, net . . . . . . . -- 262
Retained earnings . . . . . . . . . . . . . . . . . . . . . 26,869 3,241
---------- ---------
Total stockholder's equity . . . . . . . . . . . . . . . 313,334 299,111
---------- ---------
Total liabilities and stockholder's equity. . . . . . . . $ 588,764 $ 507,810
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 5
BRISTOL HOTEL ASSET COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Revenue:
Rooms . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149,794 $ 115,771
Food and beverage . . . . . . . . . . . . . . . . . . . . 44,344 36,070
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 17,702 13,354
---------- ---------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . 211,840 165,195
---------- ---------
Operating costs and expenses:
Departmental expenses:
Rooms . . . . . . . . . . . . . . . . . . . . . . . . . 37,706 32,692
Food and beverage . . . . . . . . . . . . . . . . . . . 31,282 27,118
Other . . . . . . . . . . . . . . . . . . . . . . . . . 4,528 4,258
Undistributed operating expenses:
Administrative and general . . . . . . . . . . . . . . . 18,266 16,184
Marketing . . . . . . . . . . . . . . . . . . . . . . . 15,555 12,070
Property operating costs . . . . . . . . . . . . . . . . 17,499 16,313
Property taxes, rent and insurance . . . . . . . . . . 8,147 5,761
Rent paid to affiliates . . . . . . . . . . . . . . . . 2,756 2,664
Depreciation and amortization . . . . . . . . . . . . . 18,377 13,505
Corporate expense . . . . . . . . . . . . . . . . . . . 10,958 8,035
---------- ---------
Operating income . . . . . . . . . . . . . . . . . . . . . . 46,766 26,595
---------- ---------
Other expenses:
Interest expense . . . . . . . . . . . . . . . . . . . . . 9,255 18,095
Other . . . . . . . . . . . . . . . . . . . . . . . . . . -- 257
---------- ---------
Income before minority interest, income taxes
and extraordinary item . . . . . . . . . . . . . . . . . 37,511 8,243
Minority interest . . . . . . . . . . . . . . . . . . . . . . -- 173
---------- ---------
Income before income taxes and extraordinary item . . . . . . 37,511 8,070
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 13,883 2,921
---------- ---------
Income before extraordinary item . . . . . . . . . . . . . . 23,628 5,149
Extraordinary loss on early . . . . . . . . . . . . . . . . .
extinguishment of debt, net of tax . . . . . . . . . . . -- (1,908)
---------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,628 $ 3,241
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 6
BRISTOL HOTEL ASSET COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON STOCK PAID-IN GAIN RETAINED
SHARES AMOUNT CAPITAL ON SECURITIES EARNINGS TOTAL
------ ------ ---------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1995 . . . . . . . . -- -- $ -- $ -- $ -- $ --
Unrealized gain on securities, net . . -- -- -- 262 -- 262
Issuance of Common Stock . . . . . . . 1,000 -- -- -- -- --
Equity contributions by Parent Company -- -- 295,608 -- -- 295,608
Net income . . . . . . . . . . . . . . -- -- -- -- 3,241 3,241
------- ------ -------- ----------- -------- ---------
Balance, December 31, 1995 1,000 -- 295,608 262 3,241 299,111
Reclass to trading securities . . . -- -- -- (262) -- (262)
Equity distributions to Parent Company -- -- (9,143) -- -- (9,143)
Net income . . . . . . . . . . . . . -- -- -- -- 23,628 23,628
------- ------ -------- ----------- -------- ---------
Balance, December 31, 1996 . . . . . . 1,000 -- $286,465 $ -- $ 26,869 $ 313,334
======= ====== ======== =========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE> 7
BRISTOL HOTEL ASSET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 23,628 $ 3,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 18,377 13,505
Amortization of deferred financing costs . . . . . . . 1,011 --
Other . . . . . . . . . . . . . . . . . . . . . . . . -- 602
Unrealized gain on marketable securities . . . . . . . (378) --
Extraordinary loss on early extinguishment
of debt, net of tax . . . . . . . . . . . . . . . . -- 1,908
Changes in assets and liabilities
Net change in working capital . . . . . . . . . . . . 2,635 (714)
Decrease (increase) in restricted cash . . . . . . . . (2,449) 2,860
Decrease in other liabilities . . . . . . . . . . . . (460) (4,440)
Increase (decrease) in deferred income taxes . . . . . 6,171 (326)
--------- ---------
Net cash provided by operating activities . . . . . 48,535 16,636
--------- ---------
Cash flows from investing activities:
Improvements to property and equipment . . . . . . . . (93,936) (60,941)
Purchases of property and equipment . . . . . . . . . (6,300) (20,000)
Sales of property and equipment . . . . . . . . . . . -- 4,711
Sales of marketable securities . . . . . . . . . . . . 726 --
--------- ---------
Net cash used in investing activities . . . . . . . (99,510) (76,230)
--------- ---------
Cash flows from financing activities:
Distributions to predecessor equity holders . . . . . -- (4,140)
Principal payments and extinguishment of
long-term debt . . . . . . . . . . . . . . . . . . . (5,266) (156,612)
Proceeds from issuance of long-term debt . . . . . . . 66,976 55,487
Contribution from (distribution to) Parent Company . . (9,143) 62,809
Proceeds from affiliate . . . . . . . . . . . . . . . -- 19,900
Proceeds from offering, net of offering costs . . . . -- 88,557
Dividend paid to minority partner . . . . . . . . . . -- (335)
Decrease in accounts receivable affiliate . . . . . . -- 542
Increase in deferred charges and other non-
current assets . . . . . . . . . . . . . . . . . . . (4,832) (4,121)
--------- ---------
Net cash provided by financing activities . . . . . 47,735 62,087
--------- ---------
Net increase (decrease) in cash and cash equivalents . . (3,240) 2,493
Cash and cash equivalents at beginning of period . . . . 7,906 5,413
--------- ---------
Cash and cash equivalents at end of period . . . . . . . $ 4,666 $ 7,906
========= =========
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE> 8
BRISTOL HOTEL ASSET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -------------------
<S> <C> <C>
Supplemental cash flow information:
Interest paid . . . . . . . . . . . . . . . . $ 9,907 $ 17,390
========= ==========
Income taxes paid . . . . . . . . . . . . . . $ 5,852 $ 2,685
========= ==========
Non-cash investing and financing activities:
Debt assumed to acquire property and equipment $ -- $ 12,100
========= ==========
Sale of non-hotel properties for assumption of
liabilities . . . . . . . . . . . . . . . . $ -- $ 4,723
========= ==========
Purchase of minority interest for common stock $ -- $ 1,110
========= ==========
Contribution to Parent Company . . . . . . . . $ -- $ 232,799
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 9
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Bristol Hotel Asset Company (the "Company") was formed on December 18, 1995 by
issuing 1,000 shares of common stock ($.01 par value) to Bristol Hotel Company
(the "Parent Company") at $1.00 per share in exchange for the Parent Company's
investment in certain subsidiaries. In addition, 15 entities (previously owned
by United Inns, Inc.), owning 24 hotels were merged into the Company on
December 18, 1995.
Prior to December 18, 1995, the Company was not a legal entity, but rather, a
combination of entities that were under common control of the Parent Company.
The operating results reflect the operations of the Company, which are
substantially those operations of the Parent Company, for the year ended
December 31, 1996 and the eleven months ended December 31, 1995.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Parent Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
The Company owns and/or operates 38 hotels located principally in the southern
United States. The 37 owned hotels range in size from 90 to 506 rooms and
suites and offer services to both businesses and transient travelers. In
addition, the Company manages one hotel containing 260 rooms. The Parent
Company is a Delaware corporation which began operations in February 1995 to
act as a holding company in connection with the acquisitions of Harvey Hotel
Company, Ltd. and its subsidiaries (together, "Harvey Hotel Companies" or
"Predecessor") and United Inns, Inc. ("United Inns") ("January Acquisitions")
(See Note 3).
Under the acquisition agreement between United/Harvey Holdings L.P. (a private
investment firm) ("Holdings"), Harvey Hotel Companies, H.K. Huie, Jr., the
Harvey Management Equity Holders (collectively, J. Peter Kline, Robert L.
Miars, John A. Beckert, Richard N. Beckert and Edward J. Rohling) and the other
parties thereto, the following occurred: (1) Holdings contributed to the Parent
Company all of the outstanding capital stock of United Inns, approximately
$15.1 million in cash and certain cash advances previously made for the benefit
of Harvey Hotel Companies in exchange for an aggregate of 68.1% of the Parent
Company's Common Stock, (2) the Harvey Management Equity Holders collectively
contributed to the Parent Company 46.4% of the outstanding partnership
interests in Harvey Hotel Companies in exchange for an aggregate of 20.6% of
the Parent Company's Common Stock and (3) Mr. Huie contributed 25.3% of his
50.6% outstanding partnership interest in Harvey Hotel Companies for 11.3% of
the Parent Company's Common Stock. In addition, Mr. Huie and two of his
daughters sold to the Parent Company approximately 27.3% of the outstanding
partnership interests in Harvey Hotel Companies for approximately $15.1 million
in cash plus interest.
As a result of these transactions, (1) Holdings, Mr. Huie and the Harvey
Management Equity Holders became the stockholders of the Parent Company, (2)
the Parent Company became the sole stockholder of United Inns, (3) the Parent
Company became the indirect owner of 99% of the outstanding partnership
interests in Harvey Hotel Companies, and in connection therewith, a wholly
owned subsidiary of the Parent Company became the managing general partner of
Harvey Hotel Companies. Subsequently one of Mr. Huie's daughters, who did not
participate in the January Acquisitions, sold her 1.0% limited partnership
interest in Harvey Hotel Companies (See Note 13).
The aggregate purchase price for Harvey Hotel Companies of $55 million in stock
and cash including the interests contributed by the Harvey Management Equity
Holders and Mr. Huie has been allocated, along with acquisition costs of $1
million, to the net assets acquired. The net assets contributed were valued at
their estimated fair value on the basis of an independent valuation performed
by Holdings and as a result of the cash paid for the 27.3% owned by Mr. Huie
and his two daughters. The excess of the purchase price over the net assets
acquired in the amount of $71.5 million was principally allocated to land and
buildings in accordance with the purchase method of accounting.
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. The accounts of United Inns and its subsidiaries
are included from the date of acquisition, February 1, 1995. All significant
interentity accounts and transactions have been eliminated.
12
<PAGE> 10
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
MARKETABLE SECURITIES
Marketable securities consist primarily of equity securities and mutual fund
shares. Equity securities have been classified as: (i) available-for-sale,
which are reported at fair value, with net unrealized gains and losses excluded
from earnings and reported as a separate component of changes in equity; or
(ii) trading securities, which are reported at fair value, with unrealized
holding gains and losses for trading securities included in earnings. At
December 31, 1995, the Company classified approximately $726,000 of marketable
securities as available-for-sale. During 1996, these were reclassified to
trading securities and sold in 1996. At December 31, 1996, all marketable
securities held by the Company were trading securities.
ACCOUNTS RECEIVABLE
Accounts receivable in the balance sheets are expected to be collected within
one year and are net of estimated uncollectible amounts of $344,000 and
$620,000 at December 31, 1996 and 1995, respectively.
INVENTORY
Inventory, consisting primarily of food and beverage products as well as
consumable supplies, is carried at the lower of cost or market. Cost is
determined on the first-in, first-out basis.
DEFERRED CHARGES AND OTHER NONCURRENT ASSETS
Deferred charges and other noncurrent assets consist primarily of financing
costs which are amortized over the life of the loan. The amounts reported in
the balance sheets at December 31, 1996 and 1995 are net of accumulated
amortization of $1,093,000 and $82,000, respectively.
PROPERTY AND EQUIPMENT
The Parent Company recorded the January 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 year ended
December 31, 1996 and the eleven months ended December 31, 1995, was $2,100,000
and $128,000, respectively.
The cost of normal repairs and maintenance that does not significantly extend
the life of the property and equipment is expensed as incurred. Depreciation is
computed on a straight-line method over the estimated useful lives of the
assets, as follows:
<TABLE>
<S> <C>
Buildings . . . . . . . . . . . . . . . . . . 40 years
Furniture, fixtures and equipment . . . . . . 3-15 years
Automobiles and trucks . . . . . . . . . . . . 3 years
Leasehold improvements . . . . . . . . . . . . Lease term or useful life,
whichever is less
</TABLE>
13
<PAGE> 11
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation and amortization expense recorded for the year ended December
31,1996 and the eleven months ended December 31, 1995 was $18.4 million and
$13.5 million, respectively.
RESTRICTED CASH
Restricted cash consists of (i) funds placed in reserve for the replacement of
furniture, fixtures and equipment and (ii) insurance reserves. The Company is
required to deposit with various lenders amounts of three percent to four
percent of hotel revenues. Deposits are made on either a monthly or quarterly
basis. As improvements are completed, the Company is reimbursed from the
replacement reserve.
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.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain financial statement items from the prior years for the Company have
been reclassified to conform with the current presentation.
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of " ("SFAS 121"). As of December 31, 1996, no impairment losses have
been incurred. However, the Company has classified certain limited-service
hotels as assets available for sale pursuant to SFAS 121 (see Note 4).
14
<PAGE> 12
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS
UNITED INNS ACQUISITION
In January 1995, Holdings entered into a merger agreement with United Inns.
Under this merger agreement, Holdings purchased most of United Inns'
then-outstanding shares of common stock pursuant to a tender offer and
therefore acquired United Inns' remaining equity by means of a cash merger
effective January 27, 1995.
The aggregate purchase price of United Inns was $67 million in cash plus the
assumption of United Inns' liabilities. Holdings recorded the acquisition of
United Inns using the purchase method of accounting. The purchase price was
allocated, along with acquisition costs of $5.1 million, to the net assets
acquired. The excess of the purchase price over net assets acquired in the
amount of $58.4 million was principally allocated to land and buildings in
accordance with the purchase method of accounting.
Holdings then contributed to the Parent Company all of the outstanding capital
stock of United Inns on January 31, 1995, as part of the January Acquisitions.
The Parent Company recorded the contribution of the capital stock of United
Inns by Holdings at Holdings' historical cost due to Holdings' ongoing
controlling common stock ownership. The consolidated statement of income for
the Company includes the results of operations for United Inns from February 1,
1995.
The following unaudited pro forma summary presents the combined results of
Harvey Hotel Companies as if United Inns had been acquired at the beginning of
1994. The pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations that would
actually have resulted had the acquisition been in effect on the date indicated
(in thousands):
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
MONTH ENDED YEAR ENDED
JANUARY 31, 1995 DECEMBER 31, 1994
---------------- -----------------
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . $ 13,142 $ 162,969
Net income (loss) after extraordinary gain and
pro forma income tax expense . . . . . . . . $ 1,111 $ (3,136)
</TABLE>
HOLIDAY INN ACQUISITION
On December 16, 1996, the Parent Company announced a definitive agreement (the
"Holiday Inns Merger Agreement") under which the Parent Company will acquire
the ownership and/or the management of 62 full-service company managed Holiday
Inn hotels in the U.S. and Canada (the "Holiday Inn Acquisition").
Pursuant to the Holiday Inns Merger Agreement and related documents, among
other things, (i) Holiday Inns, Inc. ("Holiday Inns") would merge with and
into the Company, (ii) the shares of Holiday Inn common stock outstanding
immediately prior to the Holiday Inn Acquisition would be converted into the
right to receive an aggregate of 2,391,286 shares of the Parent Company's
Common Stock, (iii) the Parent Company's certificate of incorporation would be
amended to increase the number of authorized shares of Common Stock from
75,000,000 to 150,000,000 and to remove the provisions therein relating to the
classification of the Parent Company's Board of Directors (the "Board"), and
(iv) the Board would be reconstituted so as to consist of the current members
thereof and three persons designated for election thereto by Holiday
Corporation, Holiday Inns' parent company. In addition, immediately following
the Holiday Inn Acquisition, the Parent Company would issue an additional
6,981,832 shares of the Parent Company's Common Stock in satisfaction of a
portion of the Holiday Inns debt assumed by the Company in the Holiday Inn
Acquisition and repay the remaining debt assumed ($300 million) with cash.
15
<PAGE> 13
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
Following the Holiday Inn Acquisition, the Company would be the largest Holiday
Inn franchisee in the world and one of the largest owner/operators of
full-service hotels in the United States. The Company's portfolio would consist
of 83 owned hotels containing approximately 24,000 rooms, 15 management
contracts and three Company-managed hotels owned by joint ventures in which the
Company will hold a 50% interest. In connection with the Holiday Inn
Acquisition, the Parent Company and Holiday Inns entered into various
agreements under which, subject to certain limitations, the Parent Company
would have the right to pursue certain hotel acquisition and development
opportunities presented to Holiday Corporation, and an affiliate of Holiday
Corporation would have the right to franchise the Acquired Holiday Assets at a
franchise fee of approximately 5%. The franchise fees for the Company's
existing hotels that will be converted to Holiday Inn brands will be 0% of room
revenues for the remainder of 1997, increasing to 1% in 1998, 3% in 1999 and 5%
in 2000.
Following the Holiday Inn Acquisition, the Company would be required, subject
to certain limitations, to offer Holiday Corporation the opportunity to enter
into a standard Holiday Corporation franchise agreement in effect at such time
with respect to each hotel located in the United States and Canada that the
Company manages, develops or acquires and that is reasonably appropriate to be
franchised as a Holiday Inn or Holiday Inn Select. The franchise fees to be
paid to Holiday Corporation by the Company pursuant to such franchise
agreements would be at market rates.The above provisions relating to franchise
opportunities would expire on the earliest to occur of (i) the effectiveness of
notice from Holiday Corporation to the Company of its intention to terminate
its obligations under these provisions (which notice could not be effective
until 24 months following the effective time of the Holiday Inn Acquisition)
and (ii) Holiday Corporation no longer holding a controlling equity interest in
the person that franchises the Holiday Inn and Holiday Inn Select brands or in
the person that directly or indirectly holds the intellectual property rights
related to the such brands.
Consummation of the Holiday Inn Acquisition is subject to certain closing
conditions, and there can be no assurance that the Holiday Inn Acquisition will
be consummated if any of such conditions are not satisfied.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . $ 50,528 $ 55,484
Buildings . . . . . . . . . . . . . . . . . . . . 406,682 354,887
Furniture, fixtures and equipment . . . . . . . . 74,827 36,951
--------- -----------
532,037 447,322
Less: accumulated depreciation . . . . . . . . (26,091) (13,462)
--------- -----------
505,946 433,860
Assets held for sale (net of accumulated
depreciation of $4,980) . . . . . . . . . . . 38,279 --
Construction in progress . . . . . . . . . . . . 8,339 36,845
--------- -----------
$ 552,564 $ 470,705
========= ===========
</TABLE>
The Company acquired the 159 room Holiday Inn in Plano, Texas for $6.3 million
in May, 1996 with proceeds from the Senior Term Facility. In November 1995, the
Company acquired the Dallas Downtown Hotel ("Dallas Downtown") for the
assumption of $7.3 million in outstanding debt and acquisition costs. In June
1995, the Company acquired a 368 room hotel (the "Sheraton-Atlanta") in
Atlanta, Georgia from Northeast Hotel Associates for $12.7 million. The Company
financed the acquisition of the Sheraton-Atlanta (which was later converted to
the Harvey Hotel brand) with a mortgage note payable of $12.1 million. The
mortgages on both the Sheraton-Atlanta and the Dallas
16
<PAGE> 14
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT (CONTINUED)
Downtown hotels were repaid with proceeds from the Offering (see Note 9 to the
Parent Company's financial statements) . These acquisitions were accounted for
using the purchase method of accounting; accordingly, the purchase price was
allocated based upon the estimated fair value of the individual assets.
Revenues and expenses for these hotels have been included with revenues and
expenses of the Company since the dates of their respective acquisitions.
Of the Company's 38 hotels, ten hotels are located in Dallas; ten hotels are
located in Atlanta; eight hotels are located in Houston; and four hotels are
located in Jackson, Mississippi. As a result, the Company's results of
operations and financial condition have been largely dependent on economic
conditions in these four metropolitan areas. However, upon the closing of the
Holiday Inn Acquisition (see Note 3), the Company's properties will be
geographically diverse. Following the Holiday Inn Acquisition, the Company
will operate properties in 23 states, the District of Columbia and Canada,
including multiple properties in Los Angeles, Memphis, Nashville, New Orleans,
Orlando, San Antonio and San Francisco, as well as six properties in Canada.
On January 31, 1997, subsequent to year end, the Company acquired the 382
room Allerton hotel, located on North Michigan Avenue in Chicago, Illinois for
$35 million, which was financed by borrowing from the Senior Term Facility.
The Company anticipates spending approximately $27 million in a comprehensive
refurbishment of the Allerton, which will operate as a Crowne Plaza hotel with
approximately 400 rooms upon completion.
During fiscal year 1996, the Company classified certain limited-service hotels
as assets held for sale pursuant to the provisions of SFAS 121. The Company
intends to focus its efforts on its full-service hotels, therefore, plans to
dispose of these limited-service properties. There was no definitive agreement
in place at December 31, 1996 for the sale of these properties. It is
anticipated that such a transaction could include the Company continuing to
operate the properties under lease or management agreements.
The results of operations for these limited-service properties included in the
income statements for the years ended December 31, 1996 and 1995 were:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Total revenues . . . . . . . . . . . $16,398 $14,552
Operating income . . . . . . . . . . 5,580 4,020
</TABLE>
The carrying value on the Company's balance sheet as of December 31, 1996 for
these limited-service properties was $38.3 million, which the Company believes
is less than the fair value of the properties. In accordance with SFAS 121,
the Company ceased recording depreciation for these assets in September 1996
when the decision to dispose of these assets was made.
5. MARKETABLE SECURITIES
In 1995, the Company classified certain equity securities as Available-for-Sale
Securities (per Statement of Financial Accounting Standard No. 115 "Accounting
for Certain Investments in Debt and Equity Securities"). Unrealized gains were
reported as a separate component of stockholder's equity. In May, 1996,
management resolved to sell the equity securities, and accordingly, the
securities were reclassified as Trading Securities and an unrealized gain of
approximately $450,000 was recorded in earnings in 1996. These securities were
sold during in August 1996.
17
<PAGE> 15
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Mortgage loans
Fixed rate:
8% due December 31, 2002 . . . . . . . . . . . . . . . $ 42,126 $ 44,436
8.55% due January 11, 2016 . . . . . . . . . . . . . . . 14,626 14,926
7.25% due September 30, 1997 . . . . . . . . . . . . . . 8,110 9,416
Non-interest bearing due December 31, 2002 . . . . . . . 9,086 10,600
Variable rate (as of December 31, 1996): . . . . . . . . .
7.75% Senior Term Facility due December 18, 1998 . . . . 66,976 --
10.26% due January 31, 2000 . . . . . . . . . . . . . . 9,300 9,450
10.25% due December 31, 1999 . . . . . . . . . . . . . . 6,899 7,021
8.5% due September 30, 1997 . . . . . . . . . . . . . . 1,500 1,500
Other long-term debt . . . . . . . . . . . . . . . . . . . . 4,329 3,298
Capital leases . . . . . . . . . . . . . . . . . . . . . . . 1,402 1,997
--------- ---------
164,354 102,644
Less current portion . . . . . . . . . . . . . . . . . . . (15,769) (6,582)
--------- ---------
Long-term debt, excluding current portion . . . . . . . . $ 148,585 $ 96,062
========= =========
</TABLE>
The mortgages are amortized using varying methods as provided in the individual
debt agreements. Variable rate mortgages are indexed to prime, LIBOR or the
GECC composite commercial paper rate, which were 8.25 %, 5.5% and 5.51% at
December 31, 1996, respectively. Substantially all of the Company's properties
and equipment are pledged as collateral on mortgage obligations.
On December 18, 1995, concurrent with the Parent Company's initial public
offering (See Note 9 to the Parent Company's financial statements), the Company
entered into a Term Credit Agreement with Bankers Trust Company ("Bankers
Trust") pursuant to which Bankers Trust provided for a secured senior credit
facility (the "Senior Term Facility") in the maximum principal amount of $120
million. Pursuant to the Senior Term Facility, the Company could borrow $60
million to fund the renovation of certain of the Acquired Properties. In
addition, the Company may borrow up to $60 million for the acquisition and
related refurbishment of additional hotel assets to the extent the Company
satisfies certain financial tests. The Senior Term Facility imposes certain
restrictions on the Company and certain of its subsidiaries to incur additional
debt, impose liens or mortgages on their properties, extend new guarantees, pay
dividends, repurchase their common stock, make investments and incur capital
expenditures. The Senior Term Facility matures December 18, 1998, and advances
thereunder bear interest at a rate equal to, at the election of the Company,
one-, two-, three- or six-month LIBOR plus 2.25%, payable monthly in arrears.
Additionally, the Company is required to pay an administration fee of $120,000
per annum, and a quarterly commitment fee equal to .375% per annum of any
unused portion of the Senior Term Facility. As of December 31, 1996, the
Company had borrowed $60 million for renovation costs related to the
Acquisition Properties and approximately $7 million for the purchase and
renovation of the Holiday Inn - Plano.
The Company retired approximately $138 million of outstanding debt with the
initial public offering (the "Offering") and funding of $70 million in senior
debt which was contributed by the Parent Company (see Note 13). The
extinguishment of debt resulted in an extraordinary loss of $1.9 million, net
of a tax benefit of $1 million.
As discussed in Note 14, portions of the mortgage loans associated with three
of the Company's properties have been allocated to a related party.
18
<PAGE> 16
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT (CONTINUED)
The aggregate maturities of long-term debt for the five years subsequent to
December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,769
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,629
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,787
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,759
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,917
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,493
----------
$ 164,354
==========
</TABLE>
7. INCOME TAXES
The following income tax calculation is presented on a pro forma basis,
assuming that the Company files its federal income tax returns without benefit
of the Parent Company. In reality the Company is part of the consolidated
group with the Parent Company for purposes of federal income tax calculation.
Components of income tax expense for the year ended December 31, 1996 and the
eleven months ended December 31, 1995, consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Federal:
Current . . . . . . . . . . . . . . . . . . . . $ 7,761 $ 3,338
Deferred . . . . . . . . . . . . . . . . . . . 5,301 (579)
State:
Current . . . . . . . . . . . . . . . . . . . . 488 196
Deferred . . . . . . . . . . . . . . . . . . . . 333 (34)
--------- ----------
$ 13,883 $ 2,921
========= ==========
</TABLE>
The Company estimates that its effective tax rate for 1996 approximated 37.2%.
The actual income tax expense for the year ended December 31, 1996, is computed
by applying the federal statutory income tax rate as a result of the following:
<TABLE>
<S> <C>
Income tax expense at the federal statutory rate . . . . . . . . 35.0%
State income taxes, net of federal benefit . . . . . . . . . . . 2.2
----
37.2%
====
</TABLE>
19
<PAGE> 17
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Purchase accounting adjustments to land and building. . . $ 85,134 $ 81,118
Other . . . . . . . . . . . . . . . . . . . . . . . . . -- 278
--------- -----------
Gross deferred tax liabilities . . . . . . . . . . . . . 85,134 81,396
--------- -----------
Tax credits and NOL carryforwards . . . . . . . . . . . 5,502 8,200
Accrued reserves . . . . . . . . . . . . . . . . . . . . 2,192 2,779
Other . . . . . . . . . . . . . . . . . . . . . . . . . 1,821 969
--------- -----------
Gross deferred tax asset . . . . . . . . . . . . . . . . 9,515 11,948
Valuation allowance . . . . . . . . . . . . . . . . . . -- --
--------- -----------
Deferred tax asset . . . . . . . . . . . . . . . . . . . 9,515 11,948
--------- -----------
Net deferred tax liability . . . . . . . . . . . . . . . $ 75,619 $ 69,448
========= ===========
</TABLE>
The gross deferred tax liabilities relate principally to the temporary
differences caused by the purchase accounting adjustments recorded as a result
of the January Acquisitions. For financial reporting purposes, the transactions
were recorded under the principles of purchase accounting and, accordingly, the
basis of the assets have been adjusted to fair market value. For tax reporting
purposes, the transactions resulted in the bases of the assets and liabilities
being carried forward at their adjusted bases with some adjustment for certain
gains recognized on the acquisition. This differing treatment has created book
bases in excess of tax bases and, accordingly, the related deferred tax
liabilities associated with these differences have been recorded. As the
Company depreciates and amortizes the bases of its assets for book and tax
purposes, it will record an expense for depreciation and amortization in excess
of that claimed for tax purposes. This reversal of the temporary differences
established through purchase accounting will result in the Company recording a
credit to deferred tax expense for the tax effect of these differences.
The remaining deferred tax assets are expected to be realized in future periods
through the reversal of existing taxable temporary differences.
For federal tax reporting purposes, net operating losses of $12,166,000 and tax
credits of $657,000 generated by United Inns in prior years are available to be
carried forward to periods expiring as follows (in thousands):
<TABLE>
<CAPTION>
YEAR OF EXPIRATION FEDERAL NOL TAX CREDITS
------------------ ----------- -----------
<S> <C> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 142
2002 . . . . . . . . . . . . . . . . . . . . . . . . -- 154
2003 . . . . . . . . . . . . . . . . . . . . . . . . 986 158
2004 . . . . . . . . . . . . . . . . . . . . . . . . -- 103
2005 . . . . . . . . . . . . . . . . . . . . . . . . 7,557 58
2006 to 2010 . . . . . . . . . . . . . . . . . . . . 3,623 42
-------- --------
$ 12,166 $ 657
======== ========
</TABLE>
The losses are subject to the loss limitation rules due to the change in
ownership of United Inns. Net operating losses generated by United Inns and its
subsidiaries are further limited as they were incurred prior to their ownership
by the Company. Accordingly, these losses are available only to offset the
income generated by United Inns and its subsidiaries and will be limited to
$4.6 million annually.
20
<PAGE> 18
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Accounts payable . . . . . . . . . . . . . . . . . $ 1,689 $ 5,064
Accrued payroll and payroll taxes . . . . . . . . 5,208 2,963
Accrued interest . . . . . . . . . . . . . . . . . 650 1,666
Other . . . . . . . . . . . . . . . . . . . . . . 6,218 7,218
-------- ---------
$ 13,765 $ 16,911
======== =========
</TABLE>
9. STOCKHOLDER'S EQUITY
On December 18, 1995, the Company was capitalized by issuing 1,000 shares of
common stock ($.01 par value) for $1.00 per share. Concurrent with the
issuance of common stock, the Parent Company contributed approximately $301
million in equity from the proceeds of the debt refinancing and the Offering to
the Company. These proceeds were used by the Company to extinguish outstanding
debt.
10. OPERATING LEASES
The Company leases certain land (see Note 14), office space and equipment under
noncancellable operating lease commitments. Minimum rentals due under these
agreements for the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,774
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,787
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,797
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,620
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,451
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,387
-------
$61,816
=======
</TABLE>
The Company leases certain hotel space to third party vendors. Future minimum
rentals to be received under noncancellable operating leases that have initial
or remaining lease terms in excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,344
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
-------
$ 2,088
=======
</TABLE>
21
<PAGE> 19
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. MANAGEMENT CONTRACTS
At December 31, 1996, the Company has contracted to manage one hotel owned by
others. Harvey Hotel Wichita is owned by Starwood Lodging Trust and Starwood
Lodging Corporation, a publicly traded real estate investment trust. The
management agreement provides that for years ending after December 31, 1994,
the Company will receive a base management fee equal to 2% of gross income to
the extent that excess cash flow (as defined in the management agreement) is
sufficient to pay such base management fee. In addition, the Company is
entitled to an annual incentive fee equal to 25% of excess cash flow plus 25%
of the amount by which net operating income exceeds projected net operating
income. The management agreement has a five-year term expiring on December 20,
1998, subject to earlier termination or extension under certain circumstances.
The owner of the hotel may terminate the agreement upon fifteen days notice and
the payment of a termination fee in an amount equal to the average monthly fee
times the number of months remaining under the agreement. Both the base
management fee and the incentive management fee are subordinate to a preference
fee that is paid to the owners. Management fees for the year ended December
31, 1996 and the eleven months ended December 31, 1995 were $227,000 and
$396,000, respectively.
The Company managed the Harvey Hotel Downtown Dallas from November 1, 1994
until December 20, 1996. The management agreement with the owner provided for a
monthly management fee of 4% of gross monthly revenues, as defined in the
agreement. The agreement also provided for an incentive management fee to be
paid annually based on hotel performance. The agreement was terminated upon
the sale of the property by the owner. Management fees received under this
contract for the year ended December 31, 1996 and the eleven months ended
December 31, 1995 were $1,790,000 and $986,000, respectively. The Company also
received a $600,000 ($500,000 net of certain expenses) early termination fee
from the property owner upon termination of the management contract.
12. BENEFITS
Health (including fully insured term life and accidental death and
dismemberment), dental and disability coverage is provided to the Company's
employees through a Welfare Benefit Trust (the "Trust"). The Company maintains
varying levels of stop-loss and umbrella insurance policies to limit the
Company's per occurrence and aggregate liability in any given year. Actual
claims and premiums on stop-loss insurance, medical and disability policies are
paid from the Trust. The Trust is funded through a combination of employer and
employee contributions. The Trust also pays work-related injury claims which
are funded by the employer for its employees in Texas. Since April 1, 1995, all
employees have been eligible for participation in the benefits provided through
the Trust. The Company provided $2.9 million and $2.3 million related to these
benefits as of December 31, 1996 and 1995, respectively.
The Company offers a Profit Sharing Plan and Trust ("401(k) Plan") to certain
employees. The 401(k) Plan is designed to be a qualified trust under section
401(a) of the Internal Revenue Code. Under the 401(k) Plan, eligible employees
are allowed to defer up to 16% of their income on a pretax basis through
contributions to the Plan; however, only the first 6% of pretax income is
subject to matching by the Company. The Company may elect to make matching
contributions of up to 50% of the employees' matchable contributions subject to
certain performance measures of the Company. The Company provided for matching
contributions for the year ended December 31, 1996 and the eleven months ended
December 31, 1995 totaling $135,000 and $343,000, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company is the guarantor on the $70 million, 11.22% Senior Notes due 2000
issued by the Parent Company.
Under the terms of the hotel franchise agreements expiring at various dates
through 2016, the Company is obligated to pay certain fees for franchising
royalties, reservation and advertising services. Franchise fees paid for the
year ended December 31, 1996 and the eleven months ended December 31, 1995 were
$4.1 million and $3.3 million, respectively.
22
<PAGE> 20
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is currently involved in certain guest and customer claims,
employee wage claims and other disputed amounts arising in the ordinary course
of business. In the opinion of management, the pending litigation will not have
a materially adverse effect on the Company's financial position or results of
operations.
In connection with the administration of the Dallas County Probate Court of the
estate of the deceased wife of H.K. Huie, Jr., one of Mr. Huie's daughters
(the "Plaintiff"), alleged self dealing and breach of duty and trust by Mr.
Huie as executor and testamentary trustee under his wife's will and in
connection with his actions as the managing general partner of Harvey Hotel
Company and related partnerships and ventures (the "Probate Proceeding").
Several of the Company's officers and certain subsidiaries were also named
defendants in the Probate Proceeding. In November 1995, the Company and the
Plaintiff entered into a settlement agreement and release (the "Settlement
Agreement") pursuant to which Plaintiff agreed to release the Company,
including its subsidiaries from the lawsuit. Pursuant to the Settlement
Agreement, the Company paid an aggregate of $2.4 million for the Plaintiff's 1%
interest in Harvey Hotel Company and a full release from all claims and causes
of action. However, at that time, the named officers remained defendants in
the Probate Proceeding.
In the summer of 1996, during continuing mediation with the officers, the
Plaintiff threatened the Company with further action, claiming fraud and
misrepresentation in the negotiation of the November, 1995, Settlement
Agreement. In August, 1996, there was a final resolution of the Probate
Proceeding, a result of which the Company paid an additional $0.75 million for
the full satisfaction of all claims and causes of action which could be
asserted against the Company, its subsidiaries or its officers. The Company
had reserved $1.65 million for this litigation. As a result, the Company
recognized $0.9 million ($0.6 million after tax) as other income during the
third quarter of 1996.
United Inns is presently under examination by the Tennessee Department of
Revenue. The Company has determined and provided for an estimated liability. In
the opinion of management, the outcome of this examination will not have a
material adverse effect on the Company's business, assets or results of
operations.
All of the owned hotels of the Company have undergone Phase I environmental
assessments which generally provide a physical inspection and data base search
but not soil or groundwater analysis. In addition, most of the Company's hotels
have been inspected to determine the presence of asbestos-containing materials
("ACM's"). While ACM's are present in certain of the Company's properties,
operations and maintenance programs for maintaining such ACM's have been
designed and 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
has revealed any environmental condition that management believes would have a
material adverse effect on the Company's business, assets or results of
operations, nor is management aware of any such condition. However, it is
possible that these assessments have not revealed all potential environmental
liabilities or that there are material environmental liabilities of which
management is not aware.
The Company leases the land underlying three of its Dallas hotels, the Harvey -
DFW, Bristol Suites, and Harvey - Dallas, from entities controlled by H. K.
Huie (the "Huie Land Ventures"). These leases include provisions by which the
Huie Land Venture can require the Company to purchase the land at a specified
price per parcel, less associated debt (see Note 14 for further discussion of
the debt). Additionally, pursuant to the terms of the leases, the Company can
require the Huie Land Ventures to sell the land to the Company at the same
specified price less related debt referred to above on the following
conditions: (i) if the Company has decided to sell or exchange its interest in
the leasehold or (ii) on the occurrence of the death, incapacity or bankruptcy
of H.K. Huie, Jr. or any transfer, sale, conveyance or other event which
results in the loss by H. K. Huie, Jr. of the control of the Huie Land
Ventures. The Company also has a Right of First Refusal if the Huie Land
Venture receives an offer from a third party to purchase the land. As of
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<PAGE> 21
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
December 31, 1996, neither the Company nor the Huie Land Ventures had
notified the other party of an interest to exercise any of these options.
As discussed further in Note 14, the Company disposed of certain of its
non-hotel properties to HH Land Company, L.P. ("HH Land Company"), a related
party. Upon acquisition of the non-hotel properties, HH Land Company assumed
all liabilities associated with the non-hotel properties through a formal
indemnification agreement, including environmental liabilities associated with
the properties. The Company remains contingently liable for the environmental
costs associated with the properties. At such time that the Company determines
that it is not probable that HH Land Company will fully pay the remediation
costs related to the disposed properties, the Company will recognize such
liabilities.
The Company has contracted to manage the Alpha Suites hotel, which is owned by
H.K. Huie, Jr. The property is currently under construction, with completion
anticipated in the fall of 1997. The Company's management contract is for
three years, and provides for a management fee of 4% of gross revenue, an
accounting fee of 1% of gross revenue and an incentive management fee of 30% of
operating profit.
14. TRANSACTIONS WITH RELATED PARTIES
In September 1995, the Company disposed of certain of its non-hotel properties
which management believed were not integral to the Company's operations. To
effect this disposition, Holdings and Harvey Management Equity Holders formed
HH Land Company, which acquired six parcels of real property and all of the
capital stock of certain subsidiaries of United Inns which owned or had owned
certain non-hotel properties and other assets. The assets mainly consisted of
two car wash operations and undeveloped tracts of land. The aggregate purchase
price was $87,000 and the assumption of all liabilities (including
environmental liabilities) and risk relating to those acquired properties. The
Company believes that the terms of such sales approximated the fair market
value of assets sold.
Until September 30, 1996, the Company leased its home office space from
Huie-Miars Midway Atriums J.V., which is owned 75% by Mr. Huie and 25% by
Robert L. Miars (an officer of the Company), on a five-year lease. Rent expense
reflected in the financial statements for the year ended December 31, 1996 and
the eleven months ended December 31, 1995, were $347,000 and $282,000,
respectively. Prior to April 1995, the Predecessor leased its home office
space from Huie Properties on a month-to-month basis by sharing the pro rata
cost of the facility. Expenses for such lease reflected in these financial
statements was $346,000 for the eleven months ended December 31, 1995.
Huie Properties and Huie Miars Construction Corporation, which is owned 50% by
Mr. Huie and 50% by Robert L. Miars, provided maintenance and construction
services to the Company on a routine basis, including the construction of new
hotels and the renovation of existing properties. The Company incurred
$119,000 for construction management fees during the eleven months ended
December 31, 1995.
The Company and Mr. Huie, representing various land ventures, are co-borrowers
of funds secured by Harvey Hotel -DFW Airport, Harvey Hotel - Dallas and
Bristol Suites and the various related land parcels. The Company and Mr. Huie
agreed to an assignment of the debt to the various unrelated land ventures
resulting in the assignment of 23.73%, 24.24% and 22.18% of the debt associated
with the borrowings for each property, respectively.
24
<PAGE> 22
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
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):
<TABLE>
<CAPTION>
1996 1995
----------------------- ----------------------
TOTAL ALLOCATED TOTAL ALLOCATED
DEBT TO HUIE DEBT TO HUIE
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Harvey Hotel - DFW Airport . . . . . . . . $ 25,581 $ 6,071 $ 27,225 $ 6,462
Harvey Hotel - Dallas . . . . . . . . . . 7,600 1,843 7,756 1,880
Bristol Suites . . . . . . . . . . . . . . 20,756 4,604 22,532 4,998
</TABLE>
The Company is jointly and severally liable in the event of nonpayment by Mr.
Huie of the debt allocated. The allocated debt totaling $12.5 million and
$13.3 million at December 31, 1996 and 1995, respectively, has not been
reflected in these consolidated financial statements.
The land leases for the Harvey Hotel - DFW Airport, the Harvey Hotel - Dallas
and the Bristol Suites expire on December 31, 2037, September 14, 2030 and
April 30, 2035, respectively. Harvey Hotel - DFW Airport pays monthly land rent
in the amount of the greater of (i) 6% of gross monthly revenue or (ii)
approximately $50,000 per month. Harvey Hotel - Dallas pays monthly land rent
in the amount of the greater of (i) 4% of gross revenues or (ii) $15,000.
Effective January 1, 2000, the rent will be recalculated based upon the
consumer price index; however, it will not be less than $20,000 per month nor
more than $40,000 per month. Bristol Suites pays monthly land rent in the
amount of the greater of (i) 6% of gross monthly rental revenue or (ii) $49,000
per month. Total land rentals for the above properties for the year ended
December 31, 1996 and the eleven months ended December 31, 1995 were $2.3
million and $2.0 million, respectively.
The Company has contracted to manage the Alpha Suites hotel for Mr. Huie. The
construction of the hotel is expected to be completed in the fall of 1997, at
which time the Company will begin management (see Note 13 for further
discussion).
15. FAIR VALUE
The Company has estimated the fair value of its financial instruments at
December 31, 1996 and 1995, as required by Statement of Financial Accounting
Standards No. 107, "Disclosure about Fair Value of Financial Instruments." The
carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair values.
Marketable securities are carried at fair value, which is determined based upon
quoted market prices. The carrying values of variable and fixed rate debt are
reasonable estimates of their fair values.
16. SUBSEQUENT EVENTS
On January 31, 1997, the Company purchased the 382 room Allerton Hotel, located
on North Michigan Avenue in Chicago, Illinois for $35 million, funded from
borrowings from the Senior Term Facility. The Company anticipates spending
approximately an additional $27 million in a comprehensive refurbishment of the
Allerton, which, when completed, will operate under the Crowne Plaza brand with
approximately 400 rooms.
On March 6, 1997, the Parent Company filed a Form S-3 Registration Statement
under the Securities Act of 1933 which provides for the future issuances by the
Parent Company of up to $500 million of equity or debt securities.
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