<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------------------
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 30, 1998
Date of Report (Date of earliest event reported)
BRISTOL HOTEL COMPANY
14295 Midway Road
Dallas, Texas 75244
972-391-3910
Commission File No. 1-14062
Incorporated in Delaware IRS No. 75-2584227
Not applicable
(Former name or former address, if changed since last report)
================================================================================
<PAGE> 2
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, 1997 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/ John D. Bailey
--------------------------------------
John D. Bailey
Vice President, Controller and Chief
Accounting 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 NO.
--------
<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 sheets of Bristol Hotel
Asset Company (a Delaware corporation) as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholder's equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bristol Hotel Asset Company as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 6, 1998 (except with respect
to the matter discussed in Note 18,
as to which the date is March 25, 1998)
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 statements of income, of changes
in equity and of cash flows for Bristol Hotel Asset Company ("Company"), present
fairly, in all material respects, the results of its operations and its 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 audit. We conducted our audit
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 audit provides 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 SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................................................ $ 85,996 $ 4,666
Trading securities ....................................................... 103 116
Accounts receivable (net of allowance of $2,255 and $344)) ............... 29,675 10,501
Inventory ................................................................ 8,140 3,320
Deposits ................................................................. 7,567 5,404
Other current assets ..................................................... 1,601 950
---------- ----------
Total current assets ............................................ 133,082 24,957
---------- ----------
Property and equipment (net of accumulated
depreciation of $75,925 and $31,071) ...................................... 1,406,776 552,564
Other assets
Restricted cash .......................................................... 9,662 3,069
Investment in joint venture, net ......................................... 8,101 --
Goodwill (net of accumulated amortization of $868 and $0) ................ 51,705 --
Deferred charges and other noncurrent assets
(net of accumulated amortization of $180 and $1,093) ................. 13,124 8,174
---------- ----------
Total assets .................................................... $1,622,450 $ 588,764
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt ........................................ $ 8,137 $ 15,769
Accounts payable and accrued expenses .................................... 31,340 13,765
Accrued construction costs ............................................... 1,330 4,797
Accrued property, sales and use taxes .................................... 15,880 7,346
Accrued insurance ........................................................ 9,530 6,920
Advance deposits ......................................................... 1,156 278
---------- ----------
Total current liabilities ....................................... 67,373 48,875
---------- ----------
Long-term debt, excluding current portion ..................................... 666,312 148,585
Deferred income taxes ......................................................... 240,497 75,619
Other liabilities ............................................................. 2,702 2,351
---------- ----------
Total liabilities ............................................... 976,884 275,430
---------- ----------
Additional paid-in capital .................................................... 590,995 286,465
Foreign currency translation adjustment ....................................... 286 --
Retained earnings ............................................................. 54,285 26,869
---------- ----------
Total stockholder's equity ...................................... 645,566 313,334
---------- ----------
Total liabilities and stockholder's equity ...................... $1,622,450 $ 588,764
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE> 5
BRISTOL HOTEL ASSET COMPANY
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Eleven Months
Year Ended December 31, Ended December 31,
------------------------------ ------------------
1997 1996 1995
------------- ------------- ------------------
<S> <C> <C> <C>
REVENUE:
Rooms .................................................... $ 374,929 $ 149,794 $ 115,771
Food and beverage............................................ 92,167 44,344 36,070
Management fees.............................................. 3,312 2,513 1,382
Other .................................................... 29,448 15,189 11,972
------------- ------------- -------------
Total revenue....................................... 499,856 211,840 165,195
------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms.................................................... 104,455 37,706 32,692
Food and beverage........................................ 69,310 31,282 27,118
Other.................................................... 9,269 4,528 4,258
Undistributed operating expenses:
Administrative and general............................... 43,942 18,266 16,184
Marketing................................................ 34,072 15,555 12,070
Property operating costs................................. 43,875 17,499 16,313
Property taxes, rent and insurance ...................... 35,126 8,147 5,761
Rent paid to affiliates.................................. - 2,756 2,664
Depreciation and amortization............................ 39,228 18,377 13,505
Corporate expense........................................ 24,450 10,958 8,035
------------- ------------- -------------
Operating income.................................................. 96,129 46,766 26,595
------------- ------------- -------------
Other (income) expenses:
Interest expense............................................. 35,414 9,255 18,095
Equity in earnings of joint ventures......................... (1,293) -- --
Other .................................................... -- -- 257
------------- ------------- -------------
Income before minority interest, income taxes and
extraordinary item............................................. 62,008 37,511 8,243
Minority interest................................................. -- -- 173
------------- ------------- -------------
Income before income taxes and extraordinary item................. 62,008 37,511 8,070
Income taxes...................................................... 24,681 13,883 2,921
------------- ------------- -------------
Income before extraordinary item.................................. 37,327 23,628 5,149
Extraordinary loss on early extinguishment of debt,
net of tax .................................................... 9,765 -- 1,908
------------- ------------- -------------
Net income........................................................ $ 27,562 $ 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>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN(LOSS) CUMULATIVE RETAINED
-------------------- PAID-IN ON TRANSLATION EARNINGS
SHARES AMOUNT CAPITAL SECURITIES ADJUSTMENT (DEFICIT) TOTAL
--------- ---------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at 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 at December 31, 1995 ........... 1,000 -- 295,608 262 -- 3,241 299,111
Reclass securities to trading ....... -- -- -- (262) -- -- (262)
Equity distributions to
Parent Company ................... -- -- (9,143) -- -- -- (9,143)
Net income .......................... -- -- -- -- -- 23,628 23,628
----- --------- --------- ------ ------- -------- --------
Balance at December 31, 1996 ........... 1,000 -- 286,465 -- -- 26,869 313,334
Equity contribution by Parent
Company .......................... -- -- 304,530 -- -- -- 304,530
Stock split ......................... -- -- -- -- -- (146) (146)
Foreign currency translation ........ -- -- -- -- 286 -- 286
Net Income .......................... -- -- -- -- -- 27,562 27,562
----- --------- --------- ------ ------- -------- --------
Balance, December 31, 1997 ............. 1,000 $ -- $ 590,995 $ -- $ 286 $ 54,285 $645,566
===== ========= ========= ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
9
<PAGE> 7
BRISTOL HOTEL ASSET COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Eleven Months
Year Ended December 31, Ended December 31,
------------------------- -------------------
1997 1996 1995
--------- ---------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 27,562 $ 23,628 $ 3,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 39,228 18,377 13,505
Amortization of deferred financing costs ............... 1,735 1,011 --
Equity in earnings of joint ventures ................... (1,575) -- --
Unrealized gain on marketable securities ............... -- (378) --
Non-cash portion of foreign currency translation ....... 286 -- --
Extraordinary loss on early extinguishment
of debt, net of tax ................................. 9,473 -- 1,908
Other .................................................. -- -- 602
Changes in assets and liabilities:
Net change in working capital .......................... 2,142 2,635 (714)
Decrease (increase) in restricted cash ................. (6,593) (2,449) 2,860
Increase (decrease) in other liabilities ............... 217 (460) (4,440)
Increase in advance deposits ........................... 878 -- --
Deferred income taxes .................................. 5,850 6,171 (326)
--------- --------- ---------
Net cash provided by operating activities ......... 79,203 48,535 16,636
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to property and equipment ..................... (53,663) (93,936) (60,941)
Holiday Inn Acquisition, net of costs ...................... (399,113) -- --
Purchases of property and equipment
(net of associated debt) ................................ (74,877) (6,300) (20,000)
Sale of property and equipment ............................. -- -- 4,711
Sales of marketable securities ............................. -- 726 --
--------- --------- ---------
Net cash used in investing activities ............. (527,653) (99,510) (76,230)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to predecessor equity holders ................ -- -- (4,140)
Proceeds from Refinancing .................................. 600,000 -- --
Proceeds from New Credit Facility .......................... 560,000 -- --
Repayment of New Credit Facility ........................... (560,000) -- --
Early extinguishment of long-term debt ..................... (133,540) -- --
Principal payments and extinguishment of
long-term debt .......................................... (8,187) (5,266) (156,612)
Proceeds from issuance of long-term debt ................... 43,410 66,976 55,487
Contribution from (distribution to) Parent Company ......... 49,327 (9,143) 62,809
Proceeds from affiliate .................................... -- -- 19,900
Proceeds from offering, net of offering costs .............. -- -- 88,557
Increase in deferred charges and other
non-current assets ...................................... (21,230) (4,832) (4,121)
Other ...................................................... -- -- 207
--------- --------- ---------
Net cash provided by financing activities ......... 529,780 47,735 62,087
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
10
<PAGE> 8
BRISTOL HOTEL ASSET COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Eleven Months
Year Ended December 31, Ended December 31,
--------------------------- ------------------
1997 1996 1995
-------- -------------- ------------------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents ..... $ 81,330 $ (3,240) $ 2,493
Cash and cash equivalents at beginning of period ......... 4,666 7,906 5,413
-------- -------------- --------
Cash and cash equivalents at end of period ............... $ 85,996 $ 4,666 $ 7,906
======== ============== ========
Supplemental cash flow information:
Interest paid ....................................... $ 31,852 $ 9,907 $ 17,390
======== ============== ========
Income taxes paid ................................... $ 10,942 $ 5,852 $ 2,685
======== ============== ========
Non-cash investing and financing activities:
Debt assumed to acquire property and equipment ...... $ 8,412 $ -- $ 12,100
======== ============== ========
Sale of non-hotel properties for assumption of liabilities $ -- $ -- $ 4,723
======== ============== ========
Purchase of minority interest for common stock ........... $ -- $ -- $ 1,110
======== ============== ========
Distribution to Parent Company ........................... $ 49,327 $ -- $232,799
======== ============== ========
Parent Company common stock issued in
Holiday Inn Acquisition ............................... $267,967 $ -- $ --
======== ============== ========
</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 (together with its subsidiaries, collectively,
the "Company") is a Delaware corporation which began operations 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. The Company
owns 84 hotels and manages an additional eight hotels, one of which is
owned by a joint venture in which the Company owns a 50% interest.
The Parent Company is a Delaware corporation which began operations in
February 1995 after the acquisitions of Harvey Hotel Company, Ltd. and its
subsidiaries (together, "Harvey Hotel Companies" or "Predecessor") and
United Inns, Inc. ("United Inns") (collectively, the "Combination"). The
Parent Company owns 86 hotels and manages 15 additional hotels, two of
which are owned by joint ventures in which the Parent Company owns a 50%
interest. The Parent Company acquired the ownership and/or management of 60
of these properties on April 28, 1997 (the "Holiday Inn Acquisition").
The operating results of the Company are substantially the operating
results of the Parent Company for the related period; therefore, 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, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include unrestricted cash in banks and cash on
hand. Liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
TRADING SECURITIES
Marketable securities consist primarily of equity securities and mutual
fund shares. Equity securities have been classified as (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, 1997 and 1996, all marketable securities held by the
Company were trading securities.
ACCOUNTS RECEIVABLE
Accounts receivable in the balance sheet are expected to be collected
within one year and are net of estimated uncollectible amounts of $2.3
million and $344,000 at December 31, 1997 and 1996, 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.
12
<PAGE> 10
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED CHARGES AND OTHER NONCURRENT ASSETS
Deferred charges and other noncurrent assets consist primarily of financing
costs which are amortized over the life of the related loan. The amount
reported in the balance sheet at December 31, 1997 and 1996 are net of
accumulated amortization of $180,000 and $1.1 million, respectively.
PROPERTY AND EQUIPMENT
The Combination and the Holiday Inn Acquisition were recorded 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 on the books of BHAC and its
subsidiaries. Subsequent additions and improvements are capitalized at
their cost, including interest costs associated with the renovation of
certain hotels. The acquisition price and subsequent additions and
improvements, less accumulated depreciation, are reflected on the Company's
consolidated balance sheet. Capitalized interest for the years ended
December 31, 1997 and 1996 were $1.3 million and $2.1 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 3 years
Leasehold improvements Lease term or useful
life, whichever is less
Depreciation and amortization expense recorded for the years ended December
31,1997 and 1996 , and the eleven months ended December 31, 1995 were $39.2
million, $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) tax and insurance reserves.
The Company is required to deposit monthly with various lenders amounts of
three percent to four percent of hotel revenues plus the tax and insurance
escrow. As tax and insurance payments are made and improvements are
completed, the Company is reimbursed from the reserves.
FOREIGN CURRENCY TRANSACTIONS
As part of the Holiday Inn Acquisition, a subsidiary of the Company
acquired six hotels in Canada. Results of operations for those hotels are
maintained in Canadian dollars and translated using average exchange rates
during the period. Currency transaction losses are included in net income
and were $303,000 for the year ended December 31, 1997. Assets and
liabilities are translated to U.S. dollars using the exchange rate in
effect at the balance sheet date. Resulting translation adjustments are
reflected in stockholder's equity as a cumulative foreign currency
translation adjustment. Cumulative currency translation gains included in
stockholder's equity at December 31, 1997 were $286,000.
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
13
<PAGE> 11
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (continued)
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.
3. ACQUISITIONS
UNITED INNS ACQUISITION
On January 27, 1995, United/Harvey Holdings L.P. ("Holdings") acquired the
common stock of United Inns for an aggregate purchase price of $67 million
plus the assumption of United Inns' liabilities. The acquisition was
accounted for as a purchase and the purchase price was allocated to the net
assets acquired. Under the acquisition agreement with Holdings, Harvey
Hotel Companies, H. K. Huie, Jr., the Harvey Management Equity Holders and
the other parties thereto, the following occurred: (1) Holdings contributed
to the 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 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, Holdings, Mr. Huie and the Harvey
Management Equity Holders became the stockholders of the Parent Company,
the Parent Company became the sole stockholder of United Inns, 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 Combination, sold her 1.0% limited partnership
interest in Harvey Hotel Companies (See Note 14).
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
14
<PAGE> 12
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
UNITED INNS ACQUISITION (continued)
paid for the 27.3% owned by Mr. Huie and his two daughters. The excess of
the purchase price over the net assets acquired of $71.5 million was
principally allocated to land and buildings in accordance with the purchase
method of accounting.
The consolidated statements of income for the Company includes the results
of operations for United Inns from February 1, 1995.
The following unaudited pro forma summary presents the combined results of
Harvey Hotel Companies as if United Inns had been acquired at the beginning
of 1995. The pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations that
would actually have resulted had the acquisition been in effect on the date
indicated (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
Month Ended
January 31, 1995
----------------
<S> <C>
Total revenues ............................. $13,142
Net income after extraordinary gain and
pro forma income tax expense ............ $ 1,111
</TABLE>
HOLIDAY INN ACQUISITION
On April 28, 1997, the Parent Company and its subsidiaries (including the
Company) acquired the ownership of 45 full-service Holiday Inns and the
management of an additional 15 Holiday Inn properties, three of which were
owned by joint ventures in which the Company acquired a 50% interest (the
owned hotels, management contracts and joint venture interests,
collectively referred to as the "Holiday Inn Assets"). As consideration for
the Holiday Inn Acquisition, the Parent Company and its subsidiaries paid
$398 million in cash and issued 9,381,308 shares (pre-Stock Split, as
defined in the Parent Company's 1997 Annual Report on Form 10K) of the
Parent Company's common stock. The acquisition has been accounted for as a
purchase and the results of operations of the Holiday Inn Assets have been
included in the consolidated financial statements since April 28, 1997. The
purchase price, including liabilities assumed in the acquisition
(principally deferred tax liabilities) was allocated to the assets
acquired, based upon their fair market values. The excess of the purchase
price over the estimated fair market value of the net assets acquired was
recorded as goodwill and is being amortized over 40 years.
The following unaudited pro forma summary presents the results of the
Company as if the Holiday Inn Acquisition and related refinancing pursuant
to the New Credit Facility (see Note 6) had occurred at the beginning of
1996. The pro forma results have been prepared for comparative purposes
only and are not indicative of the results of operations that would have
occurred had the Holiday Inn Acquisition occurred on the date indicated.
<TABLE>
<CAPTION>
(Unaudited)
1997 1996
------------- --------
(in thousands)
<S> <C> <C>
Total revenues........................... $ 619,671 $566,369
Income before extraordinary item......... $ 44,093 $ 35,998
Net income............................... $ 35,667 $ 35,998
</TABLE>
15
<PAGE> 13
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
OTHER ACQUISITIONS
In addition to the Holiday Inn Acquisition, the Company completed the
following single-asset acquisitions in 1997 and 1996:
<TABLE>
<CAPTION>
Mortgage
Date Number Purchase Debt
Acquired Location of Rooms Price Assumed
-------- -------- -------- ----- -------
<S> <C> <C> <C> <C>
December 1997 Milpitas (San Jose), CA 305 $ 4.25 million (1) $ --
October 1997 St. Louis, MO 318 $18.00 million $ 8.4 million
January 1997 Chicago, IL 378 $35.00 million $ --
May 1996 Plano, TX 161 $ 6.30 million $ --
</TABLE>
(1) The Holiday Inn - Milpitas was previously owned by a joint venture in
which the Company owned a 50% interest. The Company purchased the
remaining 50% interest in the venture for $4.25 million and,
concurrently with the acquisition, repaid all outstanding debt
associated with the property of $25.7 million.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Land ............................................................. $ 156,738 $ 50,528
Buildings ........................................................ 1,137,564 406,682
Furniture, fixtures and equipment ................................ 157,099 74,827
----------- -----------
1,451,401 532,037
Less accumulated depreciation ................................ (75,925) (26,091)
----------- -----------
1,375,476 505,946
Assets held for sale (net of accumulated
depreciation of $0 and $4,980) .............................. -- 38,279
Construction in progress ......................................... 31,300 8,339
----------- -----------
$ 1,406,776 $ 552,564
=========== ===========
</TABLE>
The Company's properties are predominantly full-service hotels that operate
in the upscale and mid-price with food and beverage segments of the lodging
industry under franchise agreements primarily with Holiday Inn. The Company
seeks to maintain a geographically diverse portfolio of hotels to offset
the effects of regional economic cycles. The Company operates properties in
22 states, the District of Columbia and Canada, including 13 hotels in
California, 11 in Georgia, 27 in Texas, seven in Florida, and six in
Canada.
During fiscal year 1996, the Company classified certain limited-service
hotels as assets held for sale pursuant to the provisions of SFAS 121.
During 1997, the Company reclassified these assets as held and used,
therefore recording depreciation expense on these assets. The results of
operations for these limited-service properties included in the income
statement for the years ended December 31, 1997, 1996 and 1995 were (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Total revenues.............................. $ 13,464 $ 16,398 $ 14,552
Operating income............................ 2,186 5,580 4,020
</TABLE>
16
<PAGE> 14
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. MARKETABLE SECURITIES
In 1995, the Company classified certain equity securities as
Available-for-Sale Securities (per Statement of Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and Equity
Securities"). Unrealized gains were reported as a separate component of
stockholders' equity. In May 1996, management resolved to sell the equity
securities, and accordingly, the securities were reclassified as trading
securities and an unrealized gain of approximately $450,000 was recorded in
earnings in 1996. These securities were sold in August 1996.
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Fixed rate debt:
7.66 % due October 27, 2009 ................................. $ 455,000 $ --
7.458% due November 11, 2007 ................................ 144,834 --
8% due December 31, 2002 .................................... 40,263 42,126
8.55% due January 11, 2016 .................................. 14,324 14,626
7.25% due September 30, 1997 ................................ -- 8,110
9.5% due August 1, 2005 ..................................... 8,366 --
Non-interest bearing due December 31, 2002 .................. 7,950 9,086
Variable rate:
7.75% Senior Term Facility due December 18, 1998 ............ -- 66,976
10.26% due January 31, 2000 ................................. -- 9,300
10.25% due December 31, 1999 ................................ -- 6,899
8.5% due September 30, 1997 ................................. -- 1,500
Other long-term debt ............................................... 345 4,329
Capital leases ..................................................... 3,367 1,402
--------- ---------
674,449 164,354
Less current portion ............................................... (8,137) (15,769)
--------- ---------
Long-term debt, excluding current portion ................... $ 666,312 $ 148,585
========= =========
</TABLE>
The mortgages are amortized using varying methods as provided in the
individual debt agreements. Substantially all of the Company's properties
and equipment are pledged as collateral on mortgage obligations.
The Company obtained the financing for the Holiday Inn Acquisition under a
new senior term facility which provided for up to $560 million aggregate
amount of term loan borrowings (the "New Credit Facility"). The New Credit
Facility was utilized to repay existing debt of approximately $134 million,
to fund the cash portion of the Holiday Inn Acquisition and related closing
costs. The Company repaid $108 million of borrowings from the New Credit
Facility in May 1997 with proceeds from the Parent Company's common stock
offering. The treatment of the extraordinary costs related to the repayment
of debt is more fully described in Note 8.
On October 28, 1997, the Company completed the refinancing of its existing
$560 million credit facility. The new financing (the "Refinancing") has two
tranches: (a) $145 million at a fixed interest rate of 7.458%, a term of 10
years, and secured by 15 hotel properties; and, (b) $455 million at a fixed
interest rate of 7.66%, a term of 12 years, and secured by 62 hotel
properties. The Company and its subsidiaries are the borrowers for the
Refinancing.
The Parent Company prepaid $40 million of its Senior Notes in December
1997. The balance at December 31, 1997 on the Senior Notes was $30 million.
In conjunction with the prepayment, the Parent Company amended the Senior
Notes indenture to allow for a more flexible prepayment schedule.
17
<PAGE> 15
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 years ended December 31, 1997 and
1996 and the eleven months ended December 31, 1995, consist of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Federal:
Current...................................... $ 15,357 $ 7,761 $ 3,338
Deferred..................................... 4,637 5,301 (579)
State:
Current...................................... 1,837 488 196
Deferred..................................... 509 333 (34)
Canada:
Current...................................... 1,618 -- --
Deferred..................................... 723 -- --
-------- --------- -------
$ 24,681 $ 13,883 $ 2,921
======== ========= =======
</TABLE>
The Company estimates that its effective tax rate for 1997 approximated
39.9%. The actual income tax expense for the year ended December 31, 1997,
is computed by applying the federal statutory income tax rate as a result
of the following:
<TABLE>
<S> <C>
Income tax expense at the U.S. Federal statutory rate............. 35.0%
State income taxes, net of federal benefit........................ 3.6%
Permanent differences and effect of higher
Canadian tax rates............................................. 1.3%
----
39.9%
====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997
and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Purchase accounting adjustments to land and building .... $246,833 $ 85,134
Other ................................................... 994 --
-------- --------
Gross deferred tax liabilities .......................... 247,827 85,134
-------- --------
Tax credits and NOL carryforwards ....................... 4,011 5,502
Accrued reserves ........................................ 1,823 2,192
Other ................................................... 1,496 1,821
-------- --------
Gross deferred tax asset ................................ 7,330 9,515
Valuation allowance ..................................... -- --
-------- --------
Deferred tax asset ...................................... 7,330 9,515
-------- --------
Net deferred tax liability ........................ $240,497 $ 75,619
======== ========
</TABLE>
18
<PAGE> 16
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The gross deferred tax liabilities relate principally to the temporary
differences caused by the purchase accounting adjustments recorded as a
result of the Combination and the Holiday Inn Acquisition. For financial
reporting purposes, the transactions were recorded under the principles of
purchase accounting and, accordingly, the basis of the assets have been
adjusted to fair market value. For tax reporting purposes, the transactions
resulted in the basis of the assets and liabilities being carried forward
at their adjusted basis with some adjustment for certain gains recognized
on the acquisition. This differing treatment has created book basis in
excess of tax basis and, accordingly, the related deferred tax liabilities
associated with these differences have been recorded. As the Company
depreciates and amortizes the basis 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 $8,988,000 and
tax credits of $657,000 generated by United Inns and Harvey Hotel
Corporation in prior years are available to be carried forward to periods
expiring as follows (in thousands):
<TABLE>
<CAPTION>
YEAR OF EXPIRATION Federal NOL Tax Credits
------------------ ----------- -----------
<S> <C> <C>
2001....................... $ - $142
2002....................... - 154
2003....................... - 158
2004....................... - 103
2005....................... 3,924 58
2006 to 2010.................. 5,064 42
--------- ----
$ 8,988 $657
========= ====
</TABLE>
The losses and credits are subject to an annual loss limitation equivalent
of approximately $4.8 million due to the changes in ownership of United
Inns and Harvey Hotel Corporation which occurred in 1995. These
carryforwards are further limited as they were incurred prior to the
ownership of United Inns and Harvey Hotel Corporation by the Company.
Accordingly, these carryforwards are available only to offset income and
taxes associated with the operations of the hotels that generated them.
8. EXTRAORDINARY ITEMS
On April 28, 1997, the Company recognized an extraordinary loss of $2.2
million ($1.3 million, net of tax) related to the early extinguishment of
debt with proceeds from the New Credit Facility. The Company incurred
$479,000 of prepayment penalties and wrote off $1.7 million in deferred
financing costs.
The Company refinanced the New Credit Facility in October 1997 and
recognized an extraordinary loss of $14.0 million ($8.4 million, net of
tax) related to the early extinguishment of the New Credit Facility. The
loss on extinguishment reflects the write-off of deferred financing fees
related to the New Credit Facility.
19
<PAGE> 17
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Accounts payable.................................................. $ 2,839 $ 1,689
Accrued payroll and payroll taxes................................. 15,262 5,208
Accrued interest ............................................... 3,779 650
Accrued property costs............................................ 1,269 1,314
Other............................................................. 8,191 4,904
------------- -------------
31,340 $ 13,765
============= =============
</TABLE>
10. OPERATING LEASES
The Company leases certain land, office space and equipment under
noncancellable operating lease commitments. Minimum rentals due under these
agreements for the next five years and thereafter are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
1998................................................ $ 11,841
1999................................................ 11,883
2000................................................ 11,954
2001................................................ 11,937
2002................................................ 11,811
Thereafter.......................................... 216,075
--------
$275,501
========
</TABLE>
Leases include long-term ground leases for certain hotels, generally with
renewal options. Certain leases contain provisions for the payment of
contingent rentals based on a percentage of sales.
The Company leases certain hotel space to third party vendors. Future
minimum rentals to be received under noncancellable operating leases that
have initial or remaining lease terms in excess of one year are as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
1998................................. $ 3,582
1999................................. 3,562
2000................................. 3,289
2001................................. 3,116
2002................................. 2,720
Thereafter.......................... 13,868
-------
$30,137
=======
</TABLE>
11. MANAGEMENT CONTRACTS
The Company acquired the management of eight hotels in the Holiday Inn
Acquisition, two of which were owned by joint ventures in which the Company
owned a 50% interest. The purchase price allocated to these contracts at
April 28, 1997 was $1.6 million and is being amortized on a straight-line
basis over the remaining lives of the agreements, which range from one to
eleven years. The amortization of the purchase price recorded in the year
ended December 31, 1997 was $602,000 and management fee income was $3.3
million, $2.5 million, and $1.4 million for the years ended December 31,
1997 and 1996, and the eleven months ended December 31, 1995, 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 Company cannot
guarantee that it will continue to manage these properties to the contract
expiration date.
20
<PAGE> 18
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. MANAGEMENT CONTRACTS (CONTINUED)
The Company acquired the remaining 50% interest in one of the joint
ventures in which it was a partner in December 1997, but no value was
assigned to the agreement related to the joint venture in the Holiday Inn
Acquisition.
12. INVESTMENTS IN JOINT VENTURES
The Company acquired 50% interests in two joint ventures in the Holiday Inn
Acquisition. The purchase price allocated to these joint ventures was
approximately $8.3 million and is being amortized on a straight-line basis
over the estimated life of the assets acquired. Amortization expense of
$460,000 was recorded in the year ended December 31, 1997.
On December 11, 1997, the Company acquired the remaining 50% interest in
the Milpitas Joint Venture for $4.25 million. Concurrently with the
acquisition, the Company paid off all outstanding debt related to the
property of $25.7 million. None of the original $12 million purchase price
allocated to the joint ventures in the Holiday Inn Acquisition was
attributed to the Milpitas Joint Venture.
13. BENEFITS
Health (including fully insured term life and accidental death and
dismemberment), dental and disability coverage is provided to the Company's
employees through the Welfare Benefit Trust (the "Trust"). The Company
maintains varying levels of stop-loss and umbrella insurance policies to
limit the Company's per occurrence and aggregate liability in any given
year. Actual claims and premiums on stop-loss insurance, medical and
disability policies are paid from the Trust. The Trust is funded through a
combination of employer and employee contributions. The Trust also pays
work-related injury claims which are funded by the employer for its
employees in Texas. Since April 1, 1995, all employees have been eligible
for participation in the benefits provided through the Trust. The Company
provided $6.1 million and $2.9 million related to these benefits for the
years ended December 31, 1997 and 1996, respectively.
The Company offers a Profit Sharing Plan and Trust ("401(k) Plan") to
certain employees. The 401(k) Plan is designed to be a qualified trust
under Section 401(a) of the Internal Revenue Code. Under the 401(k) Plan,
eligible employees are allowed to defer up to 16% of their income on a
pretax basis through contributions to the Plan; however, only the first 6%
of pretax income is subject to matching by the Company. The Company may
elect to make matching contributions of up to 50% of the employees'
matchable contributions subject to certain performance measures of the
Company. The Company provided for matching contributions for the years
ended December 31, 1997 and 1996 totaling $1.5 million and $135,000
respectively.
14. COMMITMENTS AND CONTINGENCIES
The Company is a guarantor on the 11.22% Senior Secured Notes due 2000
issued by the Parent Company. At December 31, 1997, there was $30 million
outstanding on the Senior Notes.
In connection with the Refinancing, Bristol Hotel Operating Company,
("BHOC"), a wholly-owned subsidiary of the Parent Company and an affiliate
of the Company, became an additional guarantor of the Senior Notes. BHOC's
sole operating asset is one property acquired in December 1997, and
therefore its results of operations are not material to the guaranty.
Substantially all of the Company's hotel properties are (or will be in the
next year) operated pursuant to franchise or license agreements ("Franchise
Agreements"), primarily with Holiday Inn Franchising, Inc. or its
affiliates. The Company also operates hotels under franchise agreements
with Marriott International, Inc., Hampton Inn (a division of Promus
Hotels, Inc.), Ramada Franchise Systems, Inc. and Days Inn Inc. of America
Franchising Inc. The Franchise Agreements generally require the payment of
a monthly royalty fee based on gross room revenue and various other fees
associated with certain marketing or advertising
21
<PAGE> 19
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
and centralized reservation services, also generally based on gross room
revenues. The Franchise Agreements have various durations through the year
2017, and generally may not be terminated without the payment of
substantial fees. Franchise fees of $19.3 million and $4.1 million were
paid during the years ending December 31, 1997 and 1996, respectively.
The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the
hotels which are established by the franchisors to maintain uniformity in
the system created by each such franchisor. Such standards generally
regulate the appearance of the hotel, quality and type of goods and
services offered, signage and protection of trademarks. Compliance with
such standards may from time to time require significant expenditures for
capital improvements.
The Company is currently involved in certain guest and customer claims,
employee wage claims and other disputes arising in the ordinary course of
business. In the opinion of management, the pending litigation will not
have a materially adverse effect on the Company's financial position or
results of operations.
On March 28, 1997, the Company paid approximately $663,000 to the State of
Tennessee Department of Revenue in full settlement of all claims for
franchise and excise tax related to United Inns, Inc.
In connection with the administration of the Dallas County Probate Court of
the estate of the deceased wife of H.H. 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.
All of the owned hotels of the Company have undergone Phase I environmental
assessments which generally provide a physical inspection and data base
search but not soil or groundwater analysis. In addition, most of the
Company's hotels have been inspected to determine the presence of
asbestos-containing materials ("ACM's"). While ACM's are present in certain
of the Company's properties, operations and maintenance programs for
maintaining such ACM's have been implemented, or the ACM's have been
scheduled to be or have been abated, at such hotels. None of the
environmental assessments conducted to date 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.
In September 1995, the Company disposed of certain of its non-hotel
properties to HH Land Company, L.P. ("HH Land Company"). Upon acquisition
of the non-hotel properties, HH Land Company assumed all liabilities
associated with the non-hotel properties through a formal indemnification
agreement, including environmental
22
<PAGE> 20
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
liabilities associated with the properties. The Company remains
contingently liable for the environmental costs associated with the
properties. At such time that the Company determines that it is not
probable that HH Land Company will fully pay the remediation costs related
to the disposed properties, the Company will recognize such liabilities.
The Company leases the land underlying several of its hotels under various
long-term leases through the year 2063. Lease payments under the agreements
were $10.9 million and $2.6 million for the years ended December 31, 1997
and 1996, respectively.
The Company and H. K. Huie, Jr. ("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. 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>
1997 1996
---------------------- --------------------
Total Allocated Total Allocated
Debt to Huie Debt to Huie
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Harvey Hotel - DFW Airport $ 24,275 $ 5,762 $ 25,581 $ 6,071
Harvey Hotel - Dallas 7,442 1,802 7,600 1,843
Bristol Suites 19,378 4,298 20,756 4,604
</TABLE>
The Company is jointly and severally liable in the event of nonpayment by
Mr. Huie of the debt allocated. For December 31, 1997, the allocated
amounts have not been reflected in the consolidated financial statements of
the Company. However, the Company does not record interest expense on the
allocated debt because payments made to Mr. Huie are appropriately recorded
as rental expense under the related land leases. The land parcels at the
respective hotels are security for the additional liability.
15. RELATED PARTY TRANSACTIONS
HOTEL PROPERTIES AGREEMENT
Concurrently with the Holiday Inn Acquisition, the Company, and Holiday
Corporation and its affiliates (collectively, "HC") entered into a hotel
properties agreement (the "Hotel Properties Agreement"). Pursuant to the
Hotel Properties Agreement, the Company will offer to HC the opportunity to
enter into a standard HC franchise agreement for each hotel that the
Company acquires, manages or develops that meets specified criteria. The
Hotel Properties Agreement requires that 85% of the rooms in the Company's
owned, leased and managed hotels be operated under a Holiday Inn brand,
subject to certain limitations. The above provisions of the Hotel
Properties Agreement will expire the earlier of (i) the date that HC
terminates it obligation at any time following 24 months after the Holiday
Inn Acquisition (the "Holiday Notice") and (ii) HC no longer holds a
controlling interest in the franchisor of the Holiday Inn brands.
Additionally, the Company has a right of first refusal on any entity or
other interest meeting certain criteria that HC wishes to acquire or
develop, subject to certain limitations. HC can terminate its obligation
under this provision in accordance with the Holiday Notice.
The Company has agreed to enter into Franchise Agreements with HC pursuant
to which certain Bristol properties will be rebranded to Holiday Inn
brands, subject to normal franchising procedures. Franchise
23
<PAGE> 21
BRISTOL HOTEL ASSET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
HOTEL PROPERTIES AGREEMENT (continued)
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 these
Franchise Agreements and related marketing, advertising and reservation
services were $21.7 million in the year ended December 31, 1997, consisting
primarily of franchise royalty fees of $13.0 million and franchise
marketing fees of $4.5 million.
INTERIM SERVICES AGREEMENT
The Company entered into an interim services agreement (the "ISA
Agreement") with Holiday Hospitality Corporation ("HHC") for HHC to provide
certain accounting, payroll, employee benefit, training, treasury,
management information and construction and design services to Bristol for
a transition period following the Holiday Inn Acquisition. In consideration
for such services, the Company reimbursed HHC for the estimated cost
incurred in connection with providing the services, totaling $1.3 million
for the year ended December 31, 1997. The ISA Agreement expired in October
1997.
16. FAIR VALUE
The Company has estimated the fair value of its financial instruments at
December 31, 1997 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.
17. SUBSEQUENT EVENT - OMAHA ACQUISITION
On February 2, 1998, the Company announced that it had entered into a
definitive agreement to acquire 20 Midwestern hotels from Omaha Hotel, Inc.
for $19.1 million in cash, 1.43 million shares of the Parent Company's
common stock and $40.9 million of assumed debt. 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 acquisition is anticipated to close in April 1998.
18. SUBSEQUENT EVENT - PROPOSED MERGER
On March 24, 1998, the Parent Company announced a proposed merger with
FelCor Suite Hotels, Inc.("FelCor"), subject to approval by shareholders of
both companies and final documentation. Under the terms of the proposed
merger, FelCor will acquire the real estate holdings of the Company and the
Parent Company in return for 31.7 million shares of newly issued FelCor
stock. Prior to the merger, the Parent Company will spin off, as a taxable
dividend, all of its non-real estate holdings into a newly formed public
company to be known as Bristol Hotels & Resorts, Inc. ("New Bristol").
Each of the Parent Company's outstanding common shares will be exchanged
for .685 shares of FelCor common stock. In addition, Parent Company
shareholders will receive a taxable distribution of one share of New
Bristol common stock for each share of Parent Company's common stock.
The merger is expected to close by the end of June 1998.
24
