<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1998
BRISTOL HOTELS & RESORTS
14295 Midway Road
Dallas, Texas 75244
(972) 391-3910
Commission File No. 1-14047
Incorporated in Delaware IRS No. 75-2754805
------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, Par Value $.01 per share New York Stock Exchange
------------
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of common stock, par value $.01 per share, outstanding at
November 11, 1998 was 17,778,315.
------------
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<PAGE> 2
BRISTOL HOTELS & RESORTS
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION. PAGE NO.
--------
<S> <C>
Item 1. Financial Statements:
Bristol Hotels & Resorts
Condensed Consolidated Statement of Income for the three months
ended September 30, 1998........................................................ 3
Condensed Consolidated Statement of Income for the period
May 20, 1998 through September 30, 1998......................................... 4
Condensed Consolidated Balance Sheet as of September 30, 1998...................... 5
Condensed Consolidated Statement of Cash Flows for the period
May 20, 1998 through September 30, 1998......................................... 6
Notes to Condensed Consolidated Financial Statements............................... 7
Bristol Hotel Company (Predecessor)
Condensed Consolidated Statements of Income for the period
July 1, 1998 through July 27, 1998 and the three months
ended September 30, 1997........................................................ 10
Condensed Consolidated Statements of Income for the period
January 1, 1998 through July 27, 1998 and the nine
months
ended September 30, 1997........................................................ 11
Condensed Consolidated Balance Sheet as of December 31, 1997....................... 12
Condensed Consolidated Statement of Cash Flows for the period
January 1, 1998 through July 27, 1998 and the nine months ended
September 30, 1997.............................................................. 13
Notes to Condensed Consolidated Financial Statements............................... 15
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.................................................................. 18
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K..................................................... 25
SIGNATURE ................................................................................... 26
</TABLE>
2
<PAGE> 3
BRISTOL HOTELS & RESORTS
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited, in thousands except per share amounts)
<TABLE>
<S> <C>
REVENUE
Rooms ..................................................... $ 92,048
Food and beverage ......................................... 20,987
Management fees ........................................... 998
Construction management fees .............................. 995
Other ..................................................... 6,179
--------
Total revenue .................................. 121,207
--------
OPERATING COSTS AND EXPENSES
Departmental expenses:
Rooms ................................................. 26,053
Food and beverage ..................................... 16,052
Other operating departments ........................... 2,535
Undistributed operating expenses:
Administrative and general ............................ 11,728
Marketing ............................................. 7,721
Property occupancy costs .............................. 11,847
Tenant lease expense .................................. 38,894
Depreciation and amortization ......................... 378
Corporate expense ..................................... 3,958
--------
Operating income .............................................. 2,041
Interest expense, net ......................................... 78
--------
Income before income taxes .................................... 1,963
Provision for income taxes .................................... 787
--------
NET INCOME .................................................... $ 1,176
========
Earnings per common and common equivalent share:
Net income:
Basic ................................................. $ 0.09
Diluted ............................................... 0.09
Weighted average number of common and common
equivalent shares outstanding:
Basic ................................................. 12,753
Diluted ............................................... 12,921
</TABLE>
The accompanying notes are an integral part of this condensed
consolidated financial statement.
3
<PAGE> 4
BRISTOL HOTELS & RESORTS
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD MAY 20, 1998 THROUGH SEPTEMBER 30, 1998
(Unaudited, in thousands except per share amounts)
<TABLE>
<S> <C>
REVENUE
Rooms ............................................. $ 92,175
Food and beverage ................................. 20,988
Management fees ................................... 998
Construction management fees ...................... 995
Other ............................................. 6,183
--------
Total revenue .......................... 121,339
--------
OPERATING COSTS AND EXPENSES
Departmental expenses:
Rooms ......................................... 26,101
Food and beverage ............................. 16,052
Other operating departments ................... 2,536
Undistributed operating expenses:
Administrative and general .................... 11,743
Marketing ..................................... 7,734
Property occupancy costs ...................... 11,863
Tenant lease expense .......................... 38,992
Depreciation and amortization ................. 378
Corporate expense ............................. 3,958
--------
Operating income ...................................... 1,982
Interest expense, net ................................. 78
--------
Income before income taxes ............................ 1,904
Provision for income taxes ............................ 787
--------
NET INCOME ............................................ $ 1,117
========
Earnings per common and common equivalent share:
Net income:
Basic ......................................... $ 0.19
Diluted ....................................... 0.18
Weighted average number of common and common
equivalent shares outstanding:
Basic ......................................... 6,018
Diluted ....................................... 6,196
</TABLE>
The accompanying notes are an integral part of this condensed
consolidated financial statement.
4
<PAGE> 5
BRISTOL HOTELS & RESORTS
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(Unaudited, Dollars in Thousands)
<TABLE>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents ................................... $ 21,485
Accounts receivable, net .................................... 53,677
Inventory ................................................... 8,710
Deposits and other current assets ........................... 16,400
---------
Total current assets ................................. 100,272
Property and equipment, net ..................................... 6,278
Restricted cash ................................................. 1,360
Investment in management contracts, net ......................... 2,021
Deferred charges and other non-current assets, net .............. 1,475
---------
Total assets ......................................... $ 111,406
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ....................... $ 56,228
Accrued occupancy, sales and use tax ........................ 7,668
Accrued insurance ........................................... 7,752
Advance deposits ............................................ 2,837
---------
Total current liabilities ............................ 74,485
Deferred income taxes ........................................... 866
Other liabilities ............................................... 2,675
---------
Total liabilities .................................... 78,026
---------
Common stock ($.01 par value; 100,000,000 shares
authorized, 31,957,919 shares issued,
17,778,315 shares outstanding) .............................. 228
Additional paid-in capital ...................................... 56,691
Retained earnings ............................................... 1,117
Other accumulated comprehensive income .......................... (19)
Treasury stock, at cost (5,065,409 shares) ...................... (24,637)
---------
Total stockholders' equity ........................... 33,380
---------
Total liabilities and stockholders' equity ........... $ 111,406
=========
</TABLE>
The accompanying notes are an integral part of this condensed
consolidated financial statement.
5
<PAGE> 6
BRISTOL HOTELS & RESORTS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD MAY 20, 1998 THROUGH SEPTEMBER 30, 1998
(Unaudited, Dollars in Thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 1,117
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ........................... 378
Amortization of deferred financing fees ................. 55
Non-cash portion of foreign currency translation ........ (19)
Compensation expense recognized for employee
stock options ........................................ 54
Changes in working capital .................................. (5,262)
Decrease in restricted cash ................................. 5
Increase in other liabilities ............................... 18
--------
Cash used in operating activities .................... (3,654)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to property and equipment ...................... (91)
--------
Cash used in investing activities .................... (91)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution from Predecessor ............................... 48,988
Increase in deferred charges and other non-current assets ... (56)
Proceeds from employee stock purchase plan .................. 1,538
Proceeds from exercise of employee stock options ............ 574
Repurchase of shares from Bass plc .......................... (25,814)
--------
Cash provided by financing activities ................ 25,230
--------
Net increase in cash and cash equivalents ....................... 21,485
Cash and cash equivalents at beginning of period ................ --
--------
Cash and cash equivalents at end of period ...................... $ 21,485
========
</TABLE>
The accompanying notes are an integral part of this condensed
consolidated financial statement.
6
<PAGE> 7
BRISTOL HOTELS & RESORTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND
Bristol Hotels & Resorts (together with its subsidiaries, the
"Company") is a Delaware corporation which was incorporated in March
1998 and began operations in May 1998 as a subsidiary of Bristol Hotel
Company ("BHC" or "Predecessor"). The Company was spun-off from BHC in
connection with the merger of BHC with FelCor Lodging Trust
Incorporated ("FelCor") on July 27, 1998 (the "FelCor Merger").
The Company is one of the leading independent hotel operating
companies in the United States operating 123 primarily full-service
hotels in the upscale and midscale segments of the hotel industry
containing approximately 32,700 rooms, of which 106 hotels are
operated under the long-term leases with FelCor. The Company operates
the largest number of Bass Hotels & Resorts branded hotels, including
Crowne Plaza, Holiday Inn, Holiday Inn Select and Holiday Inn Express
hotels, in the world. The Company also operates 22 hotels under other
hotel brands, including Sheraton Four Points, Hilton, Hampton Inn,
Homewood Suites, Courtyard by Marriott and Fairfield Inn.
2. BASIS OF PRESENTATION
The financial statements of the Company as of September 30, 1998
reflect its operations from May 1998 through September 1998. Prior to
July 27, 1998 (the spin-off date), the Company's sole asset was the
leasehold interest in the Hampton Inn - Las Vegas; therefore, the
condensed consolidated statements of income presented for the Company
for three months ended September 30, 1998 and the period from May 20,
1998 to September 30, 1998 are not, in the opinion of management,
indicative of the operations of the Company subsequent to the spin-off
date. The Company began operations in May 1998; therefore, no
statements of income or cash flows are presented for the nine months
ended September 30, 1998.
The financial information for the Predecessor for the periods from
July 1, 1998 through July 27, 1998 and from January 1, 1998 through
July 27, 1998 (before giving effect to the spin-off and the FelCor
Merger) and the three and nine months ended September 30, 1997 is
presented elsewhere in this Form 10-Q. However, management does not
believe that the results of operations of the Predecessor are
indicative of the Company's future operating results.
In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly, in all
material respects, the financial position of the Company as of
September 30, 1998 and the results of its operations for the three
months ended September 30, 1998 and the period from May 20, 1998
through September 30, 1998 and its cash flows for period from May 20,
1998 through September 30, 1998 have been made.
3. FELCOR MERGER AND THE SPINOFF
On July 27, 1998, BHC's hotel operating business was spun off as a
separate publicly traded company, Bristol Hotels & Resorts. The FelCor
Merger was consummated following the spin-off.
Each of the BHC hotels acquired by FelCor in the FelCor Merger are
leased to and operated by the Company. The Company and FelCor are
separately owned and managed, but are expected to work together in the
acquisition and leasing of additional hotels.
7
<PAGE> 8
BRISTOL HOTELS & RESORTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. FELCOR MERGER AND THE SPINOFF (CONTINUED)
In the spin-off, BHC stockholders received one common share of the
Company for every two of their BHC common shares. In the FelCor
Merger, BHC stockholders received 0.685 FelCor common shares for each
of their existing BHC common shares. As a result of these
transactions, former BHC stockholders own all of the Company's equity
and 44% of FelCor's outstanding common equity. The spin-off was
taxable to BHC and its stockholders, while the merger was tax-free to
FelCor and BHC stockholders.
4. TREASURY STOCK
Immediately after the spin-off, the Company purchased 5.3 million
shares of its stock held by affiliates of Bass plc (the "Bass
Entities"), in order to assure FelCor's compliance with certain REIT
ownership requirements. The purchase price for these shares was $25.8
million ($4.86 per share), and was funded from cash contributed by BHC
to the Company for this purpose. The repurchased shares are classified
as treasury shares on the Company's balance sheet.
5. EMPLOYEE STOCK PURCHASE PLAN
On July 27, 1998 immediately after the spin-off, the Company issued
approximately 242,000 shares of its common stock pursuant to its 1998
Stock Purchase Plan ("the Plan"). Under the Plan, the Company can
offer for sale to eligible employees and non-employee directors up to
2.25 million shares of its common stock. The proceeds from the
issuance of these shares totaled $1.5 million, or $6.38 per share,
which the Company believes was the fair market value of the shares on
that date.
6. LONG-TERM DEBT
In connection with the spin-off, the Company entered into a $40
million revolving credit facility (the "Credit Facility") with Bankers
Trust Company. Certain of the Company's subsidiaries, including the
tenants under the FelCor leases, are named as borrowers under the
Credit Facility, and Bristol Hotels & Resorts is the guarantor. The
Credit Facility is secured by essentially all of the Company's assets,
including the stock of its subsidiaries and their rights under the
leases with FelCor. Borrowings under the Credit Facility bear interest
at a rate of LIBOR plus 1.875% or a base rate plus 0.875% and will
mature one year after the spin-off is completed, with two one-year
extension options. The $40 million of commitments under the Credit
Facility may be used for working capital and other general corporate
purposes.
A sub-limit of up to $20 million of such commitments is available to
issue letters of credit to secure the Company's obligations under the
leases with FelCor and other owners, subject to the reduction of such
sub-limit to reflect the achievement of liquid net worth requirements
related to such leases. The Company will pay a fee of 1.875% annually
on the maximum amount which may be drawn under each letter of credit
issued. The letter of credit sub-limit under the Credit Facility has a
one-year term without renewal options. Concurrently with the spin-off,
a letter of credit for $20 million was issued to FelCor to secure the
Company's obligations under the leases.
8
<PAGE> 9
BRISTOL HOTELS & RESORTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The objective
of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive income
is the total of net income and all other non-owner changes in a
company's equity. The Company does not believe that the adoption of
SFAS 130 will have a material impact on the Company's financial
statements. Due to the Company's Canadian operations, it engaged in
transactions involving foreign currency resulting in translation
adjustments of approximately $19 thousand for the three months ended
September 30, 1998 and the period from May 20, 1998 through September
30, 1998.
9
<PAGE> 10
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
July 1, 1998 Three Months
Through Ended
July 27, 1998 September 30, 1997
------------- ------------------
<S> <C> <C>
REVENUE
Rooms ............................................................ $ 49,021 $ 125,686
Food and beverage ................................................ 9,167 25,709
Management fees .................................................. 82 2,007
Other ............................................................ 4,779 9,603
------------- -------------
Total revenue ......................................... 63,049 163,005
------------- -------------
OPERATING COSTS AND EXPENSES
Departmental expenses:
Rooms ........................................................ 17,200 36,153
Food and beverage ............................................ 8,934 21,195
Other ........................................................ 638 2,898
Undistributed operating expenses:
Administrative and general ................................... 8,666 14,920
Marketing .................................................... 5,162 10,703
Property occupancy costs ..................................... 14,528 26,135
Depreciation and amortization ................................ 7,382 12,899
Corporate expense ............................................ 12,669 5,850
------------- -------------
Operating income (loss) .............................................. (12,130) 32,252
Other (income) expense:
Interest expense ................................................. 5,817 13,116
Equity in income of joint ventures ............................... 602 (808)
------------- -------------
Income (loss) before income taxes .................................... (18,549) 19,944
Income taxes ......................................................... (7,420) 7,878
------------- -------------
Net income (loss) .................................................... $ (11,129) $ 12,066
============= =============
Earnings per common and common equivalent share:
Net income (loss):
Basic ........................................................ $ (0.25) $ 0.28
Diluted ...................................................... (0.24) $ 0.27
Weighted average number of common and common
Equivalent shares outstanding:
Basic ........................................................ 45,235 43,635
Diluted ...................................................... 46,013 44,643
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
10
<PAGE> 11
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
January 1, 1998 Nine Months
Through Ended
July 27, 1998 September 30, 1997
------------- ------------------
<S> <C> <C>
REVENUE
Rooms ............................................. $ 308,638 $ 266,787
Food and beverage ................................. 68,999 62,059
Management fees ................................... 3,538 3,305
Other ............................................. 22,835 20,731
------------- -------------
Total revenue .......................... 404,010 352,882
------------- -------------
OPERATING COSTS AND EXPENSES
Departmental expenses:
Rooms ......................................... 89,721 72,823
Food and beverage ............................. 54,751 46,945
Other ......................................... 5,424 6,432
Undistributed operating expenses:
Administrative and general .................... 41,517 31,026
Marketing ..................................... 29,169 22,395
Property occupancy costs ...................... 65,907 54,647
Depreciation and amortization ................. 34,300 28,437
Corporate expense ............................. 27,676 17,716
------------- -------------
Operating income ...................................... 55,545 72,461
Other (income) expense:
Interest expense .................................. 30,892 31,040
Equity in income of joint ventures ................ (783) (1,319)
------------- -------------
Income before income taxes and extraordinary item ..... 25,436 42,740
Income taxes .......................................... 10,175 16,642
------------- -------------
Income before extraordinary item ...................... 15,261 26,098
Extraordinary loss, net of tax ........................ (25,689) (1,338)
------------- -------------
Net income (loss) ..................................... $ (10,428) $ 24,760
============= =============
Earnings per common and common equivalent share:
Income before extraordinary
item:
Basic ......................................... $ 0.34 $ 0.74
Diluted ....................................... $ 0.34 $ 0.72
Net income (loss):
Basic ......................................... $ (0.23) $ 0.70
Diluted ....................................... $ (0.23) $ 0.68
Weighted average number of common and common
equivalent shares outstanding:
Basic ......................................... 44,380 35,244
Diluted ....................................... 45,194 36,213
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
11
<PAGE> 12
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
1997
------------
ASSETS
<S> <C>
Current assets
Cash and cash equivalents ................................... $ 86,167
Accounts receivable, net .................................... 31,305
Inventory ................................................... 8,286
Deposits and other current assets ........................... 9,298
------------
Total current assets ............................. 135,056
Property and equipment, net ..................................... 1,439,167
Other assets
Restricted cash ............................................. 9,283
Goodwill, net ............................................... 52,773
Investments in joint ventures, net .......................... 12,396
Deferred charges and other non-current assets, net .......... 17,963
------------
Total assets ..................................... $ 1,666,638
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt ........................... $ 8,455
Accounts payable and accrued expenses ....................... 29,852
Accrued property, sales and use taxes ....................... 15,911
Accrued insurance reserves .................................. 9,530
------------
Total current liabilities ........................ 63,748
------------
Long-term debt, excluding current portion ....................... 708,864
Deferred income taxes ........................................... 242,530
Other liabilities ............................................... 2,702
------------
Total liabilities ................................ 1,017,844
------------
Common stock ($.01 par value; 150,000,000 shares
authorized, 45,734,472 shares issued, 43,641,401
shares outstanding) .......................................... 436
Additional paid-in capital ...................................... 606,935
Other accumulated comprehensive income .......................... 286
Retained earnings ............................................... 41,137
------------
Total stockholders' equity ....................... 648,794
------------
Total liabilities and stockholders' equity ....... $ 1,666,638
============
</TABLE>
The accompanying notes are an integral part of this condensed
consolidated financial statement.
12
<PAGE> 13
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
January 1, 1998 Nine Months
Through Ended
July 27, 1998 September 30, 1997
------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ (10,428) $ 24,760
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................ 34,300 28,437
Amortization of deferred financing costs and other
non-current assets ..................................... 1,609 2,154
Non-cash portion of extraordinary item, net of tax ....... 5,095 1,046
Compensation expense recognized for employee
stock options .......................................... 132 227
Equity in earnings of joint ventures ..................... 616 (1,319)
Non-cash portion of foreign currency translation ......... 1,276 --
Changes in working capital .................................. 5,791 19,923
(Increase) decrease in restricted cash ...................... 1,263 (14,605)
Distribution from joint ventures ............................ 90 100
Deferred income tax provision ............................... 1,143 1,645
Decrease in other liabilities ............................... (785) (479)
------------- -------------
Cash provided by operating activities ............. 40,102 61,889
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to property and equipment ...................... (102,283) (28,008)
HI-Thomas Circle settlement ................................. 4,100 --
Sale of property and equipment .............................. 4,750 --
Omaha Acquisition and related costs (net of assumed debt) ... (20,043) --
Holiday Inn Acquisition and related costs ................... -- (400,159)
Purchase of property and equipment .......................... (9,000) (35,000)
------------- -------------
Cash used in investing activities ................. (122,476) (463,167)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock offering, net of costs ........... -- 107,852
Proceeds from credit facility ............................... -- 560,000
Repayment of credit facility with proceeds of offering ...... -- (108,000)
Proceeds from issuance of other long-term debt .............. -- 2,210
Repayment of debt assumed in Omaha Acquisition .............. (25,329) --
Repayment of long-term debt ................................. (13,508) (138,361)
Repayment of Senior Notes ................................... (30,000) --
Borrowings under FelCor Facility ............................ 120,000 --
Proceeds from BT loan ....................................... 490,000 --
Repayment of Nomura Credit Facility ......................... (455,000) --
Proceeds from exercise of employee stock options ............ 1,631 --
Proceeds from senior term facility .......................... -- 41,200
Increase in deferred charges and other non-current assets ... (4,021) (14,498)
------------- -------------
Cash provided by financing activities ............. 83,773 450,403
------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
13
<PAGE> 14
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
January 1, 1998 Nine Months
Through Ended
July 27, 1998 September 30, 1997
------------- ------------------
<S> <C> <C>
Net increase in cash and cash equivalents ............. 1,399 49,125
Cash and cash equivalents at beginning of period ...... 86,167 4,666
------------- -------------
Cash and cash equivalents at end of period ............ $ 87,566 $ 53,791
============= =============
Supplemental cash flow information:
Non-cash investing activities
Common Stock issued in Holiday Inn Acquisition . $ -- $ 267,967
============= =============
Common Stock issued in Omaha Acquisition ....... $ 40,000 $ --
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
14
<PAGE> 15
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Bristol Hotel Company ("BHC" or the "Predecessor") is a Delaware
corporation, which was incorporated in November 1994 and began
operations after the acquisitions of Harvey Hotel Company, Ltd., and
its subsidiaries and United Inns, Inc. At July 27, 1998, prior to the
spin-off and the FelCor Merger (as defined in Note 2), BHC owned 108
hotels and managed 15 additional hotels, one of which was owned by a
joint venture in which BHC owned a 50% interest. The properties, which
contain approximately 32,700 rooms, are located in 27 states, the
District of Columbia and Canada. BHC acquired the ownership and/or
management of 60 of these properties on April 28, 1997 (the "Holiday
Inn Acquisition").
The condensed consolidated income statements are for the periods from
July 1,1998 through July 27, 1998 and January 1, 1998 through July 27,
1998, and the condensed consolidated statement of cash flows is for
the period January 1, 1998 through July 27, 1998, before giving effect
to the spin-off and the FelCor Merger (as defined in Note 2).
Management does not believe that the results of operations of BHC as
predecessor are necessarily indicative of the future results of the
spin-off entity, Bristol Hotels & Resorts ("BH&R").
The condensed consolidated balance sheet at December 31, 1997 has been
derived from the audited balance sheet at that date. The condensed
consolidated statements of income for the periods July 1, 1998 through
July 27, 1998 and January 1, 1998 through July 27, 1998, and the three
and nine months ended September 30, 1997, and the condensed
consolidated statements of cash flow for the period January 1, 1998
through July 27, 1998 and the nine months ended September 30, 1997
have been prepared by BHC and are unaudited. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly, in all material respects,
the results of operations for the periods from July 1, 1998 through
July 27, 1998 and January 1, 1998 through July 27, 1998 and the three
and nine months ended September 30, 1997 and its cash flows for the
period from January 1, 1998 through July 27, 1998 and the nine months
ended September 30, 1997 have been made. Interim results are not
necessarily indicative of fiscal year performance because of seasonal
and short-term variations.
2. FELCOR MERGER AND THE SPIN-OFF
BHC's hotel operating business was spun off as a separate publicly
traded company, Bristol Hotels & Resorts, in connection with the
merger of BHC with FelCor Suite Hotels, Inc. ("FelCor") on July 27,
1998 (the "FelCor Merger"). The FelCor Merger was consummated
following the spin-off.
In the spin-off, BHC stockholders received one common share of BH&R
for every two of their BHC common shares. In the FelCor Merger, BHC
stockholders received 0.685 FelCor common shares for each of their
existing BHC common shares. As a result of these transactions, former
BHC stockholders own all of BH&R's equity and 44% of FelCor's
outstanding common equity. The spin-off was taxable to BHC and its
stockholders, while the merger was tax-free to FelCor and BHC
stockholders.
Each of the BHC hotels acquired by FelCor in the FelCor Merger are
leased to and operated by BH&R. BH&R and FelCor are separately owned
and managed, but are expected to work together in the acquisition and
leasing of additional hotels.
15
<PAGE> 16
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. ACQUISITIONS AND DISPOSITIONS
On April 21, 1998, BHC acquired the 187-room Sheraton Four Points
Hotel in Leominster, Massachusetts for $9.0 million. The purchase
price was funded with borrowings from the FelCor Facility (as
described below).
On April 30, 1998, BHC acquired 20 midwestern hotels (the "Omaha
Acquisition"). The total consideration for these assets was $40
million of assumed debt (of which $25.3 million was paid off at
closing), $20 million in cash and 1.43 million shares of BHC's common
stock. The portfolio consists of nine full-service Holiday Inns, five
Holiday Inn Express hotels, five Hampton Inns and one Homewood Suites,
with locations in Omaha, Nebraska; Moline, Illinois; Davenport, Iowa;
Central Kansas and Midland/Odessa, Texas. BHC funded the cash portion
of the purchase price and the $25.3 million of debt prepayments with
borrowings under the FelCor Facility (as described below).
On June 9, 1998, BHC sold the 200 room Holiday Inn - Winter Park, in
Orlando, Florida for $4.75 million. The net proceeds of the sale were
applied to the BT Loan (defined below).
On July 24, 1998, in settlement of a dispute with its joint venture
partner, BHC sold its 50% interest in the HI - Thomas Circle Joint
Venture to an affiliate of John Hancock Life Insurance Company, its
joint venture partner, for $4.1 million, resulting in a loss of $664
thousand.
4. LONG-TERM DEBT AND EXTRAORDINARY ITEMS
On April 21, 1998, BHC entered into an interim credit facility with
FelCor pursuant to which BHC can borrow up to $120 million to fund
acquisitions and redevelopment costs and for other corporate purposes
(the "FelCor Facility"). The FelCor Facility bears interest at a rate
of LIBOR plus 2% and matures on December 31, 2003.
On May 11, 1998, BHC refinanced its existing $455 million loan from
Nomura Asset Capital Corporation and Bankers Trust Company (the
"Nomura Credit Facility") with a new $455 million loan from Bankers
Trust Company (the "BT Loan"). The BT Loan is secured by a pledge of
stock in the subsidiaries of BHC, bears interest at LIBOR plus 1-3/4%
and matures on May 11, 2001. BHC incurred approximately $33.1 million
in yield maintenance costs and prepayment penalties related to the
payoff of the existing facility, which, along with approximately $6.9
million of deferred financing charges was recognized as an
extraordinary loss in the second quarter of 1998. On July 24, 1998,
BHC amended the BT Loan to provide for additional borrowing of $35
million from Bankers Trust. Approximately $25.8 million of this amount
was contributed to BH&R for their repurchase of BH&R stock from
affiliates of Bass plc.
On June 15, 1998, BHC prepaid the remaining $30 million of its 11.22%
Senior Secured Notes due 2000 (the "Senior Notes"). BHC incurred $1.2
million of prepayment penalties, which, along with $1.6 million of
deferred financing costs and unamortized discount, was recognized as
an extraordinary loss in the second quarter of 1998.
16
<PAGE> 17
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. COMPREHENSIVE INCOME
BHC has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components in the financial statements. The objective of SFAS 130 is
to report a measure of all changes in equity of an enterprise that
result from transactions and other economic events of the period other
than transactions with owners. Comprehensive income is the total of
net income and all other non-owner changes in a company's equity.
Due to BHC's Canadian operations, it engaged in transactions involving
foreign currency resulting in translation adjustments of approximately
$2.0 million and $1.6 million for the one and seven months ended July
27, 1998. For the period from July 1, 1998 through July 27, 1998 and
January 1, 1998 through July 27, 1998, comprehensive loss was $9.1
million and $8.9 million, respectively. There was no other
comprehensive income items for the three and nine months ended
September 30, 1997.
17
<PAGE> 18
BRISTOL HOTELS & RESORTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q are forward-looking statements and
information that are based on the Company's current views and assumptions
concerning future events. Forward-looking statements are typically identified
by the words "believe," "expect," "anticipate," "intend," "estimate," "project"
and similar expressions. These statements are subject to risks and
uncertainties that could cause the Company's actual operations and results of
operations to differ materially from those reflected in such forward-looking
statements.
Forward-looking statements are not guarantees of future performance and are
subject to the Company achieving its business strategy and the costs and
expected benefits of that strategy and having sufficient cash flow and other
sources of cash to fund its lease payments, debt service requirements, working
capital needs and other significant expenditures. Forward-looking statements
are also based on what the Company anticipates future trends in the lodging
industry will be and how those will be affected by industry capacity, the
seasonal nature of the lodging industry, product demand and pricing and the
other matters referred to from time to time in the Company's filing with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly release the results of any revisions to these forward looking
statements that may be made to reflect any future events or circumstances.
OVERVIEW
BRISTOL HOTELS & RESORTS
The Company's results of operations from May 20, 1998 through September 30,
1998 include the operations of the Hampton Inn - Las Vegas and the operations
for the assets acquired in the spin-off, including the FelCor leases, from July
28, 1998. Therefore, the operating results of the Company for the three months
ended September 30, 1998 and the period from May 20, 1998 through September 30,
1998 are not indicative of its future performance.
BRISTOL HOTEL COMPANY
Results of operations for the three and nine months ended September 30,1997
include the 36 original hotels owned by BHC as of January 1, 1996 (the
"Original Bristol Portfolio"), Holiday Inn - Plano, the Allerton (as of January
31, 1997), five months of operations for the 45 hotels acquired in the Holiday
Inn Acquisition on April 28, 1997 (the "Holiday Inn Assets") as well as five
months of management of the 15 hotels under management contracts. Results of
operations for the periods ended July 27, 1998 include the properties listed
above, as well as the Holiday Inn - Milpitas, the Holiday Inn - Philadelphia
Independence Mall, and the Holiday Inn - St. Louis for the entire period, the
Sheraton Four Points - Leominster as of April 21, 1998 and the Hampton Inn -
Las Vegas as of May 20, 1998 (collectively, the "Single Asset Acquisitions"),
and the 20 hotels acquired in the Omaha Acquisition (as of April 30, 1998).
REDEVELOPMENT AND REBRANDING PROGRAM
The redevelopment and rebranding program (the "Redevelopment and Rebranding
Program") started by BHC in November 1997 and continued by the Company impacted
both the Company's and BHC's 1998 operating results. The Redevelopment and
Rebranding Program entails exterior and interior reconstruction of and
renovations to a substantial number of the Holiday Inn Assets and the Single
Asset Acquisitions as well as the rebranding of certain hotels operated under
the Company's own brand names. In addition to the renovations, the Company
expects to rebrand 20 hotels to the Crowne Plaza or Crowne Plaza Suites brand.
The Company believes the conversions to the Crowne Plaza brands will enable
18
<PAGE> 19
BRISTOL HOTELS & RESORTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
REDEVELOPMENT AND REBRANDING PROGRAM (CONTINUED)
the hotels to more effectively compete in the markets in which they operate. In
the first nine months of 1998, the rebranding of nine hotels, totaling 2,968
rooms, to the Crowne Plaza or Crowne Plaza Suites brand was completed. In total
24 hotels with 7,895 rooms were undergoing redevelopment in the first nine
months of 1998, of which the redevelopment and/or rebranding of 18 hotels
containing 5,912 rooms was completed by September 30, 1998. The Redevelopment
and Rebranding Program is expected to be substantially complete by the end of
1999.
STATISTICAL SUMMARY
The following statistical information is presented on a pro forma basis, as if
the Holiday Inn Acquisition and the Omaha Acquisition had occurred on January 1
of each period presented.
Pro forma Average Daily Rate ("ADR") and occupancy for the three months ended
September 30, 1998 were $80.45 and 69.4%, respectively, compared to $75.11 and
73.4% for the three months ended September 30, 1997. ADR increased 7.1%
compared to 1997, and the 4.0 percentage point ("pp") decrease in occupancy is
primarily due to the disruptions to the hotels during the Redevelopment and
Rebranding Program. Pro forma revenue per available room ("RevPAR") was $55.79
for the three months ended September 30, 1998, compared to $55.13 for the same
period in 1997. This 1.2% increase is primarily attributable to general market
conditions, the Company's management expertise and the strength of the Holiday
Inn brand name and reservation system, offset by the disruptions caused by the
Redevelopment and Rebranding Program. During the three months ended September
30, 1998, 3.0% of total available rooms, totaling 85,283 room nights, were
out-of-service as a result of the Redevelopment and Rebranding Program. Without
the effect of the properties under redevelopment in the periods, pro forma ADR,
occupancy and RevPAR for the three months ended September 30, 1998 were $79.98,
71.6% and $57.29 compared to $74.89, 73.8% and $55.31 for the same period in
1997, resulting in an increase in ADR and RevPAR of 6.8% and 3.6%,
respectively, and a decrease of 2.2 pp in occupancy. Excluding the properties
under redevelopment during the period and the assets targeted for sale, ADR,
occupancy and RevPAR were $80.32, 71.3% and $57.27, respectively, for the three
months ended September 30, 1998 and $74.99, 73.1% and $54.82, respectively, for
the same period in 1997, resulting in a 7.1% and 4.5% increase in ADR and
RevPAR, respectively, and a 1.8 pp decrease in occupancy.
Pro forma ADR, occupancy and RevPAR for the nine months ended September 30,
1998 were $80.14, 68.8% and $55.15 compared to $74.54, 71.6% and $53.36 for the
nine months ended September 30, 1997, resulting in an increase in ADR and
RevPAR of 7.5% and 3.4%, respectively, and a decrease of 2.8 pp in occupancy.
This 3.4% increase is primarily attributable to general market conditions, the
Company's management expertise and the strength of the Holiday Inn brand name
and reservation system, offset by the disruptions caused by the Redevelopment
and Rebranding Program. During the nine months ended September 30, 1998, 3.2%
of total available rooms, totaling 266,481 room nights, were out-of-service as
a result of the Redevelopment and Rebranding Program. Without the effect of the
assets under redevelopment during the periods, pro forma ADR, occupancy and
RevPAR for the nine months ended September 30, 1998 were $77.77, 69.8% and
$54.29 compared to $72.70, 70.8% and $51.50, respectively, resulting in an
increase of 7.0% in ADR and 5.4% in RevPAR, and a decrease of 1.0 pp in
occupancy. Excluding the properties under redevelopment during the period and
assets targeted for sale, ADR, occupancy and RevPAR for the nine months ended
September 30, 1998 were $77.43, 70.4% and $54.51, respectively, compared to
$72.06, 71.2% and $51.31, respectively, for the same period in 1997, resulting
in a 7.5% and 6.2% increase in ADR and RevPAR, respectively,and a 0.8 pp
decrease in occupancy.
19
<PAGE> 20
BRISTOL HOTELS & RESORTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
RESULTS OF OPERATIONS
BRISTOL HOTELS & RESORTS
Three months ended September 30, 1998 and period
from May 20, 1998 through September 30, 1998
Rooms revenue was $92.0 million and $92.2 million for the quarter ended
September 30, 1998 and the period from May 20, 1998 through September 30, 1998,
respectively. This amount is primarily related to operations for the two months
after the spin-off. Rooms profit margin was 71.7% for both periods.
Food and beverage revenue was $21.0 million for both the three months ended
September 30, 1998 and the period from May 20, 1998 through September 30, 1998.
Food and beverage profit margin was 23.5% for both periods.
Management fee income was $998 thousand for the three months ended September
30, 1998 and the period from May 20, 1998 through September 30, 1998.
Construction management fees for the quarter ended September 30, 1998 and the
period from May 20, 1998 through September 30, 1998 were $995 thousand. The
construction management fees are charged by the Company to the hotel owners for
purchasing and project management services provided by the Company for
construction projects (including the Redevelopment and Rebranding Program),
calculated as a percent of the total project costs.
Property occupancy costs include normal hotel operating costs, but do not
include property taxes, ground rent and property insurance. Under the terms of
the leases, these costs are borne by the property owner. Property occupancy
costs were $11.9 million for both periods ended September 30, 1998.
Tenant lease expense for the three months ended September 30, 1998 and the
period from May 20, 1998 through September 30, 1998 was $38.9 million and $39.0
million, respectively. This amount represents lease payments to property owners
(primarily FelCor) under long-term lease agreements. EBITDA (earnings before
interest, taxes, depreciation and amortization) was $2.4 million for both
periods. EBITDA margin (EBITDA divided by total revenues) was 2.0% and 1.9% for
the three months ended September 30, 1998 and the period from May 20, 1998
through September 30, 1998, respectively.
Depreciation and amortization was $378 thousand for the three months ending
September 30, 1998 and the period from May 20, 1998 through September 30, 1998.
This amount relates primarily to the property and equipment in the Company's
corporate office.
Due to the factors discussed above, net income was $1.2 million and $1.1
million for the three months ended September 30, 1998 and the period from May
20, 1998 through September 30, 1998, respectively.
BRISTOL HOTEL COMPANY (PREDECESSOR)
July 1, 1998 through July 27, 1998 Compared to
Three Months Ended September 30, 1997
Rooms revenue was $49.0 million for the period July 1, 1998 through July 27,
1998, compared to $125.7 million for the three months ended September 30, 1997.
The pro rata increase is primarily due to the effect of the Single Asset
Acquisitions and the Omaha Acquisition. Rooms profit margin was 64.9% for the
month ended July 27, 1998 and 72.1% for the quarter ended September 30, 1997.
The 7.2 pp decrease is due to increased franchise costs resulting from the
rebranding of certain of the hotels in the Original
20
<PAGE> 21
BRISTOL HOTELS & RESORTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
BRISTOL HOTEL COMPANY (PREDECESSOR)
July 1, 1998 through July 27, 1998 Compared to
Three Months Ended September 30, 1997 (continued)
Bristol Portfolio to Holiday Inn and Crowne Plaza brands, as well as lower
margins for hotels undergoing redevelopment during the period.
Food and beverage revenue was $9.2 million for the period ended July 27, 1998
and $25.7 million for the quarter ended September 30, 1997. Food and beverage
profit margin fell from 17.6% in the quarter ended September 30, 1997 to 2.5%
in the month ended July 27, 1998. The 15.1 pp decrease is primarily
attributable to an increase in food costs, as well as increased payroll costs.
Gross operating margin (total revenue less departmental expenses,
administrative and general, marketing and property occupancy costs divided by
total revenue) was 12.6% for the period ended July 27, 1998, compared to 31.3%
for the quarter ended September 30, 1997. The 18.7 pp decrease is primarily due
to the decrease in rooms and food and beverage profit discussed above, as well
as increased property occupancy costs. The increase in property occupancy costs
is due to the addition of the Single Asset Acquisitions and the Omaha
Acquisition along with increased property tax expense due to restructuring of
the Province of Ontario tax system and reassessments of the entire portfolio
based on the most recent jurisdictional information.
Corporate expenses were $12.7 million for the period ended July 27, 1998
compared to $5.9 million for the quarter ended September 30, 1997.
Approximately $7.5 million of this increase is attributable to one-time
professional fees of approximately $4.0 million and other costs, including
transfer taxes and SEC filing fees, of $3.5 million related to the FelCor
merger.
Interest expense was $5.8 million for the period ended July 27, 1998 compared
to $13.1 million for the quarter ended September 30, 1997. The pro rata
increase is due to the increased borrowings under the FelCor facility and debt
assumed in the Omaha Acquisition.
Depreciation and amortization expense was $7.4 million for the period ended
July 27, 1998, compared to $12.9 million for the three months ended September
30, 1997. The pro rata increase is primarily attributable to the addition of
the Single Asset Acquisitions and the accelerated depreciation of software that
has been replaced or upgraded.
Income from equity in joint ventures was $808 thousand for the three months
ended September 30, 1997, compared to a loss of $602 thousand for the period
ended July 27, 1998. At September 30, 1997, BHC owned 50% interests in three
joint ventures. BHC purchased the remaining 50% in the Milpitas Joint Venture
in December 1997, and sold its 50% interest in the HI-Thomas Circle Joint
Venture in July 1998 for $4.1 million, resulting in a loss of approximately
$664 thousand.
Due to the factors discussed above, net income decreased from $12.1 million for
the quarter ended September 30, 1997 to a net loss of $11.1 million for the one
month ended July 27, 1998.
21
<PAGE> 22
BRISTOL HOTELS & RESORTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
BRISTOL HOTEL COMPANY (PREDECESSOR)
January 1, 1998 through July 27, 1998
Compared to Nine Months Ended September 30, 1997
Rooms revenue for the period ended July 27, 1998 was $308.6 million compared to
$266.8 million for the nine months ended September 30, 1997. The pro rata
increase is primarily due to the addition of the Holiday Inn Assets, the Single
Asset Acquisitions and the Omaha Acquisition from their respective acquisition
dates. Rooms profit margin was 70.9% for the period ended July 27, 1998,
compared to 72.7% for the nine months ended September 30, 1997. The slight
decrease is attributable to higher franchise costs due to the rebranding of
certain hotels in the Original Bristol Portfolio to Holiday Inn and Crowne
Plaza brands in 1998, as well as the lower margins for properties under
redevelopment during the period.
Food and beverage revenue was $69.0 million for the period ended July 27, 1998,
compared to $62.1 million for the nine months ended September 30, 1997. Food
and beverage profit margin was 20.7% for the period ended July 27, 1998
compared to 24.4% for the nine months ended September 30, 1997.
Gross operating margin was 29.1% for the period ended July 27, 1998, compared
to 33.6% for the nine months ended September 30, 1997. The 4.5 pp decrease is
primarily due to the increased costs incurred in July 1998 and discussed
previously.
Corporate expenses were $27.7 million for the period ended July 27, 1998,
compared to $17.7 million for the nine months ended September 30, 1997.
Approximately $10.5 million of this increase is attributable to one-time
professional fees of approximately $6.2 million and other costs, including
transfer taxes and SEC filing fees, of $4.3 million related to the FelCor
merger.
Property occupancy costs for the period ended July 27, 1998 were $65.9 million
compared to $54.6 million for the nine months ended September 30, 1997. The pro
rata increase is due to the increased number of hotels owned by BHC during the
period, and higher property tax and land rent related to those assets.
Interest expense was $30.9 million for the period ended July 27, 1998, compared
to $31.0 million for the nine months ended September 30, 1997. The pro rata
increase is due to borrowings for the Holiday Inn Acquisition, as well as debt
related to the Omaha Acquisition and other debt incurred under the FelCor
Facility.
Depreciation and amortization was $34.3 million for the period ended July 27,
1998 compared to $28.4 million for the nine months ended September 30, 1997.
The pro rata increase is due to the Holiday Inn, Omaha and Single Asset
Acquisitions.
Because of the factors discussed above, net loss for the period ended July 27,
1998 was $10.4 million, compared to net income of $24.8 million for the nine
months ended September 30, 1997.
22
<PAGE> 23
BRISTOL HOTELS & RESORTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash flow from
operations and borrowings under the $40 million revolving credit facility with
Bankers Trust Company (the "Credit Facility"). The Company had approximately
$23.1 million of cash at the spin-off date and approximately $21.5 million of
cash as of September 30, 1998.
The Company's cash flows are sensitive to the performance of the leased and
managed properties. For managed properties, the Company's cash flows are
principally tied to changes in the gross revenues of the properties. For leased
properties, the Company is impacted both by changes in gross revenues as well
as changes in operating expenses and rent expense. Rent expense is paid
principally as a percentage of gross revenues and is largely tied to room
revenue volume. Room revenue increases or decreases caused by changes in room
rates have only a minor impact on operating expenses, as compared to revenue
increases or decreases generated by changes in occupancy, which also can
produce significant changes in operating costs. As a result, the Company's cash
flows are more directly impacted by revenue increases or decreases caused by
changes in average room rates. Increased revenues caused by increases in
occupancy levels could have little impact on the Company's cash flows or could
actually reduce cash flow if the incremental business is not sold at
sufficiently high average room rates.
The $40 million of commitments under the Credit Facility may be used for
working capital and other general corporate purposes. Additionally, a sub-limit
of up to $20 million of such commitments is available to issue letters of
credit to secure the Company's obligations under the leases with FelCor and
other owners, subject to the reduction of such sub-limit to reflect the
Company's achievement of liquid net worth requirements related to such leases.
Concurrently with the spin-off, a letter of credit for $20 million was issued
to FelCor to secure the Company's obligations under the leases. This amount may
be adjusted from time to time pursuant to the liquid net worth requirements
described above.
Based on these sources, the Company is actively pursuing opportunities for
growth. The Company anticipates adding to its leasehold and management
portfolio, both through its relationship with FelCor, as well as working with
other REITs and individual property owners who could benefit from the Company's
services. Some of these new contracts could potentially require a small capital
investment on the part of the Company. The Company may also purchase hotel
leases or management contracts from third parties. The Company is continuously
exploring opportunities for increasing efficiency at the hotels and the
corporate office, and for reducing operating costs at the hotels it operates.
Some of these opportunities could require small capital investments by the
Company during the next fiscal year to achieve the targeted savings, including
such items as the purchase and installation of energy saving devices throughout
the hotels. Additionally, the Company expects to incur up to approximately $2.0
million of information technology improvement costs in the Company's corporate
office in the next fiscal year. The Company believes that it has adequate
capital resources to fund its growth opportunities for the immediate future.
YEAR 2000 COMPLIANCE
In order to fully comprehend the Year 2000 Problem and how it will impact the
Company's operations, the Company has established a Year 2000 Readiness
Program. The program contemplates the completion of the following steps:
Awareness, Inventory, Assessment, Planning & Scheduling, Replace/Upgrade, Test
Compliance & Functionality, and finally, Implementation/Contingency Planning.
As of November 1, 1998, the Company has completed the Year 2000 Readiness
Program through the Assessment stage, and in some instances has proceeded to
the Planning & Scheduling phase. The Company anticipates completing the
Planning & Scheduling stage by the end of the first quarter 1999.
23
<PAGE> 24
BRISTOL HOTELS & RESORTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
YEAR 2000 COMPLIANCE (CONTINUED)
In particular:
1) During the third quarter of 1998 the Company completed its evaluation
and technical inventory of the Company's corporate headquarters and
all of the property level systems which might be impacted by the Year
2000 Problem. The Company has secured the resources and scheduled the
remedy of each of those systems that it has identified as having
potential Year 2000 issues. The Company has also established a
contingency plan for the centralized computer operating systems, which
has been tested and is in a state of readiness.
2) The Company continues to evaluate non-information technology systems
such as embedded chip mechanical/engineering systems, energy
management systems, and security systems and expects to have this
review completed by the end of the first quarter of 1999 at both its
corporate headquarters and its properties. As of November 1998, the
Company has not discovered any embedded chip problems that would cause
critical systems to fail.
3) The Company is also working closely with its franchisors to ensure
readiness. Each of these franchisors has indicated to the Company that
their reservation systems will be Year 2000 compliant by January 31,
1999.
4) The Company is continuing to survey its major vendors and service
providers to determine Year 2000 readiness and anticipates completing
these surveys by the end of the fourth quarter of 1998.
Costs
The Company is working with FelCor and its other owners to remedy the property
level non-ready systems identified. In particular, the Company has prepared and
presented a budget to FelCor setting out the anticipated costs and timeline for
the remedy to make those 109 properties Year 2000 ready by January 1, 2000,
which budget has been approved. While most of the costs associated with the
remedy to the FelCor properties will be borne by FelCor, it is anticipated that
the Company will bear approximately $650 thousand of the cost. For each of its
other property owners, the Company will present a 1999 capital budget pursuant
to the time line set forth in each owner's operating agreement. These budgets
will include presentations of Year 2000 remedy costs. The third party owners
are contractually obligated to bear this cost. Other than those specified
above, the Company is not aware of any additional costs that it will bear to
remedy the Year 2000 problems company-wide.
Risks
The Company cannot predict the actual effects to it of the Year 2000 problem,
which depends on numerous factors including whether significant third parties
properly and timely remedy the Year 2000 issue and whether broad-based or
systemic failures occur (including disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services or failures in financial transactions or payment processing systems
such as credit cards), as well as the severity and duration of any such
failures. There can be no assurances that Year 2000 remediation by third
parties will be properly and timely completed, and failure to do so may have a
material adverse effect on the Company, its business and its financial
condition. Further, the Company may have no option but to remain with a vendor
who cannot assure Year 2000 readiness if an alternative source is not available
at commercially reasonable terms. The Company's Year 2000 Readiness Program is
expected to reduce the level of uncertainty about the Year 2000 problem.
24
<PAGE> 25
PART II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
25
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRISTOL HOTELS & RESORTS
Date: November 13, 1998 By /s/ John D. Bailey
----------------------------------
John D. Bailey
Vice President, Controller and
Chief Accounting Officer
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ --------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAY-20-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,485
<SECURITIES> 0
<RECEIVABLES> 55,155
<ALLOWANCES> (1,478)
<INVENTORY> 8,710
<CURRENT-ASSETS> 100,272
<PP&E> 8,425
<DEPRECIATION> (2,147)
<TOTAL-ASSETS> 111,406
<CURRENT-LIABILITIES> 74,485
<BONDS> 0
0
0
<COMMON> 228
<OTHER-SE> 56,691
<TOTAL-LIABILITY-AND-EQUITY> 111,406
<SALES> 0
<TOTAL-REVENUES> 121,339
<CGS> 0
<TOTAL-COSTS> 115,021
<OTHER-EXPENSES> 4,336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78
<INCOME-PRETAX> 1,904
<INCOME-TAX> 787
<INCOME-CONTINUING> 1,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,117
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
