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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the Year Ended December 31, 1998
BRISTOL HOTELS & RESORTS
14295 Midway Road
Addison, Texas 75001
972-391-3910
Commission File No. 1-14047
Incorporated in Delaware IRS No. 75-2754805
Former Name and Address:
Bristol Hotels & Resorts, Inc.
14295 Midway Road
Dallas, Texas 75244
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Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Name of each exchange
Title of each class on which registered
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<S> <C>
Common Stock, Par Value $.01 per share New York Stock Exchange
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The Company (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Company's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-K. Yes No X .
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The aggregate market value of the voting stock held by non-affiliates of
the Company at March 4, 1999, was $67,871,119. Such computation excludes
10,539,929 shares held by the Company's affiliates, directors and executive
officers. At March 4, 1999, there were 17,779,515 shares of Common Stock
outstanding.
Documents Incorporated by Reference: Certain sections of the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
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PART I.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-K are forward-looking statements and
information that are based on Bristol Hotels & Resorts' (the "Company") current
views and assumptions concerning future events. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "project" and similar expressions. These statements are subject to
risks and uncertainties that could cause the Company's actual operations and
results of operations to differ materially from those reflected in such
forward-looking statements.
Forward-looking statements are not guarantees of future performance and are
subject to the Company achieving its business strategy and the costs and
expected benefits of that strategy and having sufficient cash flow and other
sources of cash to fund its lease payments, debt service requirements, working
capital needs and other significant expenditures. Forward-looking statements
are also based on what the Company anticipates future trends in the lodging
industry will be and how those will be affected by industry capacity, the
seasonal nature of the lodging industry, product demand and pricing and the
other matters referred to from time to time in the Company's filings with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly release the results of any revisions to these forward looking
statements that may be made to reflect any future events or circumstances.
ITEMS 1 & 2. BUSINESS & PROPERTIES
Bristol Hotels & Resorts is one of the leading independent operators of hotels
in North America, operating 120 hotels with approximately 32,100 rooms as of
December 31, 1998. The Company operates the largest number of Bass Hotels &
Resorts ("Bass") branded hotels in the world, including Crowne Plaza, Holiday
Inn Select, Holiday Inn and Holiday Inn Express. The Company operates 91 hotels
under Bass brands. The Company also operates 22 hotels under other hotel
brands, including Hampton Inn, Homewood Suites, Hilton, Courtyard by Marriott,
Sheraton Four Points and Fairfield Inn, five hotels under its proprietary
brands, and two non-branded hotels. The Company operates primarily full-service
hotels in the mid-priced to upscale segments of the hospitality industry and
its hotels are located in 19 of the top 25 lodging markets in the United
States.
The Company was formed on March 20, 1998 ("Inception"), and began operations as
a subsidiary of Bristol Hotel Company ("BHC" or the "Predecessor") on May 20,
1998. On July 27, 1998, BHC spun off its hotel operating business (the
"Spin-off") into the Company. The Company began trading on the New York Stock
Exchange on July 28, 1998. BHC's real estate entity then merged into FelCor
Lodging Trust Incorporated ("FelCor"). FelCor is one of the nation's largest
hotel real estate investment trusts ("REIT"), owning 190 hotels in North
America.
The Company operates 105 hotels pursuant to long-term leases from FelCor, and
manages and leases properties for other owners, such as Winston Hotels, Inc.
and Lone Star Opportunity Fund.
STRATEGIC RELATIONSHIPS
The Company is one of the leading independent operators of hotels in North
America. While the Company is not limited to the operation of hotels for any
one brand or owner, it has formed certain strategic alliances that it believes
will be important to its future success.
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Bass Hotels & Resorts
In April 1997 the Predecessor acquired 60 Bass branded hotels (the "Holiday Inn
Acquisition") from Bass, and in doing so, created a significant relationship
with Bass. The Company benefits from Bass' worldwide reservation system,
Holidex, and their marketing and promotional support, as well as the
recognition value of the Bass brands. Bass is committed to enhancing the
quality of its hotel brands, thereby increasing the value they bring to
franchisees. In 1994, Bass initiated a comprehensive modernization program to
renovate and update the hotels operating under the Holiday Inn flag. To date,
franchisees have spent more than $1.5 billion towards this effort, and by the
year 2000, the Company will have overseen the investment of $400 million in the
redevelopment of the Crowne Plaza and Holiday Inn hotels that it operates. The
Company, as operator of the largest number of Bass branded hotels in the world,
has taken an active role in helping develop these standards. In December 1998
the Company's Combined Quality Index (not including the properties then
undergoing redevelopment), the standard on which Bass branded hotels are
scored, was 843 out of a possible 1000, which was higher than the average of
832 for all Bass branded hotels.
FelCor
The Company operates 105 hotels pursuant to long-term leases with FelCor,
manages one property owned by FelCor and manages an additional property owned
by a joint venture in which FelCor owns a 50% interest. This makes FelCor the
Company's largest lessor by a significant margin. This relationship is one that
the Company believes will lead to mutual growth and expansion.
Other Owners and Franchisors
While the Company enjoys the benefits of its alliances with Bass and FelCor, it
is an independent operator, and is free to pursue relationships with other
owners and franchisors. The Company operates hotels for owners such as Winston
Hotels, Inc. and Lone Star Opportunity Fund. The Company recently announced an
agreement with the Landmark Organization to manage two Hilton Garden Inns and a
265-room upscale Hilton Hotel, all of which are currently under development.
The Company is currently in discussions with Hilton Hotels Corporation and
related franchisees that could result in the addition of several Hilton branded
hotels to the Company's portfolio. The Company is having discussions with
several other owners and developers which could lead to operating agreements
for additional hotels carrying a variety of brands.
PROPERTIES
The following table sets forth certain information with respect to each hotel
leased or managed by the Company as of December 31, 1998:
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NO. OF
HOTEL LOCATION ROOMS
<S> <C> <C>
LEASED:
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Holiday Inn - Montgomery..................................... Montgomery, AL................... 213
Holiday Inn - Texarkana I-30................................. Texarkana, AR.................... 210
Days Inn - Flagstaff (3)..................................... Flagstaff, AZ.................... 157
Fairfield Inn - Downtown Scottsdale.......................... Scottsdale, AZ................... 218
Holiday Inn - Santa Barbara.................................. Santa Barbara, CA................ 160
Holiday Inn Select - Irvine/Orange County Airport (1)........ Irvine, CA....................... 334
Crowne Plaza - Pleasanton.................................... Pleasanton, CA................... 244
Holiday Inn - San Diego on the Bay (2)....................... San Diego, CA.................... 600
Holiday Inn - San Jose North (1)............................. San Jose, CA..................... 305
Holiday Inn - San Francisco Financial District............... San Francisco, CA................ 565
Holiday Inn - San Francisco Fisherman's Wharf................ San Francisco, CA................ 585
Crowne Plaza - San Francisco Union Square.................... San Francisco, CA................ 403
Holiday Inn Express - Colorado Springs Central (3)........... Colorado Springs, CO............. 207
Ramada Inn - Colorado Springs North (3)...................... Colorado Springs, CO............. 220
</TABLE>
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<TABLE>
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NO. OF
HOTEL LOCATION ROOMS
<S> <C> <C>
LEASED (continued):
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Crowne Plaza - Hartford Downtown............................. Hartford, CT..................... 342
Holiday Inn Select - Stamford................................ Stamford, CT..................... 383
Holiday Inn - Cocoa Beach Oceanfront Resort.................. Cocoa Beach, FL.................. 500
Holiday Inn - Nikki Bird..................................... Kissimmee, FL.................... 529
Crowne Plaza - Miami International Airport................... Miami, FL........................ 304
Holiday Inn Select - Orlando International Airport........... Orlando, FL...................... 288
Holiday Inn - Orlando International Drive Resort............. Orlando, FL...................... 652
Holiday Inn - Tampa Near Busch Gardens(R)..................... Tampa, FL........................ 395
Courtyard by Marriott - Downtown Atlanta..................... Atlanta, GA...................... 211
Fairfield Inn - Downtown Atlanta............................. Atlanta, GA...................... 242
Holiday Inn - Atlanta Airport North.......................... Atlanta, GA...................... 493
Crowne Plaza - Atlanta Powers Ferry.......................... Atlanta, GA...................... 296
Crowne Plaza - Atlanta Airport............................... Atlanta, GA...................... 378
Holiday Inn Select - Atlanta Perimeter Dunwoody.............. Atlanta, GA...................... 250
Holiday Inn Express - Atlanta I-20 East...................... Atlanta, GA...................... 167
Holiday Inn - Atlanta South/Jonesboro........................ Atlanta, GA...................... 180
Holiday Inn - Columbus Airport North......................... Columbus, GA..................... 223
Hampton Inn - Marietta....................................... Marietta, GA..................... 140
Hampton Inn - Davenport...................................... Davenport, IA.................... 132
Holiday Inn - Davenport...................................... Davenport, IA.................... 287
Crowne Plaza - Allerton Hotel (1)............................ Chicago, IL...................... 444
Hampton Inn - Moline......................................... Moline, IL....................... 138
Holiday Inn - Moline Airport................................. Moline, IL....................... 216
Holiday Inn Express - Moline Airport......................... Moline, IL....................... 111
Holiday Inn Express - Colby.................................. Colby, KS........................ 72
Holiday Inn - Great Bend..................................... Great Bend, KS................... 174
Hampton Inn - Hays........................................... Hays, KS......................... 117
Holiday Inn - Hays........................................... Hays, KS......................... 191
Holiday Inn - Salina......................................... Salina, KS....................... 195
Holiday Inn Express & Suites - Salina........................ Salina, KS....................... 93
Holiday Inn - New Orleans French Quarter..................... New Orleans, LA.................. 276
Holiday Inn Select - Boston Government Center................ Boston, MA....................... 303
Sheraton Four Points ........................................ Leominster, MA................... 187
Holiday Inn - Kansas City Northeast.......................... Kansas City, MO.................. 167
Holiday Inn - Westport....................................... St. Louis, MO.................... 318
Holiday Inn - Jackson Southwest.............................. Jackson, MS...................... 289
Crowne Plaza - Downtown Jackson.............................. Jackson, MS...................... 354
Hampton Inn - Jackson North.................................. Jackson, MS...................... 119
Holiday Inn Hotel & Suites - Jackson North................... Jackson, MS...................... 224
Whispering Woods Hotel and Conference Center................. Olive Branch, MS................. 181
Homewood Suites ............................................ Omaha, NE........................ 108
Hampton Inn - Omaha Central.................................. Omaha, NE........................ 132
Holiday Inn - Omaha Central.................................. Omaha, NE........................ 383
Holiday Inn - Omaha NW (1)................................... Omaha, NE........................ 213
Hampton Inn - Omaha SW....................................... Omaha, NE........................ 132
Holiday Inn Express & Suites - Omaha SW...................... Omaha, NE........................ 78
Holiday Inn - Albuquerque Mountain View...................... Albuquerque, NM.................. 360
Hampton Inn - Las Vegas...................................... Las Vegas, NV.................... 128
Crowne Plaza - Philadelphia Center City...................... Philadelphia, PA................. 445
Holiday Inn - Independence Mall.............................. Philadelphia, PA................. 364
Holiday Inn - Pittsburgh University Center................... Pittsburgh, PA................... 251
</TABLE>
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<TABLE>
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NO. OF
HOTEL LOCATION ROOMS
<S> <C> <C>
LEASED (continued):
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The Mills House Hotel - Charleston Holiday Inn............... Charleston, SC................... 214
Holiday Inn - Columbia Airport (3)........................... Columbia, SC..................... 148
Crowne Plaza - Greenville.................................... Greenville, SC................... 208
Holiday Inn - Knoxville Central.............................. Knoxville, TN.................... 242
Holiday Inn Select - Nashville Opryland/Airport.............. Nashville, TN.................... 384
Holiday Inn - Amarillo I-40.................................. Amarillo, TX..................... 247
Holiday Inn - Austin Town Lake............................... Austin, TX....................... 320
Holiday Inn - Beaumont Midtown I-10.......................... Beaumont, TX..................... 190
Bristol House................................................ Dallas, TX....................... 127
Fairfield Inn - Dallas Regal Row............................. Dallas, TX....................... 204
Harvey Hotel - Dallas........................................ Dallas, TX....................... 313
Crowne Plaza - North Dallas.................................. Dallas, TX....................... 429
Crowne Plaza Suites.......................................... Dallas, TX....................... 295
Hampton - Downtown Dallas/West End........................... Dallas, TX....................... 311
Crowne Plaza - Dallas Market Center.......................... Dallas, TX....................... 354
Courtyard by Marriott - Houston Near The Galleria............ Houston, TX...................... 209
Fairfield Inn - Houston Near The Galleria.................... Houston, TX...................... 107
Holiday Inn Select - Houston Near Greenway Plaza............. Houston, TX...................... 355
Crowne Plaza - Medical Center................................ Houston, TX...................... 294
Fairfield Inn - Houston I-10 East............................ Houston, TX...................... 160
Holiday Inn - Houston Intercontinental Airport............... Houston, TX...................... 413
Hampton Inn - Houston I-10 East.............................. Houston, TX...................... 90
Holiday Inn Select - Houston I-10 West (2)................... Houston, TX...................... 349
Holiday Inn & Suites - Houston Medical Center................ Houston, TX...................... 285
Harvey Suites - DFW Airport.................................. Irving, TX ..................... 164
Harvey Hotel - DFW Airport................................... Irving, TX....................... 506
Holiday Inn - Midland Country Villa.......................... Midland, TX...................... 250
Holiday Inn - Odessa Centre.................................. Odessa, TX....................... 245
Holiday Inn Express - Odessa Parkway......................... Odessa, TX....................... 186
Harvey Hotel - Plano......................................... Plano, TX........................ 279
Holiday Inn - Plano.......................................... Plano, TX........................ 161
Holiday Inn - San Antonio Downtown........................... San Antonio, TX.................. 314
Holiday Inn Select - San Antonio International Airport....... San Antonio, TX.................. 397
Holiday Inn - Waco I-35...................................... Waco, TX......................... 171
Holiday Inn - Salt Lake City Airport......................... Salt Lake City, UT............... 190
Holiday Inn - Cambridge...................................... Cambridge, Ontario............... 139
Holiday Inn Select - Toronto Airport......................... Toronto, Ontario ................ 444
Holiday Inn - Kitchener Waterloo............................. Kitchener, Ontario............... 182
Holiday Inn - Peterborough - Waterfront...................... Peterborough, Ontario............ 154
Holiday Inn - Sarnia......................................... Sarnia, Ontario.................. 151
Holiday Inn - Toronto Yorkdale............................... Toronto, Ontario................. 370
MANAGED:
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Holiday Inn - Hollywood...................................... Hollywood, CA.................... 470
Holiday Inn - Woodland Hills................................. Woodland Hills, CA............... 124
Holiday Inn - San Francisco Civic Center..................... San Francisco, CA................ 393
Holiday Inn - Torrance....................................... Torrance, CA..................... 329
Capital City Hotel........................................... Washington, DC................... 208
Holiday Inn - South Bend University Area..................... South Bend, IN................... 229
Holiday Inn - Great Plains Mall Area......................... Olathe, KS....................... 148
Holiday Inn - Lexington North................................ Lexington, KY.................... 303
</TABLE>
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NO. OF
HOTEL LOCATION ROOMS
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MANAGED (continued):
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Chateau LeMoyne - New Orleans Holiday Inn.................... New Orleans, LA.................. 171
Holiday Inn - Cincinnati North............................... Cincinnati, OH................... 407
Hilton Meadowlands (1) (4)................................... Secaucus, NJ..................... 301
Holiday Inn - Memphis East................................... Memphis, TN...................... 243
Holiday Inn - Nashville Vanderbilt........................... Nashville, TN.................... 300
Holiday Inn - San Antonio Riverwalk.......................... San Antonio, TX.................. 313
MANAGED - 1999 ADDITIONS:
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Cambridge Inn (5)............................................ Cambridge, MA.................... 112
Hampton Inn - Sault Ste. Marie............................... Sault Ste. Marie, MI............. 82
</TABLE>
NOTES:
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(1) These hotels will be converted to the Crowne Plaza brand
during 1999.
(2) These hotels will be converted to the Crowne Plaza brand
during 2000.
(3) These hotels were sold in the first quarter of 1999 and the
Company's operating leases were terminated.
(4) This management contract was converted to a lease effective
January 1, 1999.
(5) This hotel will be converted to the Holiday Inn Express brand
in 1999.
LEASES
The Company operates 106 hotels pursuant to long-term leases with property
owners, 105 of which are with FelCor. The leases are for varying terms,
generally from three to fifteen years, with renewal options. Under these
leases, the Company recognizes all revenues and substantially all expenses
associated with the hotel's operations. Typically, other than real estate
taxes, property insurance costs, depreciation, ground rent, debt service and
capital improvement costs, each of which are the owner's obligation, the
Company is required to pay all of the costs associated with operating the
hotel, such as employee-related expenses, utility costs and other hotel-based
operating expenses. Lease terms typically require the payment of a fixed
monthly base rent regardless of the performance of the hotel leased and a
variable rent based on a percentage of revenues, allowing the owner to
participate in the profitability of the hotel.
MANAGEMENT AGREEMENTS
The Company retained the management of 16 hotels at the Spin-off. In general,
the management agreements have remaining terms that range from one to 11 years
(subject to extension or renewal), and are generally cancelable under certain
conditions. The management agreements specify base fees, which are generally
based on percentages of gross revenues and, in certain cases, also provide for
incentive fees. Under these management contracts, the Company operates all
aspects of a hotel's operations. The owner of the hotel is generally
responsible for all costs, expenses and liabilities incurred in connection with
operating the hotel, including reimbursing the Company for the expenses and
salaries of all hotel employees.
These management contracts may contain provisions which allow the third party
owner to terminate the contract for such reasons as sale of the property, for
cause or without cause. Therefore, the Company cannot guarantee that it will
continue to manage these properties to the contract expiration date. The
Company will cease to manage the Holiday Inn - Hollywood on March 31, 1999. The
owner of five properties currently managed by the Company has notified the
Company of its intent to sell these properties, and the Company believes its
management of these hotels could terminate upon sale. Many of the Company's
management contracts require a termination payment by the owner to the Company
in the event of a termination.
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The Company added to its management contract activity with the addition of
Holiday Inn in Olathe, Kansas in September 1998, and the Cambridge Inn in
Cambridge, Massachusetts and Hampton Inn in Sault Ste. Marie, Michigan in the
first quarter of 1999. In addition to its management of the Cambridge Inn, the
Company owns a 15% equity interest in the property.
FRANCHISE AGREEMENTS
As of December 31, 1998, the Company had franchise agreements (collectively,
the "Franchise Agreements") with Holiday Inns Franchising, Inc., Hampton Inn (a
division of Promus Hotels, Inc.), Days Inns of America, Inc., Marriott
International, Inc., Hilton Inns, Inc., Promus Hotels, Inc., and Ramada
Franchise Systems, Inc. Although the terms of the Franchise Agreements differ,
each requires the Company to pay a monthly royalty fee based on gross revenues
attributable to room rentals, plus marketing and reservation contributions,
which are also based on gross revenues. The terms of the Franchise Agreements
generally are between 10 and 20 years, with a substantial penalty for early
termination by the Company.
As of December 31, 1998, the Company's portfolio segregated by brands was as
follows:
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NO. OF NO. OF
BRAND HOTELS ROOMS
Bass Hotels & Resorts
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Crowne Plaza 14 4,790
Holiday Inn Select 12 4,038
Holiday Inn 58 16,783
Holiday Inn Express 7 914
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91 26,525
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Marriott International
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Courtyard by Marriott 2 420
Fairfield Inn 5 931
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7 1,351
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Promus Hotels
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Hampton Inn 10 1,439
Homewood Suites 1 108
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11 1,547
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Other Brands
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Harvey/Bristol 5 1,389
Independent 2 389
Hilton 1 301
Ramada 1 220
Sheraton Four Points 1 187
Days Inn 1 157
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11 2,643
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TOTAL PORTFOLIO 120 32,066
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REDEVELOPMENT AND REBRANDING PROGRAM
In November 1997, the Predecessor initiated a comprehensive redevelopment and
rebranding program (the "Redevelopment and Rebranding Program") which entails
exterior and interior reconstruction of and renovations to a substantial number
of the hotels acquired in the Holiday Inn Acquisition and other acquisitions in
1997 and 1998 as well as the rebranding of certain hotels operated under the
Company's own brand names. The Redevelopment and Rebranding Program is expected
to be substantially complete by the end of 1999.
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In addition to the renovations, the Company expects to rebrand 20 hotels to the
Crowne Plaza or Crowne Plaza Suites brand. The Company believes the conversions
to the Crowne Plaza brand will enable the hotels to more effectively compete in
the markets in which they operate. Crowne Plaza - Philadelphia Center City, for
example, which converted to a Crowne Plaza from a Holiday Inn - Select in the
second quarter of 1998, experienced a 4.0 percentage point increase in
occupancy, a 13.7% increase in average rate, and a 20.3% increase in Revenue
Per Available Room ("RevPAR") in the fourth quarter of 1998 compared to the
same period in 1997. The Company cannot insure that all properties rebranded to
the Crowne Plaza brand will have similar results.
INFRASTRUCTURE
With the merger of the Predecessor's real estate assets into FelCor, the
Company is not involved in the ownership of hotels and is able to focus its
efforts on its key strength, the operation of hotels. The Company's senior
management team has been in place for 18 years. The Company's culture is
founded on four core philosophies which have contributed to its success:
Incredibly friendly employees
Spotlessly clean and well-maintained
hotels
Exceeding expectations at every opportunity
Doing the right thing
In order to achieve its goals, the Company has an operations-focused
infrastructure that allows it to maximize returns to hotel owners and to its
shareholders. The Company's corporate office structure is designed to allow
management teams in the hotels to focus their time and energy on maximizing
revenues and the guest service aspect of operating their hotels. Through the
centralization of routine, repetitive or specialized functions, the Company
believes it can achieve lower operating costs and superior results. Centralized
functions include the following:
Design and Construction
The Company's in-house design, construction and capital project management team
provides ongoing construction services for capital projects or redevelopments.
This team has had extensive experience in managing the redevelopment of
full-service hotels, such as the current Redevelopment and Rebranding Program
and the successful completion of the $130 million redevelopment program of the
assets acquired by the Predecessor in 1995 and 1996. The Company's Senior Vice
President of Design and Construction was responsible for the construction of
the Predecessor's original six hotels, which the Company still operates today.
Purchasing
The Company's purchasing team brings reduced costs from national purchasing
contracts for both the design and construction area and for the operating needs
of the hotels. In addition to the Company's own supplier relationships, the
Company has developed joint supplier relationships in cooperation with Bass
that provide additional cost savings. The Company's purchasing department
oversaw an annual purchasing volume in 1998 approaching $300 million.
Information Technology and Telecommunications
The Company's team of Information Technology ("IT") specialists provides
technological support to the hotels. The Company maintains a 24-hour support
desk to assist the hotels with their technological needs. The IT team is
charged with the design and implementation of a Wide Area Network, which will
enable the hotels to communicate in real time with the corporate office and
each other, improving productivity and efficiency of communication. The Telecom
Revenue and Profit Optimization Program, which focuses on maximizing profits in
the telephone departments of the hotels, an area which is often neglected in
the industry, is managed by the IT team.
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The IT team is responsible for ensuring all systems at the Company's corporate
office and all property-level systems, such as reservation and front office
systems, are Year 2000 compliant. A special Year 2000 project team has been
formed. For a more thorough account of the Company's Year 2000 readiness,
please refer to Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Advertising
The Company's Predecessor began operating a full-service in-house advertising
agency in the 1980s to serve its marketing, advertising, promotional and
production requirements. This in-house team is able to provide a wide array of
advertising services, collateral production and marketing support at a
significantly lower cost than outsourced solutions.
Accounting
The Company operates centralized cash management, internal audit, accounts
payable, payroll, and general ledger processing and analysis functions that
provide accurate and timely information to hotel owners, general managers and
company management. Hotel owners and management receive both standardized and
specialized reports to provide valuable information to help maximize each
hotel's profitability.
Legal
The legal department provides support and advice to the hotels concerning
routine legal matters including vendor and service provider contracts,
franchise matters, employment issues, beverage and operating permits, as well
as questions concerning the owner/Company relationship. By providing these
services in-house, the Company maximizes cost efficiencies and allows the
hotels to focus on exceeding the guests' expectations.
Payroll and Employee Services
The Company provides on-line PeopleSoft human resources applications to hotels,
and access to a centralized call-in processing of human resource management and
reporting, allowing for a reduction of property based staff. Centralized
payroll reduces labor needed at the hotels and provides a lower processing cost
than outsourcing this function.
The Company's training professionals provide classes on an ongoing basis, such
as week-long Sales Schools, Revenue Management Schools, General Manager
Schools, and specialized Catering Sales and Meeting Services Schools.
Additionally, the Company is working with Bass to develop brand-wide training
programs which will be available to all franchisees and will help promote brand
consistency.
The Company's infrastructure provides the foundation for significant growth
without a significant cost increase. This foundation and the core philosophies
have given the Company the ability to position itself by capitalizing on its
greatest asset, its human capital.
COMPETITION
The Company competes primarily in the upscale and midscale with food and
beverage full-service segment of the lodging industry, as defined by Smith
Travel Research, a noted industry resource. Hotel chains such as Marriott,
Hyatt and Embassy Suites are direct competitors of the Company, and in each
geographic market in which the Company's hotels are located, there are other
limited-service and full-service hotels that compete with the Company's hotels.
In addition, the Company's food and beverage operations compete with local
freestanding restaurants and bars. The Company's banquet and catering
operations compete with other full-service hotels, upscale restaurants and
local country clubs for weddings, large group events and convention business.
Some of the Company's competitors have larger networks of locations and greater
financial resources than the Company. Competition in the United States lodging
industry is generally based on convenience of location, price, range of
services and guest amenities offered, plus the quality of customer
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service and overall product. Newer, recently constructed hotels compete
effectively against older hotels if the older hotels are not refurbished on a
regular basis. While newer limited-service hotels do not compete directly with
the Company's larger full-service hotels, they do provide alternatives for
guests who do not need the amenities of a full-service hotel.
THE LODGING INDUSTRY
The lodging industry has shown significant improvement, having recovered from
the severe supply and demand disparity and recession that plagued the industry
throughout the late 1980s and early 1990s. The industry broke even in 1992 and
returned to profitability in 1993, having recorded six consecutive years of
unprofitable operations prior to 1992. According to PricewaterhouseCoopers
estimates, the lodging industry is expected to report a record $18.9 billion in
profits in 1998, an 11.2% improvement over the previous high of $17.0 billion
in 1997. Profitability is projected to continue at record levels through the
PricewaterhouseCoopers forecast period of 2001. More productive and lean, the
lodging industry has taken advantage of yield management systems to maximize
room rate and occupancy. Occupancy increased from 62.7% in 1992 to 63.9% in
1998, an increase of 1.2 percentage points ("pp"). Room rates, however, have
increased from $59.62 to $78.67 during the same period, a 32.0% increase or
4.7% per annum. With the increases, room rates have surpassed the consumer
price index (CPI) every year since 1994.
While new development increased the room supply in 1998 by 4.0%, it should be
noted that most of the development occurred in the extended-stay and
limited-service sectors. Also, most of the new construction occurred in
suburban and secondary market locations. The full-service sector and urban
market locations were largely spared from overbuilding. The Company believes
that future construction activity will slow as a result of the lack of
available capital and availability of existing full-service properties for sale
at a discount to replacement cost. Evidence of this is the cancellation of
projects planned by several publicly traded lodging companies, as well as a
reduction in estimated new construction in 1999. According to PaineWebber,
87,000 new hotel rooms will open in the U.S. in 1999, representing supply
growth of only 2.3%, as opposed to earlier projections of 150,000 new hotel
rooms. New construction in 2000 is expected to be even less than 1999. The
reduction in room starts should return the industry to more favorable
supply-demand conditions.
With an increase in supply of 4.0% in 1998, the industry continued to raise
rates above the CPI level. According to PricewaterhouseCoopers, rates increased
4.5%, from $75.26 in 1997 to $78.67 in 1998. Occupancy dipped 0.6 pp, from
64.5% to 63.9% during the same period. The resulting RevPAR statistic increased
3.6%, from $48.54 in 1997 to $50.27 in 1998. The two largest RevPAR increases
in 1998 came from the upscale and midprice with food and beverage segments,
segments which are representative of a majority of the Company's portfolio.
RevPAR for the upscale segment increased 4.5 % to $66.28 in 1998, while the
midprice with food and beverage segment increased 3.9% to $40.86 for the same
period. The performance of these two segments is due to rate increases, as
opposed to occupancy increases. The upper upscale segment reported the greatest
increase in rate in 1998, increasing 5.9% to $138.48. The upper upscale segment
rate was 1.5 times the upscale segment rate of $93.22 and 2.1 times the
midprice with food and beverage segment rate of $67.31. It is management's
belief that many business travelers and groups who frequent the upper upscale
segment (which includes Hilton, Hyatt, and Marriott) will be priced out of
these hotels and will turn their business to the upscale and midprice with food
and beverage segments. The Company is poised to reap the benefits, having
redeveloped many of its full-service properties to "like-new" status. The
Company believes it can provide the same level of service, facilities, and
amenities that many upper upscale segment guests desire at a better price-value
relationship. For a discussion of the Company's operating statistics, please
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EMPLOYEES
As of December 31, 1998, the Company employed approximately 14,000 employees,
including 311 at the Company's corporate office. Approximately 2,000 employees
at 13 of the Company's hotels are represented by a labor union.
Management believes that ongoing labor relations are favorable.
10
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings arising in the normal
course of business. The Company believes that the ultimate outcome of such
proceedings will not have a material adverse effect on the results of
operations or financial condition of the Company; however, there can be no
assurance that this will be the case.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of 1998.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "BH" and began trading on July 28, 1998. The range of the high
and low sales price of the Company's Common Stock as reported on the NYSE
Composite Tape for each of the quarters during the period July 28, 1998,
through December 31, 1998, is set forth below:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
July 28 - September 30, 1998.................. $ 7.750 $ 4.375
Fourth quarter 1998........................... $ 6.125 $ 3.250
</TABLE>
On March 4, 1999, the last reported sale price of the Common Stock on the NYSE
was $9.38. As of March 4, 1999, the Company had 278 stockholders of record. The
Company believes the number of beneficial owners of its Common Stock to be
approximately 2,750.
The Company has not paid any cash dividends on its Common Stock and does not
presently intend to do so in the foreseeable future.
11
<PAGE> 12
PART II.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data for the
Company for the period from Inception (March 20, 1998) through December 31,
1998, and for the Predecessor (and its predecessor, Harvey Hotel Companies) for
the following periods: January 1 through July 27, 1998, years ended December
31, 1997 and 1996, eleven months ended December 31, 1995, one month ended
January 31, 1995, and year ended December 31, 1994. The selected balance sheet
data is presented for the Company as of December 31, 1998, and the Predecessor
(and its predecessor, Harvey Hotel Companies) as of December 31, 1994 through
1997. The selected financial data set forth below are qualified in their
entirety by, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
12
<PAGE> 13
BRISTOL HOTELS & RESORTS
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Inception
(March 20, 1998) -
December 31, 1998
-----------------
OPERATING DATA:
<S> <C>
REVENUE:
Rooms ............................................. $ 217,236
Food, beverage and other .......................... 77,682
---------
Total revenue ........................... 294,918
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms .......................................... 64,427
Food, beverage and other ....................... 50,854
Undistributed operating expenses:
Administration and general, marketing .......... 49,374
Property operating costs ....................... 28,163
Tenant lease expense ........................... 87,925
Depreciation and amortization .................. 1,027
Corporate expense .............................. 9,407
---------
Operating income ........................ 3,741
Other (income) expense:
Interest, net ..................................... (689)
Income taxes ...................................... 1,785
---------
Net income ............................................. $ 2,645
=========
Diluted earnings per common and common equivalent share:
Net income ........................................ $ 0.27
Weighted average number of common and
common equivalent shares outstanding - diluted ...... 9,952
BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 24,916
Property and equipment, net ....................... 5,889
Total assets ...................................... 105,522
Stockholders' equity .............................. 35,409
</TABLE>
13
<PAGE> 14
BRISTOL HOTEL COMPANY (PREDECESSOR)
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended Eleven Months Ended
December 31, December 31,
January 1, 1998 ---------------- -------------------
to July 27, 1998 1997 1996 1995
---------------- ---- ---- ----
OPERATING DATA:
<S> <C> <C> <C> <C>
REVENUE:
Rooms ....................................... $ 308,638 $ 377,380 $ 149,794 $ 115,771
Food, beverage and other .................... 95,372 127,138 62,046 49,424
--------- --------- --------- ---------
Total revenue .................... 404,010 504,518 211,840 165,195
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms ................................ 89,721 105,063 37,706 32,692
Food, beverage and other ............. 60,175 79,092 35,810 31,376
Undistributed operating expenses:
Administration and general,
marketing ......................... 70,686 78,694 33,821 28,254
Property operating costs ............. 65,907 79,633 28,402 24,738
Depreciation and amortization ........ 34,300 39,690 18,377 13,505
Corporate expense .................... 27,676 24,450 10,958 8,035
--------- --------- --------- ---------
Operating income ................. 55,545 97,896 46,766 26,595
--------- --------- --------- ---------
Other (income) expenses:
Interest expense ..................... 30,892 44,591 18,616 18,374
Other non-operating expenses ......... -- -- -- 430
Equity in income of joint ventures ... (783) (1,916) -- --
Income taxes ......................... 10,175 22,007 10,401 2,822
--------- --------- --------- ---------
Income before extraordinary item ............ 15,261 33,214 17,749 4,969
Extraordinary loss on early extinguishment
of debt, net of income taxes ............. (25,689) (12,741) -- (1,908)
--------- --------- --------- ---------
Net income (loss) ........................... $ (10,428) $ 20,473 $ 17,749 $ 3,061
========= ========= ========= =========
Diluted earnings (loss) per common and common
equivalent share:
Income before extraordinary item ..... $ 0.34 $ 0.87 $ 0.70 $ 0.28
Net income (loss) .................... $ (0.23) $ 0.53 $ 0.70 $ 0.17
Weighted average number of common
and common equivalent shares
outstanding - diluted ....................... 45,194 38,332 25,526 17,909
</TABLE>
14
<PAGE> 15
BRISTOL HOTEL COMPANY (PREDECESSOR)
SELECTED HISTORICAL FINANCIAL DATA (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 86,167 $ 4,666 $ 7,906
Property and equipment, net...... 1,439,167 552,564 470,705
Total assets..................... 1,666,638 592,788 512,901
Long-term debt including
current portion............... 717,319 232,694 170,544
Stockholders' equity............. 648,794 252,157 236,122
</TABLE>
15
<PAGE> 16
HARVEY HOTEL COMPANIES (PREDECESSOR)
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MONTH ENDED YEAR ENDED
JANUARY 31, 1995 DECEMBER 31, 1994
---------------- -----------------
OPERATING DATA:
<S> <C> <C>
REVENUE:
Rooms .................................. $ 4,006 $ 44,972
Food, beverage and other ............... 1,937 25,379
-------- --------
Total revenue .......................... 5,943 70,351
-------- --------
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms .................................. 1,124 10,344
Food, beverage and other ............... 1,055 14,835
Undistributed operating expenses:
Administrative and general, marketing... 579 11,369
Property operating costs ............... 629 10,563
Depreciation ........................... 309 4,041
Corporate expense ...................... 315 3,761
-------- --------
Operating income ................... 1,932 15,438
-------- --------
Other (income) expenses:
Interest expense, net .................. 652 7,631
Other non-operating income ............. -- (337)
-------- --------
Income before extraordinary item .......... 1,280 8,144
Extraordinary gain on debt forgiveness .... -- 1,989
-------- --------
Net income ................................ $ 1,280 $ 10,133
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 4,118
Property and equipment, net............................. 80,635
Total assets............................................ 109,874
Long-term debt, including current portion............... 114,054
Equity.................................................. (11,988)
</TABLE>
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
BRISTOL HOTELS & RESORTS
The Company's results of operations from Inception (March 20, 1998) through
December 31, 1998, include the operations of the Hampton Inn - Las Vegas from
May 20, 1998, and the operations for the assets acquired in the Spin-off,
including the FelCor leases, from July 28, 1998. The Company conducted no
operations from March 20, 1998, through May 19, 1998. Therefore, the operating
results of the Company for the period from Inception through December 31, 1998,
are not indicative of its future performance.
BRISTOL HOTEL COMPANY
Results of operations for the year ended December 31, 1997, include the 36
original hotels owned by BHC as of January 1, 1996 (the "Original Bristol
Portfolio"), Holiday Inn - Plano, the Allerton (as of January 31, 1997), eight
months of operations for the 45 hotels acquired in the Holiday Inn Acquisition
on April 28, 1997 (the "Holiday Inn Assets"), as well as eight months of
management of the 15 hotels under management contracts. Results of operations
for the period January 1, 1998, through July 27, 1998, include the properties
listed above, as well as the Holiday Inn - San Jose North, the Holiday Inn -
Philadelphia Independence Mall, and the Holiday Inn - St. Louis for the entire
period, the Sheraton Four Points - Leominster as of April 21, 1998, and the
Hampton Inn - Las Vegas as of May 20, 1998, (collectively, the "Single Asset
Acquisitions"), and the 20 hotels acquired on April 30, 1998 ("the Omaha
Acquisition").
REDEVELOPMENT AND REBRANDING PROGRAM
The Redevelopment and Rebranding Program started by BHC in November 1997 and
continued by the Company impacted both the Company's and BHC's 1998 operating
results. The Redevelopment and Rebranding Program entails exterior and interior
reconstruction of and renovations to a substantial number of the Holiday Inn
Assets and the Single Asset Acquisitions as well as the rebranding of certain
hotels operated under the Company's own brand names. In addition to the
renovations, the Company expects to rebrand 20 hotels to the Crowne Plaza or
Crowne Plaza Suites brand by 2000. The Company believes the conversions to the
Crowne Plaza brand will enable the hotels to more effectively compete in the
markets in which they operate. In 1998, the rebranding of eleven hotels,
totaling 3,614 rooms, to the Crowne Plaza or Crowne Plaza Suites brand was
completed. In total 28 hotels with 9,867 rooms were undergoing redevelopment
during 1998, of which the redevelopment and/or rebranding of 22 hotels
containing 7,056 rooms was completed by December 31, 1998. The Redevelopment
and Rebranding Program is expected to be substantially complete by the end of
1999.
STATISTICAL SUMMARY
The following statistical information is presented on a pro forma basis, as if
the Holiday Inn Acquisition and the Omaha Acquisition had occurred on January 1
of each period presented and is adjusted to remove the effect of period to
period exchange rate fluctuations for the Canadian assets.
Pro forma Average Daily Rate ("ADR") and occupancy for the year ended December
31, 1998, were $81.47 and 66.4%, respectively, compared to $75.25 and 69.6% for
the year ended December 31, 1997. ADR increased 8.3% compared to 1997, and the
3.2 pp decrease in occupancy is primarily due to the disruptions to the hotels
during the Redevelopment and Rebranding Program. Pro forma RevPAR was $54.10
for the year ended December 31, 1998, compared to $52.39 for the same period in
1997. This 3.3% increase is primarily attributable to general market
conditions, the Company's management expertise and the strength of the Holiday
Inn brand name and reservation system, offset by the disruptions caused by the
Redevelopment and Rebranding
17
<PAGE> 18
Program. During the year ended December 31, 1998, 3.7% of total available
rooms, totaling 386,684 room nights, were out of service as a result of the
Redevelopment and Rebranding Program. Without the effect of the properties
under redevelopment, pro forma ADR, occupancy and RevPAR for the year ended
December 31, 1998, were $78.81, 66.5% and $52.39 compared to $73.54, 67.7% and
$49.80 for the same period in 1997, resulting in an increase in ADR and RevPAR
of 7.2% and 5.2%, respectively, and a decrease of 1.2 pp in occupancy.
Excluding the properties under redevelopment during the period and the assets
targeted for sale, ADR, occupancy and RevPAR were $79.96, 67.6% and $54.02,
respectively, for the year ended December 31, 1998, and $74.52, 68.7% and
$51.23, respectively, for the same period in 1997, resulting in a 7.3% and 5.5%
increase in ADR and RevPAR, respectively, and a 1.2 pp decrease in occupancy.
RESULTS OF OPERATIONS
BRISTOL HOTELS & RESORTS
Period from Inception (March 20, 1998) through December 31, 1998
Rooms revenue was $217.2 million for the period from March 20, 1998, through
December 31, 1998, respectively. This amount is primarily related to operations
for the five months after the Spin-off. Rooms profit margin was 70.3% for the
period. Approximately 60% of the Company's room revenue was generated from
individual business and leisure customers.
Food and beverage revenue was $58.4 million for the period ended December 31,
1998. Food and beverage profit margin was 23.8% for the period. The Company
generated approximately 61.5% of its food and beverage revenue from its banquet
and catering operations.
Management fee income was $2.4 million for the period ended December 31, 1998.
At year end, the Company had 14 management contracts, one of which converted to
a lease effective January 1, 1999. The Company has been advised by certain
owners of their intention to sell properties that are currently managed by the
Company. If a property is sold, the related management contract would likely be
terminated.
Construction management fees for the period ended December 31, 1998, were $2.1
million. The construction management fees are charged by the Company to the
hotel owners for purchasing and project management services provided by the
Company for construction projects (including the Redevelopment and Rebranding
Program), calculated as a percent of the total project costs.
Property occupancy costs include normal hotel operating costs, but do not
include property taxes, ground rent and property insurance. Under the terms of
the leases, these costs are borne by the property owner. Property occupancy
costs were $28.2 million for the period ended December 31, 1998. Of this
amount, approximately $13.5 million were related to utility costs.
Corporate expense was $9.4 million for the period ended December 31, 1998. This
amount relates to the period July 28, 1998, through December 31, 1998, and
includes the costs of the Company's corporate office support functions
described previously, public company costs such as stock exchange fees and SEC
filing costs, and costs related to corporate development and analysis of growth
opportunities.
Tenant lease expense for the period ended December 31, 1998, was $87.9 million.
This amount represents lease payments to property owners (primarily FelCor)
under long-term lease agreements.
Depreciation and amortization was $1.0 million for the period ending December
31, 1998, relating primarily to the property and equipment in the Company's
corporate office, including the Company's investment in centralized information
technology.
EBITDA (earnings before interest, taxes, depreciation and amortization) was
$4.8 million for the period. EBITDA margin (EBITDA divided by total revenues)
was 1.7% for the period ended December 31, 1998. Included in EBITDA is the
reversal of $963,000 of 401(k) discretionary matching contribution expense
accrued by the Predecessor. Net income was $2.6 million for the period from
Inception through December 31, 1998.
18
<PAGE> 19
BRISTOL HOTELS & RESORTS (CONTINUED)
Period from July 28, 1998, through December 31, 1998
Until the Spin-off, the Company had no material operations. Therefore, the
Company believes that the following presentation of its results of operations
from July 28, 1998, through December 31, 1998, is more indicative of the
Company's performance (in thousands, except per share amounts):
<TABLE>
<CAPTION>
JULY 28, 1998 -
DECEMBER 31, 1998
(UNAUDITED)
<S> <C>
REVENUE
Rooms ...................................... $217,026
Food and beverage .......................... 58,389
Management fees ............................ 2,408
Construction management fees ............... 2,095
Other ...................................... 14,861
--------
Total revenue ................... 294,779
--------
OPERATING COSTS AND EXPENSES
Departmental expenses:
Rooms .................................. 64,348
Food and beverage ...................... 44,509
Other operating departments ............ 6,342
Undistributed operating expenses:
Administrative and general ............. 27,269
Marketing .............................. 22,046
Property occupancy costs ............... 28,129
Tenant lease expense ................... 87,765
Depreciation and amortization .......... 1,027
Corporate expense ...................... 9,407
--------
Operating income ............................... 3,937
Interest income, net ........................... 608
--------
Income before income taxes ..................... 4,545
Provision for income taxes ..................... 1,785
--------
NET INCOME ..................................... $ 2,760
========
Earnings per common and common equivalent share:
Net income:
Basic .................................. $ 0.16
Diluted ................................ 0.15
Weighted average number of common and common
equivalent shares outstanding:
Basic .................................. 17,778
Diluted ................................ 17,920
</TABLE>
19
<PAGE> 20
BRISTOL HOTEL COMPANY (PREDECESSOR)
January 1, 1998, through July 27, 1998,
Compared to Year Ended December 31, 1997
Rooms revenue for the period ended July 27, 1998, was $308.6 million compared
to $377.4 million for the year ended December 31, 1997. The pro rata increase
is primarily due to the addition of the Holiday Inn Assets, the Single Asset
Acquisitions and the Omaha Acquisition from their respective acquisition dates.
Rooms profit margin was 70.9% for the period ended July 27, 1998, compared to
72.2% for the year ended December 31, 1997. The slight decrease is attributable
to higher franchise costs due to the rebranding of certain hotels in the
Original Bristol Portfolio to Holiday Inn and Crowne Plaza brands in 1998, as
well as the lower margins for properties under redevelopment during the period.
Food and beverage revenue was $69.0 million for the period ended July 27, 1998,
compared to $92.6 million for the year ended December 31, 1997. Food and
beverage profit margin was 20.7% for the period ended July 27, 1998, compared
to 24.7% for the year ended December 31, 1997.
Property occupancy costs for the period ended July 27, 1998, were $65.9 million
compared to $79.6 million for the year ended December 31, 1997. The pro rata
increase is due to the increased number of hotels owned by BHC during the
period, and higher property tax and land rent related to those assets.
Gross operating margin was 29.1% for the period ended July 27, 1998, compared
to 32.1% for the year ended December 31, 1997. The 3.0 pp decrease is primarily
due to the declines in departmental margins and higher operating costs related
to property taxes and land rentals.
Corporate expenses were $27.7 million for the period ended July 27, 1998,
compared to $24.5 million for the year ended December 31, 1997. Approximately
$10.5 million of this pro rata increase is attributable to one-time
professional fees of approximately $6.2 million and other costs, including
transfer taxes and SEC filing fees, of $4.3 million related to the FelCor
merger, offset by $3.1 million of one-time costs incurred in 1997 related to
the Holiday Inn Acquisition.
Interest expense was $30.9 million for the period ended July 27, 1998, compared
to $44.6 million for the year ended December 31, 1997. The pro rata increase is
due to borrowings for the Holiday Inn Acquisition, as well as debt assumed
related to the Omaha Acquisition and other debt incurred under the $120 million
interim credit facility with FelCor.
Depreciation and amortization was $34.3 million for the period ended July 27,
1998, compared to $39.7 million for the year ended December 31, 1997. The pro
rata increase is due to the Holiday Inn, Omaha and Single Asset Acquisitions.
The Predecessor incurred extraordinary losses of $25.7 million and $12.7
million (net of tax) during the period January 1, 1998, through July 27, 1998,
and the year ended December 31, 1997, respectively, related to early debt
retirements.
Because of the factors discussed above, net loss for the period ended July 27,
1998, was $10.4 million, compared to net income of $20.5 million for the year
ended December 31, 1997.
BRISTOL HOTEL COMPANY (PREDECESSOR)
Year Ended December 31, 1997,
Compared With Year Ended December 31, 1996
Total revenue increased 138.2% to $504.5 million for the year ended December
31, 1997, as compared to 1996 as a result of the inclusion of the Holiday Inn
Assets and the 1997 Single Asset Acquisitions from their respective acquisition
dates and the improved operating performance of the Original Bristol Portfolio.
RevPAR for the Original Bristol Portfolio was $47.53 for the year ended
December 31, 1997, compared to $43.92 for 1996, representing an 8.2% increase.
The improvement in RevPAR is primarily attributable to the successful
20
<PAGE> 21
repositioning and/or redevelopment of several hotels in the Original Bristol
Portfolio. Occupancy and ADR for the Original Bristol Portfolio was 70.0% and
$67.91, respectively, for the year ended December 31, 1997, compared to 64.4%
and $68.21, respectively, for 1996. The change from 1996 to 1997 was also
impacted by nonrecurring items in 1996 including the Atlanta Olympics and the
renovations of the certain hotels in the Original Bristol Portfolio. The
Atlanta Olympics had a positive impact on results in 1996 due to the 100%
occupancy experienced by the ten Atlanta hotels in the Original Bristol
Portfolio during the 20 days of the Olympic games. Results for 1996 were also
impacted by the renovations of 13 hotels in the Original Bristol Portfolio
throughout the year.
Rooms revenue as a percent of total revenue was 74.8% for the year ended
December 31, 1997, as compared to 70.7% for the year ended December 31, 1996,
resulting from the Holiday Inn Assets having proportionally lower food and
beverage business than the Original Bristol Portfolio. This is also evidenced
by the 151.9% increase in rooms revenue for the year ended December 31, 1997,
compared to the same period in 1996 as compared to a 108.8% increase in food
and beverage revenue.
Food and beverage revenue increased primarily due to the increase in the number
of hotels and also due to higher food and beverage revenues for the Original
Bristol Portfolio. Food and beverage revenue for the Original Bristol Portfolio
for the year ended December 31, 1997, was $51.6 million, representing a 12%
increase over 1996. This increase is primarily attributable to the effective
redevelopment of several hotels in the Original Bristol Portfolio.
The increase in management fees relates primarily to the addition of the 15
management contracts acquired in the Holiday Inn Acquisition offset by the loss
of two management agreements previously held by Bristol in 1996.
Gross operating margin (consisting of total revenue less department expenses,
administrative and general, marketing and property operating costs divided by
total revenue) was 32.1% for the year ended December 31, 1997, compared to
35.9% for the year ended December 31, 1996. The 3.8 pp decrease in gross
operating margin is primarily attributable to declines in departmental
operating margins and higher property operating costs related to property taxes
and land rentals. Declines in departmental margins relate primarily to the
integration of the Holiday Inn Assets and the 1997 Single Asset Acquisitions,
which have had historically lower margins. Property tax increases relate to
increased valuations as a result of the significant capital improvements for
several hotels in the Original Bristol Portfolio as well as an increase in tax
rates for certain hotels. Increased land rentals relate to the Holiday Inn
Assets having a proportionately higher number of ground leases than the
Original Bristol Portfolio.
Depreciation and amortization increased $21.3 million for the year ended
December 31, 1997, compared to 1996 as a result of the Holiday Inn Acquisition
and the 1997 Single Asset Acquisitions. Depreciation expense also increased as
a result of the substantial capital improvements at several hotels in the
Original Bristol Portfolio.
Corporate expenses for the year ended December 31, 1997, were $24.5 million
compared to $11.0 million for 1996. Approximately $3.1 million of the increase
relates to one-time costs incurred during the second quarter of 1997 for the
closing and integration of the Holiday Inn Acquisition. The remaining increase
relates primarily to the increase in the number of corporate employees and
related costs and increased travel expenses as a result of the acquisition.
Interest expense for the year ended December 31, 1997, increased $26.0 million
to $44.6 million primarily as a result of additional debt incurred to finance
the Holiday Inn Acquisition as well as borrowings increasing ratably in 1996 to
fund acquisitions and certain redevelopment costs.
Equity in income of joint ventures of $1.9 million for the year ended December
31, 1997, represents the Company's 50% interest in the earnings of the three
joint ventures acquired in the Holiday Inn Acquisition.
As a result of the factors described above, income before extraordinary items
increased 87.1% to $33.2 million for the year ended December 31, 1997, compared
to the year ended 1996 and diluted earnings per share increased 24.3% to $0.87
for the year ended December 31, 1997, compared to $0.70 for 1996. Recurring
21
<PAGE> 22
earnings for the year ended December 31, 1997, of $35.1 million, which exclude
the extraordinary item of $12.7 million and the one-time costs related to the
Holiday Inn Acquisition ($1.8 million, net of tax), represents a 138.8%
increase over recurring earnings for the year ended December 31, 1996, of $14.7
million, which excludes a one-time gain related to the sale of marketable
securities ($0.3 million, net of tax), the positive impact of the Atlanta
Olympics ($2.2 million, net of tax), and the litigation settlement gain ($0.6
million, net of tax). Recurring diluted earnings per share of $0.92 for the
year ended December 31, 1997, represents a 58.6% improvement over 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash flow from
operations and borrowings under the $40 million revolving credit facility with
Bankers Trust Company (the "Credit Facility"). The Company had approximately
$23.1 million of cash at Spin-off and approximately $24.9 million of cash as of
December 31, 1998. The Company believes that it currently requires
approximately $10 million to $15 million of cash to fund the day-to-day working
capital needs of the Company.
The Company's cash flows are sensitive to the performance of the leased and
managed properties. For managed properties, the Company's cash flows are
principally tied to changes in the gross revenues of the properties. For leased
properties, the Company is impacted both by changes in gross revenues as well
as changes in operating expenses and rent expense. Rent expense is paid
principally as a percentage of gross revenues and is largely tied to room
revenue volume. Room revenue increases or decreases caused by changes in room
rates have only a minor impact on operating expenses, as compared to revenue
increases or decreases generated by changes in occupancy, which also can
produce significant changes in operating costs. As a result, the Company's cash
flows are more directly impacted by revenue increases or decreases caused by
changes in average room rates. Increased revenues caused by increases in
occupancy levels could have little impact on the Company's cash flows or could
actually reduce cash flow if the incremental business is not sold at
sufficiently high average room rates.
The $40 million of commitments under the Credit Facility may be used for
working capital and other general corporate purposes. Additionally, a sub-limit
of up to $20 million of such commitments is available to issue letters of
credit to secure the Company's obligations under the leases with FelCor and
other owners, subject to the reduction of such sub-limit to reflect the
Company's achievement of liquid net worth requirements related to such leases.
Concurrently with the Spin-off, a letter of credit for $20 million was issued
to FelCor to secure the Company's obligations under the leases. This amount may
be adjusted from time to time pursuant to the liquid net worth requirements
described above. As of December 31, 1998, the letter of credit amount
outstanding was $15.9 million.
As of December 31, 1998, the Company had a $9.1 million promissory note from
FelCor (the "FelCor Note") which is due upon five days' demand. The Company
made partial demand on this note and on February 1, 1999, received $5.0 million
cash against the note. The remaining $4.1 million can be used by the Company
for working capital or other purposes.
The Company is actively pursuing opportunities for growth and anticipates
adding to its leasehold and management portfolio, both through its relationship
with FelCor, as well as working with other REITs and individual property owners
who could benefit from the Company's services. The Company began management of
the Holiday Inn in Olathe, Kansas in September, 1998, the Hampton Inn in Sault
St. Marie, Michigan in March 1999, and has announced agreements to manage two
Hilton Garden Inns and a 265-room upscale Hilton Hotel, all of which are
currently under development, for the Landmark Organization. The development of
these properties will be completed during 1999 and 2000.
It is possible that some new management contracts or leases could require a
small capital investment on the part of the Company. The Company may also
purchase hotel leases or management contracts from third parties. If such an
investment is necessary, the Company believes it has adequate capital resources
including cash on hand, availability under the Credit Facility and the FelCor
Note to fund these opportunities for the immediate future. The Company acquired
a 15% joint venture interest and the management of the Cambridge Inn in
Cambridge, Massachusetts in January 1999.
22
<PAGE> 23
The Company is continuously exploring opportunities for increasing efficiency
at the hotels and the corporate office. Some of these opportunities could
require small capital investments by the Company to achieve the targeted
savings. The Company plans to install approximately $3.5 million of
energy-saving devices throughout the leased hotels during 1999. Additionally,
the Company expects to incur up to $2.8 million of information technology
improvement costs in the Company's corporate office in the next fiscal year,
primarily related to the development and installation of the Company's Wide
Area Network which will improve productivity and ease communication between the
corporate office and the hotels. The Company believes that it has adequate
capital resources to fund its growth opportunities for the immediate future.
SEASONALITY
The lodging industry is affected by seasonal patterns. At most of the Company's
hotels, demand is higher in the second and third quarters than during the
remainder of the year. The Company's results are also impacted during periods
of renovation when rooms are placed out of service. The Company expects to have
approximately 292,646 room nights out of service in 1999 in conjunction with
the Redevelopment and Rebranding Program, consisting of: 154,826 in the first
quarter; 60,952 in the second quarter; 20,129 in the third quarter; and 56,739
in the fourth quarter.
INFLATION
The Company is impacted by inflation in both the general price movement of
certain costs of the operations of its hotels and in the ability to increase
the rates charged to its guests for rooms, food and beverage and other
services.
Many of the costs of operating the hotels can be fixed for certain periods of
time, reducing the short-term effects of changes in the rate of inflation. Room
rates, which are set on a daily basis, can be rapidly changed to meet changes
in inflation rates as well as other changing market conditions. The Company
believes that given the favorable demand/supply balance in the hotel segments
in which it operates, increases in inflation from today's relatively low rates
will not have an adverse impact on profits generated by the Company's hotels.
Changes in the rate of inflation could impact the level of short-term interest
rates. The Company does not anticipate a significant increase or decrease in
the level of short-term interest rates, and, since the Company has no floating
rate debt currently outstanding, the Company does not believe that it has any
significant exposure should a rise in market interest rates occur.
YEAR 2000 READINESS
In order to fully comprehend the Year 2000 problem and how it will impact the
Company's operations, the Company has established a Year 2000 Readiness Program
(the "Program"). The Program contemplates the completion of the following
steps: Awareness, Inventory, Assessment, Planning & Scheduling, Test Compliance
& Functionality, Replace/Upgrade, and finally, Implementation/Contingency
Planning. As of March 4, 1999 the Company has completed the Program through the
Test Compliance & Functionality stage, and has commenced the Replace/Upgrade
stage with pilot implementation beginning in March 1999. The Company expects
that the entire Program will be completed by the beginning of fourth quarter of
1999.
During the third quarter of 1998, the Company completed its evaluation and
technical inventory of the Company's corporate office and all of the
property-level systems which might be impacted by the Year 2000 problem. The
Company has secured the resources and scheduled the remedy of each of those
systems that it has identified as having potential Year 2000 issues. The
Company has also established a contingency plan for the centralized computer
operating systems, which has been tested and is in a state of readiness.
The Company continues to evaluate non-information technology systems such as
embedded chip mechanical/engineering systems, energy management systems, and
security systems. As of March 4, 1999, the Company has completed the embedded
system inventory at 100 hotels and has not identified any embedded system
issues. This inventory is expected to be completed for the remaining hotels by
the end of the first quarter of 1999. Based on current results and other
factors, the Company does not anticipate finding
23
<PAGE> 24
any material embedded system issues in critical systems at any of the hotels.
The Company is also working closely with its franchisors to ensure readiness.
Each of these franchisors indicated to the Company that their reservation
systems would be Year 2000 ready by January 31, 1999; however, the Company has
received no verification that the remediation of these systems has been
completed. The franchisors have indicated to the Company that they are
establishing contingency plans to address any potential Year 2000 readiness
issues.
The Company is continuing to survey its vendors and service providers to
determine Year 2000 readiness. As of March 4, 1999, the Company's primary
vendors and service providers have indicated that they will be Year 2000
compliant; however, there is no assurance that all of the Company's vendors and
service providers will be ready.
Contingency Plans
The Company has established a contingency plan and disaster recovery procedure
for the centralized computer operating systems, located in the Company's
corporate office, which has been tested and which the Company believes is in a
state of readiness. The Company's franchisors have also provided the hotels
with materials identifying contingency plans for major property-level system
outages and force majeure type events. Non-franchised properties are provided
this information by the Company. Additionally, each franchisor is creating
checklists and procedures for their licensed hotels which will address problems
arising from Year 2000 related outages with the franchise specific systems. The
Company is also establishing plans and procedures to train and prepare primary
staff to address operational and systemic issues arising from the Year 2000
problem. The Company contemplates that these tools and training will be
completed by the beginning of the fourth quarter 1999.
Costs
The Company is working with FelCor and its other owners to remedy the
property-level non-compliant systems identified. In particular, the Company has
prepared and presented a budget to FelCor, which has been approved, setting out
the anticipated costs and timeline for the remedy to make the properties Year
2000 compliant. While most of the costs associated with the remedy to the
FelCor properties will be borne by FelCor, it is anticipated that the Company
will bear approximately $650,000 of the cost, including the Company's portion
of the costs of software, hardware and internal employees dedicated to the
Program. For each of its other property owners, the Company has presented a
1999 capital budget including presentations of Year 2000 remedy costs. The
third-party owners are contractually obligated to bear the full amount of this
cost. Other than those specified above, the Company is not aware of any
additional costs that it will bear to remedy the Year 2000 problems
company-wide.
Risks
The Company cannot predict the actual effects to it of the Year 2000 problem,
which depends on numerous factors including whether significant third parties
properly and timely remedy the Year 2000 issue, and whether broad-based or
systemic failures occur (including disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services or failures in financial transactions or payment processing systems
such as credit cards), as well as the severity and duration of any such
failures. There can be no assurances that Year 2000 remediation by third
parties will be properly and timely completed, and failure to do so may have a
material adverse effect on the Company, its business and its financial
condition. Further, the Company may have no option but to remain with a vendor
who cannot assure Year 2000 readiness if an alternative source is not available
at commercially reasonable terms. The Company's Year 2000 Readiness Program is
expected to reduce the level of uncertainty about the Year 2000 problem.
24
<PAGE> 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial information is included on the pages indicated and is
incorporated into this item by reference:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants........................... F-1
Bristol Hotels & Resorts
Consolidated Statement of Income................................... F-2
Consolidated Balance Sheet......................................... F-3
Consolidated Statement of Cash Flows............................... F-4
Consolidated Statement of Changes in Stockholders' Equity.......... F-5
Notes to Consolidated Financial Statements......................... F-6
Bristol Hotel Company (Predecessor)
Consolidated Statements of Operations.............................. F-19
Consolidated Balance Sheet......................................... F-20
Consolidated Statements of Cash Flows.............................. F-21
Consolidated Statements of Changes in Stockholders' Equity......... F-23
Consolidated Statements of Comprehensive Income (Loss)............. F-24
Notes to Consolidated Financial Statements......................... F-25
</TABLE>
25
<PAGE> 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
The information called for by Items 10-13 is incorporated by reference to the
sections of the Company's Proxy Statement for its 1999 Annual Meeting of
Stockholders (to be filed pursuant to Regulation 14A not later than 120 days
after the close of the fiscal year).
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORT ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1. The financial statements as set forth under Item 8 are filed as part
of this report.
2. All financial statement schedules are omitted as they are either not
applicable or the required information is included in the financial
statements or the notes thereto.
3. The list of exhibits contained in the Index to Exhibits is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this Form 10-K to be signed on its behalf by
the undersigned; thereunto duly authorized, on this 25th day of March, 1999.
BRISTOL HOTELS & RESORTS
BY: /s/ John D. Bailey
------------------------------
John D. Bailey
Vice President, Controller and
Chief Accounting Officer
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/ J. Peter Kline Chairman of the Board of Directors and
--------------------------------------- Chief Executive Officer
J. Peter Kline
/s/ John A. Beckert
---------------------------------------
John A. Beckert President and Chief Operating Officer; Director
/s/ Jeffrey P. Mayer
---------------------------------------
Jeffrey P. Mayer Executive Vice President and
Chief Financial Officer
/s/ John D. Bailey
---------------------------------------
John D. Bailey Vice President, Controller and
Chief Accounting Officer
/s/ David A. Dittman
---------------------------------------
David A. Dittman Director
/s/ Kurt C. Read
---------------------------------------
Kurt C. Read Director
/s/ Thomas R. Oliver
---------------------------------------
Thomas R. Oliver Director
/s/ Reginald K. Brack, Jr.
---------------------------------------
Reginald K. Brack, Jr. Director
/s/ Robert A. Whitman
---------------------------------------
Robert A. Whitman Director
/s/ James J. Pinto
---------------------------------------
James J. Pinto Director
</TABLE>
27
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Bristol Hotels & Resorts:
We have audited the accompanying consolidated balance sheet of Bristol Hotels &
Resorts (a Delaware corporation) as of December 31, 1998, and the related
consolidated statements of income, cash flows and changes in stockholders'
equity for the period from inception (March 20, 1998) through December 31,
1998. We have also audited the accompanying consolidated balance sheet of
Bristol Hotel Company (the Company's predecessor, a former Delaware
corporation) as of December 31, 1997, and the related consolidated statements
of operations, cash flows, changes in stockholders' equity and comprehensive
income (loss) for the period from January 1, 1998 through July 27, 1998, and
for the years ended December 31, 1997 and 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bristol Hotels & Resorts as of
December 31, 1998, and the results of its operations and its cash flows for the
period from inception (March 20, 1998) through December 31, 1998; and the
financial position of Bristol Hotel Company (the Company's predecessor) as of
December 31, 1997, and the results of its operations and its cash flows for the
period from January 1, 1998, through July 27, 1998, and for the years ended
December 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 5, 1999
F-1
<PAGE> 29
BRISTOL HOTELS & RESORTS
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (MARCH 20, 1998)
THROUGH DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REVENUE
<S> <C>
Rooms ...................................... $217,236
Food and beverage .......................... 58,391
Management fees ............................ 2,408
Construction management fees ............... 2,095
Other ...................................... 14,788
--------
Total revenue ................... 294,918
--------
OPERATING COSTS AND EXPENSES
Departmental expenses:
Rooms .................................. 64,427
Food and beverage ...................... 44,509
Other operating departments ............ 6,345
Undistributed operating expenses:
Administrative and general ............. 26,917
Marketing .............................. 22,457
Property occupancy costs ............... 28,163
Tenant lease expense ................... 87,925
Depreciation and amortization .......... 1,027
Corporate expense ...................... 9,407
--------
Operating income ............................... 3,741
Interest income, net ........................... 689
--------
Income before income taxes ..................... 4,430
Provision for income taxes ..................... 1,785
--------
NET INCOME ..................................... $ 2,645
========
Earnings per common and common equivalent share:
Net income:
Basic .................................. $ 0.27
Diluted ................................ 0.27
Weighted average number of common and common
equivalent shares outstanding:
Basic .................................. 9,788
Diluted ................................ 9,952
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 30
BRISTOL HOTELS & RESORTS
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents ................................................... $ 24,916
Accounts receivable (net of allowance of $643) .............................. 35,329
Inventory ................................................................... 9,612
Note receivable - FelCor .................................................... 9,100
Prepaid rent ................................................................ 11,042
Deposits and other current assets ........................................... 6,144
---------
Total current assets ................................................. 96,143
Property and equipment (net of accumulated depreciation of $1,759) .............. 5,889
Investment in management contracts (net of accumulated amortization of $2,429)... 1,962
Deferred charges and other non-current assets
(net of accumulated amortization of $115) .................................... 1,528
---------
Total assets ......................................................... $ 105,522
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ....................................... $ 48,486
Accrued occupancy, sales and use tax ........................................ 6,512
Accrued insurance ........................................................... 6,511
Advance deposits ............................................................ 1,653
---------
Total current liabilities ............................................ 63,162
Deferred income taxes ........................................................... 1,376
Other liabilities ............................................................... 5,575
---------
Total liabilities .................................................... 70,113
---------
Common stock ($.01 par value; 100,000,000 shares
authorized, 31,957,919 shares issued,
17,778,315 shares outstanding) .............................................. 228
Additional paid-in capital ...................................................... 57,160
Retained earnings ............................................................... 2,645
Foreign currency translation adjustment ......................................... 12
Treasury stock, at cost (5,065,409 shares) ...................................... (24,636)
---------
Total stockholders' equity ........................................... 35,409
---------
Total liabilities and stockholders' equity ........................... $ 105,522
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 31
BRISTOL HOTELS & RESORTS
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 20, 1998)
THROUGH DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net income .............................................. $ 2,645
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ....................... 1,027
Amortization of deferred financing fees ............. 115
Non-cash portion of foreign currency translation .... 12
Compensation expense recognized for employee
stock options .................................... 139
Changes in working capital .............................. (9,026)
Decrease in restricted cash ............................. 907
Deferred tax provision .................................. 510
Increase in other liabilities ........................... 2,918
--------
Cash used in operating activities ................ (753)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to property and equipment .................. (285)
--------
Cash used in investing activities ................ (285)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from Predecessor at Spin-off .............. 48,988
Decrease in deferred charges and other non-current assets 282
Proceeds from employee stock purchase plan .............. 1,538
Proceeds from exercise of employee stock options ........ 960
Repurchase of shares from Bass plc ...................... (25,814)
--------
Cash provided by financing activities ............ 25,954
--------
Net increase in cash and cash equivalents ................... 24,916
Cash and cash equivalents at beginning of period ............ --
--------
Cash and cash equivalents at end of period .................. $ 24,916
========
Supplemental cash flow information:
Interest paid ........................................... $ --
========
Income taxes paid ....................................... $ 785
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 32
BRISTOL HOTELS & RESORTS
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MARCH 20, 1998)
THROUGH DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOREIGN
COMMON ADDITIONAL CURRENCY
-------------------- PAID-IN TREASURY TRANSLATION RETAINED
SHARES AMOUNT CAPITAL STOCK ADJUSTMENT EARNINGS TOTAL
-------- -------- ------- ----- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Inception......................... 1,000 $ -- $ 1 $ -- $ -- $ -- $ 1
Spin-off dividend......................... 22,616,453 226 55,702 -- -- -- 55,928
Bass stock repurchase..................... (5,307,351) -- -- (25,814) -- -- (25,814)
Employee stock purchase plan,
net of repurchases..................... 241,158 -- 360 1,178 -- -- 1,538
Employee stock options exercised.......... 227,055 2 958 -- -- -- 960
Employee stock option expense............. -- -- 139 -- -- -- 139
Foreign currency translation adjustment... -- -- -- -- 12 -- 12
Net income................................ -- -- -- -- -- 2,645 2,645
----------- --------- --------- --------- --------- ------- --------
Balance at December 31, 1998................. 17,778,315 $ 228 $ 57,160 $ (24,636) $ 12 $ 2,645 $ 35,409
=========== ========= ========= ========== ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 33
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Bristol Hotels & Resorts (together with its subsidiaries, the
"Company") is a Delaware corporation which was incorporated on March
20, 1998 ("Inception"), and began operations on May 20, 1998, as a
subsidiary of Bristol Hotel Company ("BHC" or "Predecessor"). The
Company was spun off (the "Spin-off") from BHC in connection with the
merger of BHC with FelCor Lodging Trust Incorporated ("FelCor") on
July 27, 1998 (the "FelCor Merger"), and began trading on July 28,
1998, as a separate publicly traded company.
The Company is one of the leading independent hotel operating
companies in the United States operating 120 primarily full-service
hotels (as of December 31, 1998) in the upscale and midscale segments
of the hotel industry containing approximately 32,100 rooms, of which
105 hotels are operated under the long-term leases with FelCor. The
Company operates hotels in 27 states, Canada and the District of
Columbia, with 30 hotels in Texas, 12 hotels in California and 10
hotels in Georgia. The Company operates the largest number of Bass
Hotels & Resorts (with its affiliates, collectively "Bass") branded
hotels in the world, including Crowne Plaza, Holiday Inn, Holiday Inn
Select and Holiday Inn Express hotels. The Company also operates 22
hotels under other hotel brands, including Sheraton Four Points,
Hilton, Hampton Inn, Homewood Suites, Courtyard by Marriott and
Fairfield Inn.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The financial statements of the Company as of December 31, 1998,
reflect its operations from May 20, 1998, through December 1998. The
Company had no operations from March 20, 1998, through May 19, 1998;
operations began on May 20, 1998, with the lease of the Hampton Inn -
Las Vegas. Prior to July 28, 1998, the Company's sole asset was the
leasehold interest in the Hampton Inn - Las Vegas; therefore, the
results of operations presented in the Company's consolidated
statement of income for the period from Inception through December 31,
1998, are not, in the opinion of management, indicative of the future
results of operations of the Company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include unrestricted cash in banks and cash
on hand. Liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable in the balance sheet are expected to be collected
within one year and are net of estimated uncollectible amounts of
$643,000 at December 31, 1998.
F-6
<PAGE> 34
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory, consisting primarily of food and beverage products as well
as consumable supplies, is carried at the lower of cost or market.
Cost is determined on the first-in, first-out basis.
PREPAID RENT
The Company is required to prepay each month's base rent on the last
day of the prior month. Any adjustments to this amount are paid in
arrears. As of December 31, 1998, prepaid rent was $11.0 million.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of leasehold improvements,
computer equipment and furniture and fixtures at the Company's
corporate office and uniforms at the hotels.
The cost of normal repairs and maintenance that does not significantly
extend the life of the property and equipment is expensed as incurred.
Depreciation is computed on a straight-line method over the estimated
useful lives of the assets, as follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment 3-15 years
Automobiles and trucks 5 years
Leasehold improvements Lease term or useful life,
whichever is less
</TABLE>
DEFERRED CHARGES AND OTHER NONCURRENT ASSETS
Deferred charges and other noncurrent assets consist primarily of
financing costs which are amortized over the life of the related line
of credit. The amounts reported in the balance sheet at December 31,
1998 are net of accumulated amortization of $115,000.
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Position 98-5, "Accounting for
Start-up Costs" ("SOP 98-5"). SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs. It
requires costs of start-up activities and organization costs to be
expensed as incurred. In accordance with SOP 98-5, the Company
expensed all organizational costs related to the spin-off as incurred,
and therefore, does not believe that this SOP has had any impact on
the financial results of the Company.
F-7
<PAGE> 35
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS (continued)
The Company has adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The objective
of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive income
is the total of net income and all other non-owner changes in a
company's equity. Due to the Company's Canadian operations, it engaged
in transactions involving foreign currency resulting in translation
adjustments of approximately $12,000 for the period from May 20, 1998,
through December 31, 1998, which the Company believes is immaterial
and does not require separate financial statement presentation.
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires an enterprise to report
financial information about its reportable operating segments, which
are defined as components of a business for which separate financial
information is evaluated regularly by the chief decision maker in
allocating resources and assessing performance. The Company does not
prepare such information for internal use, since it analyzes the
performance of and allocates resources to each hotel individually. The
Company's management has determined that it operates one line of
business and it would be impracticable to report segment information.
Therefore, the adoption of SFAS 131 has no impact on the Company's
financial statements.
FOREIGN CURRENCY TRANSACTIONS
The Company operates six hotels in Canada. Results of operations for
those hotels are maintained in Canadian dollars and translated using
average exchange rates during the period. Currency transaction losses
are included in net income and were $4,000 for the period May 20
through December 31, 1998. Assets and liabilities are translated to
U.S. dollars using the exchange rate in effect at the balance sheet
date. Resulting translation adjustments are reflected in stockholders'
equity as a cumulative foreign currency translation adjustment.
Cumulative currency translation gains included in stockholders' equity
at December 31, 1998, were $12,000.
INCOME TAXES
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax basis of
assets and liabilities using currently enacted tax rates in effect for
the years in which the differences are expected to reverse.
EARNINGS PER SHARE
Earnings per share is determined by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during the year. Weighted average shares is calculated
using the treasury stock method, giving effect to the common
equivalent shares outstanding as of December 31, 1998. The common
equivalent shares include employee and director stock options which
have been deemed exercised at the issue date using the treasury method
for the purposes of computing earnings per share. The Company has no
other potentially dilutive securities. All weighted average share and
per share data presented are calculated in accordance with Statement
of Financial
F-8
<PAGE> 36
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (continued)
Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"), which
calls for both basic and diluted weighted average share presentation.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions relating to
the reporting of assets and liabilities, the disclosure of contingent
assets and liabilities and the reported amounts of revenues and
expenses to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
3. FELCOR MERGER AND THE SPIN-OFF
On July 27, 1998, BHC's hotel operating business was spun off as a
separate publicly traded company, Bristol Hotels & Resorts (the
Company). The FelCor Merger was consummated following the Spin-off.
In the Spin-off, BHC stockholders received one common share of the
Company for every two of their BHC common shares. In the FelCor
Merger, BHC stockholders received 0.685 FelCor common shares for each
of their existing BHC common shares. As a result of these
transactions, former BHC stockholders own all of the Company's equity
and 44% of FelCor's outstanding common equity. The Spin-off was
taxable to BHC and its stockholders, while the FelCor Merger was
tax-free to FelCor and BHC stockholders.
Each of the BHC hotels acquired by FelCor in the FelCor Merger are
leased to and operated by the Company. The Company and FelCor are
separately owned and managed, but are expected to work together in the
acquisition and leasing of additional hotels.
The assets spun off to the Company by the Predecessor, net of the cash
used to repurchase the Bass shares, consisted of (in thousands):
<TABLE>
<S> <C>
Cash............................................. $ 48,988
Less - Cash used for Bass shares repurchase...... (25,814)
--------------
Net cash to Company.............................. 23,174
Non-cash assets.................................. 75,834
Liabilities...................................... (68,894)
--------------
Net assets received from Predecessor............. $ 30,114
=============
</TABLE>
4. FELCOR LEASES
Of the 120 hotels operated by the Company, 105 are subject to
long-term leases with FelCor. The principal terms of the FelCor leases
are summarized below, although certain terms vary from hotel to hotel.
TERM
The leases are for initial terms of three to fifteen years, with
renewal options on the same terms for a total of 15 years. If a lease
has been extended to 15 years, the Company may renew the lease for an
additional five years at then current market rates.
F-9
<PAGE> 37
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FELCOR LEASES (CONTINUED)
RENT
The Company will pay rent equal to the greater of base rent or
percentage rent. The percentage rent is based on specified percentages
of various revenue streams. Those percentages will vary within the
following ranges:
<TABLE>
<S> <C>
Room Revenues: 0% to 10% up to a revenue
breakpoint amount specified
for each hotel, then 70% above
such breakpoint
Food and Beverage Revenues: 5% to 25%
Other Revenues: Varying percentages depending
on the nature and source of
such revenues
</TABLE>
The base rent and the thresholds for computing percentage rent under
the leases will be adjusted annually to reflect changes in the
Consumer Price Index. While rental payments are made monthly, rent is
calculated on a quarterly basis. Rent may be re-negotiated if there
are material changes in the markets in which the Company operates. The
room revenue percentages for 1999 have been amended to include a third
breakpoint amount for each hotel, after which the lease payment amount
would be 60% of room revenues after such third breakpoint.
The Company paid $87.4 million to FelCor from July 28, 1998, through
December 31, 1998. Of this amount, $54.8 million was base rent, and
$32.6 million was percentage rent above the base amount.
Future minimum (base) rental payments under the FelCor leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
1999................................... $ 154,206
2000................................... 154,206
2001................................... 154,206
2002................................... 153,843
2003................................... 153,843
Thereafter................................ 726,559
------------
$ 1,496,863
============
</TABLE>
TERMINATION
Upon the sale of a property to a third party, FelCor may terminate the
lease. The Company would be entitled to damages upon any termination
to which it did not consent consisting of a monthly payment equal to
one-twelfth of 75% of the cash flow derived from the lease for the
prior twelve months. The payment, for the majority of the assets,
would be due for a period equal to the remainder of the lease term for
the terminated lease. For five hotels acquired by FelCor which were
available for sale at December 31, 1998, the termination payments are
calculated at variable percentages during the lease term and will be
paid over the remaining term of these five year leases, subject to
certain restrictions. Four of these properties were sold by FelCor
subsequent to year end.
A lease may also be terminated by FelCor if the Company fails to
satisfy certain performance targets, liquid net worth tests, defaults
under a franchise agreement or upon a change in control of the
Company. Either party may terminate upon a breach by the other party
of the agreements under the lease.
F-10
<PAGE> 38
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FELCOR LEASES (CONTINUED)
INSURANCE, PROPERTY TAXES AND GROUND LEASES
FelCor will pay all real estate and personal property taxes (other
than with respect to personal property of the Company), property
insurance premiums and ground lease payments on the leased hotels. The
Company will pay for all liability insurance on the leased hotels,
which includes extended coverage, comprehensive general public
liability, workers' compensation and other insurance appropriate and
customary for properties similar to the leased hotels.
5. FELCOR NOTE RECEIVABLE
Pursuant to the terms of the Spin-off Agreement, the Company's net
worth was to be $30 million at the Spin-off. The difference between
the net assets and liabilities transferred to the Company and the $30
million net worth requirement was due from FelCor. This amount, net of
settlements between the Company and FelCor in the interim period, was
$9.1 million, for which FelCor executed a promissory note to the
Company. The note bears interest at a monthly LIBOR rate plus 150
basis points (7.14% as of December 31, 1998), and is due upon five
days' notice from the Company. If FelCor were to fail to pay, the
Company has the right to offset the amount due against rent payments
due to FelCor. On February 1, 1999, the Company requested and received
$5.0 million of this note amount.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<S> <C>
Leasehold improvements................ $ 818
Furniture, fixtures and equipment..... 6,830
---------
7,648
Less accumulated depreciation......... (1,759)
---------
Total.................... $ 5,889
=========
</TABLE>
7. LONG-TERM DEBT
In connection with the Spin-off, the Company entered into a $40
million revolving credit facility (the "Credit Facility"), with
Bankers Trust Company. The Credit Facility is secured by essentially
all of the Company's assets, including the stock of its subsidiaries
and their rights under the leases with FelCor. Borrowings under the
Credit Facility bear interest at a rate of LIBOR plus 1.875% or a base
rate plus 0.875% and will mature in July 1999, with two one-year
extension options. The $40 million of commitments under the Credit
Facility may be used for working capital and other general corporate
purposes.
A sub-limit of up to $20 million of such commitments is available to
issue letters of credit to secure the Company's obligations under the
leases with FelCor and other owners, subject to the reduction of such
sub-limit to reflect the achievement of liquid net worth requirements
related to such leases. The Company will pay a fee of 1.875% annually
on the maximum amount which may be drawn under each letter of credit
issued. The letter of credit sub-limit under the Credit Facility has a
one-year term without renewal options. As of December 31, 1998, a
letter of credit for $15.9 million was outstanding to FelCor to secure
the Company's obligations under the leases.
F-11
<PAGE> 39
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Components of income tax expense from continuing operations for the
period from July 28, 1998, through December 31, 1998, consists of the
following (in thousands):
<TABLE>
<CAPTION>
Federal:
<S> <C>
Current................................ $ 516
Deferred............................... 749
State:
Current................................ 102
Deferred............................... 148
Canada:
Current................................ 270
Deferred............................... --
--------------
$ 1,785
==============
</TABLE>
The Company estimates that its effective tax rate for 1998
approximated 39.85%. The actual income tax expense for the period from
July 28,1998, through December 31, 1998, is computed by applying the
U. S.
federal statutory income tax rate, adjusted as follows:
<TABLE>
<S> <C>
Income tax expense at the U. S. federal statutory rate... 35.00%
State income taxes, net of federal benefit and
permanent differences................................. 3.55%
Effect of higher Canadian tax rates...................... 1.30%
------
39.85%
======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
1998 are as follows (in thousands):
<TABLE>
<S> <C>
Purchase accounting adjustments to management
contracts and depreciable assets.................. $ 1,596
Other................................................ 263
----------
Gross deferred tax liabilities............... 1,859
----------
Accrued reserves..................................... 483
----------
Gross deferred tax asset..................... 483
----------
Net deferred tax liability................... $ 1,376
==========
</TABLE>
The gross deferred tax liabilities relate principally to the temporary
differences caused by the purchase accounting adjustments recorded as
a result of the combination of Harvey Hotel Company, Ltd. and its
affiliated businesses and United Inns, Inc. (the predecessors to BHC)
and BHC's acquisition of hotels, management contracts and other
interests from Holiday Corporation (the "Holiday Inn Acquisition").
For financial reporting purposes, the transactions were recorded under
the principles of purchase accounting and, accordingly, the basis of
the assets have been adjusted to fair market value. For tax reporting
purposes, the transactions resulted in the bases of the assets and
liabilities being carried forward at their adjusted bases with some
adjustment for certain gains recognized on the transactions discussed
above. This differing treatment has created book bases in excess of
tax bases and, accordingly, the related deferred tax liabilities
associated with these differences have been recorded. As the Company
depreciates and amortizes the bases of its assets for book and tax
purposes, it will record an expense for depreciation and amortization
in excess of that claimed for tax purposes. The reversal of these
temporary differences will result in the Company recording a credit to
deferred tax expense for the tax effect of these differences.
F-12
<PAGE> 40
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<S> <C>
Accounts payable .................................. $ 5,952
Accrued payroll, payroll taxes and benefits......... 20,425
Accrued rent........................................ 8,498
Accrued utility costs............................... 3,395
Accrued franchise fees.............................. 1,957
Accrued hotel operating expenses.................... 4,547
Other............................................... 3,712
--------
$ 48,486
========
</TABLE>
10. STOCKHOLDERS' EQUITY
NON-EMPLOYEE DIRECTOR OPTIONS
The Company instituted the Non-Employee Directors Stock Option Plan
(the "Plan") on July 27, 1998, and assumed the Predecessor's Amended
Stock Option Plan for Non-Employee Directors. Only directors who are
(i) not employees of the Company; or (ii) do not beneficially own, or
are an employee of an entity which beneficially owns 9% or more of the
outstanding common shares of the Company, are eligible under the Plan
(an "Eligible Director"). On the later of the date upon which an
Eligible Director became a director or the effective date of the Plan,
each receives an initial option to purchase 25,000 shares of Common
Stock at an exercise price equal to the market value on the date of
grant. The initial option becomes exercisable 34% at the first next
annual stockholders' meeting at which the individual remains a
director, and 33% at each of the next two consecutive annual
stockholders' meetings which the individual remains a director.
Thereafter, the Directors' Plan Committee may, but is not obligated
to, annually grant each Eligible Director an option to purchase up to
25,000 shares of Common Stock which becomes exercisable as determined
by the Directors' Plan Committee. As of December 31, 1998, a total of
101,250 options had been granted to the three Eligible Directors on
the board, including those issued under the Predecessor's plan, 23,775
of which are currently exercisable.
The Company, on behalf of its Non-Employee Directors, filed an
amendment to the Form 3's filed on August 5, 1998 reflecting the
granting of stock options pursuant to the Non-Employee Directors Stock
Option Plan.
EMPLOYEE OPTIONS
Under the Company's 1998 Equity Incentive Plan and the Predecessor's
Amended and Restated 1995 Equity Incentive Plan, which was assumed by
the Company, the Company may award options to purchase the Company's
stock to eligible officers and employees. Employee stock options may
be granted to officers and employees with an exercise price generally
not less than the fair market value of the common stock at the date of
grant. Options expire at 10 years from date of grant. Options issued
prior to December 31, 1995, have cliff vesting from 1998 - 2000 and
options issued on or after January 1, 1996, vest ratably over a four-
or five-year period from the date of the grant. There were 609,258
employee options outstanding at December 31, 1998, including those
issued under the Predecessor's plan, of which 117,769 were
exercisable.
F-13
<PAGE> 41
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
TREASURY STOCK
Immediately after the Spin-off, the Company purchased 5.3 million
shares of its stock held by affiliates of Bass, in order to assure
FelCor's compliance with certain REIT ownership requirements. The
purchase price for these shares was $25.8 million ($4.86 per share),
and was funded from cash contributed by BHC to the Company for this
purpose. The repurchased shares are classified as treasury shares on
the Company's balance sheet.
STOCK PURCHASE PLAN
In order to encourage broader ownership of the Company by providing a
means for eligible employees and directors of the Company to acquire
shares of Company stock, the Company formed the 1998 Bristol Hotels &
Resorts Stock Purchase Plan. On July 28, 1998, eligible employees and
directors purchased 241,158 shares of the Company's stock at $6.38 per
share. The shares were issued from treasury stock.
SFAS 123 DISCLOSURE
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Pronouncement Bulletin Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the market price of the Company's stock at the date
of the grant over the amount the employee must pay to acquire the
stock.
However, had compensation cost for these plans been determined
consistent with the method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Company's net income and earnings per share would have been
reduced to the following pro forma amounts (dollars in thousands,
except per share amounts):
<TABLE>
<S> <C> <C>
Net income As reported $ 2,645
Pro forma 2,623
Basic EPS As reported 0.27
Pro forma 0.27
Diluted EPS As reported 0.27
Pro forma 0.27
</TABLE>
F-14
<PAGE> 42
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock option plan at December
31, 1998, and changes during the period July 28,1998, through December
31, 1998, is presented in the table and narrative below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding at July 28,1998 ............ 927,820 $ 4.41
Options granted ........................ 75,000 6.88
Options exercised ...................... (227,055) 2.53
Options expired ........................ (65,257) 4.71
-------- --------
Options outstanding at
December 31,1998 .................... 710,508 $ 5.24
======== ========
Options exercisable at
December 31,1998 .................... 141,544 $ 5.85
======== ========
Weighted average fair value
of options granted at date of issue $ 2.40
========
</TABLE>
The 710,508 options outstanding at December 31, 1998, have exercise
prices between $2.51 and $8.50 with a weighted average exercise price
of $5.24 and a weighted average remaining contractual life of 7.2
years. At December 31, 1998, 141,544 of these options (with a weighted
average exercise price of $5.85) are exercisable.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for the grant in 1998: risk-free
interest rate of 5.49%; no expected dividend yields; expected lives of
7.2 years; expected volatility of 33.75%.
11. EARNINGS PER SHARE
The Company computes net income per share in accordance with SFAS 128.
Under SFAS 128, net income per share ("basic EPS") is computed by
dividing net earnings by the weighted average number of shares of
common stock outstanding during the period. The Company calculates net
income per share, assuming dilution ("diluted EPS"), assuming all
outstanding options to purchase common stock have been exercised at
the beginning of the year (or the time of issuance, if later). The
dilutive effect of the outstanding options is reflected by application
of the treasury stock method, whereby the proceeds from the exercised
options are assumed to be used to purchase common stock at the average
market price during the period. The following table reconciles the
computation of basic EPS to diluted EPS:
<TABLE>
<CAPTION>
PER SHARE
NET INCOME SHARES AMOUNT
-------------- ------ ------
($ IN THOUSANDS)
<S> <C> <C> <C>
Inception through December 31, 1998:
Net income per share............................ $ 2,645 9,787,535 $ 0.27
Effect of options............................... -- 164,020 --
---------- ------------ -------
Net income per share, assuming dilution......... $ 2,645 9,951,555 $ 0.27
========== ============ =======
</TABLE>
F-15
<PAGE> 43
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. OPERATING LEASES
The Company leases certain hotel space to third-party vendors. Future
minimum rentals to be received under non-cancelable operating leases
that have initial or remaining lease terms in excess of one year are
as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
1999.................................. $ 2,166
2000.................................. 1,549
2001.................................. 1,316
2002.................................. 1,110
2003.................................. 891
Thereafter............................... 3,377
--------
$ 10,409
========
</TABLE>
13. MANAGEMENT CONTRACTS
The Company retained the management of 16 hotels at Spin-off. The
basis in these contracts at July 28, 1998, was $2.1 million and is
being amortized on a straight-line basis over the remaining lives of
the agreements. The amortization of the purchase price recorded from
July 28, 1998, through December 31, 1998, was $99,000. Management fee
income was $2.4 million in the period from July 28, 1998, through
December 31, 1998. These management contracts may contain provisions
which allow the third-party owner to terminate the contract for such
reasons as sale of the property, for cause or without cause.
Therefore, the Company cannot guarantee that it will continue to
manage these properties to the contract expiration date. The Company
will cease to manage the Holiday Inn - Hollywood on March 31, 1999.
The owner of five properties currently managed by the Company has
notified the Company of its intent to sell these properties, and the
Company believes its management of these hotels could terminate upon
sale.
14. BENEFITS
Health (including fully insured term life and accidental death and
dismemberment), dental and disability coverage is provided to the
Company's employees through the Welfare Benefit Trust (the "Trust").
The Company maintains varying levels of stop-loss and umbrella
insurance policies to limit the Company's per occurrence and aggregate
liability in any given year. Actual claims and premiums on stop-loss
insurance, medical and disability policies are paid from the Trust.
The Trust is funded through a combination of employer and employee
contributions. The Trust also pays work-related injury claims, which
are funded by the employer for its employees in Texas. All employees
have been eligible for participation in the benefits provided through
the Trust. The Company provided $4.9 million related to these benefits
for the period from Inception through December 31, 1998.
The Company offers a Profit Sharing Plan and Trust ("401(k) Plan") to
certain employees. The 401(k) Plan is designed to be a qualified trust
under Section 401 of the Internal Revenue Code. Under the 401(k) Plan,
eligible employees are allowed to defer up to 16% of their income on a
pretax basis through contributions to the 401(k) Plan; however, only
the first 6% of pretax income is subject to matching by the Company.
The Company automatically makes matching contributions of 50% of the
employees' matchable contributions and may elect to make matching
contributions of up to an additional 50% of the employees' matchable
contributions subject to certain performance measures of the Company.
The Company provided for automatic matching contributions for the
period from Inception through December 31, 1998, totaling $1.0
million. The Company determined that it did not meet the performance
criteria necessary to make the discretionary 50% match contribution.
F-16
<PAGE> 44
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BENEFITS (CONTINUED)
Therefore, the Company accrued no amounts during the period from
Inception to December 31, 1998, and reversed all amounts accrued by
the Predecessor for the period from January 1, 1998, through July 27,
1998, resulting in a reversal of expense of $963,000 during the
period.
15. COMMITMENTS AND CONTINGENCIES
Substantially all of the Company's hotel properties are operated
pursuant to franchise or license agreements ("Franchise Agreements"),
primarily with Holiday Inn Franchising, Inc. or its affiliates. The
Company also operates hotels under franchise agreements with Marriott
International, Inc., Promus Hotels, Inc., Hilton Inns, Inc., Hampton
Inn (a division of Promus Hotels, Inc.), Ramada Franchise Systems,
Inc. and Days Inns of America, Inc. The Franchise Agreements generally
require the payment of a monthly royalty fee based on gross room
revenue and various other fees associated with certain marketing or
advertising and centralized reservation services, also generally based
on gross room revenues. The Franchise Agreements have various
durations through the year 2018, and generally may not be terminated
without the payment of substantial fees. Franchise marketing and
royalty fees of $12.5 million were paid during the period from
Inception through December 31, 1998.
The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the
hotels, which are established by the franchisors to maintain
uniformity in the system created by each such franchisor. Such
standards generally regulate the appearance of the hotel, quality and
type of goods and services offered, signage and protection of
trademarks. Compliance with such standards may from time to time
require significant expenditures for capital improvements, which would
be paid by the property owner.
The Company is currently involved in certain guest and customer
claims, employee wage claims and other disputes arising in the
ordinary course of business. In the opinion of management, the pending
litigation will not have a materially adverse effect on the Company's
financial position or results of operations.
16. RELATED PARTY TRANSACTIONS
The Company and Bass entered into a hotel properties agreement (the
"Hotel Properties Agreement"). The Hotel Properties Agreement requires
that the Company must enter into standard franchise agreements for
hotels having an specified aggregate number of rooms by the following
dates: 3,000 rooms by April 1, 2001; 5,200 rooms by April 1, 2002; and
a total of 8,700 new Holiday Inn branded rooms by April 1, 2003. If
the Company fails to meet these thresholds by the required dates, the
Company could pay a monthly fee equal to $73.50 per room below the
threshold amount, until the Company meets the applicable threshold or
until March 31, 2006. Additionally, the Company has a right of first
refusal on any entity or other interest meeting certain criteria that
Bass wishes to acquire or develop, subject to certain limitations. The
above provisions of the Hotel Properties Agreement will expire the
earlier of (i) the date that Bass terminates its obligation upon six
months notice at any time after October 28, 1998, or (ii) the date
that Bass no longer holds a controlling interest in the franchisor of
the Holiday Inn brands.
F-17
<PAGE> 45
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has agreed to enter into Franchise Agreements with Bass
pursuant to which certain properties will be rebranded to Holiday Inn
brands, subject to normal franchising procedures. Franchise fees for
these rebranded hotels will equal 1% in 1998, 3% in 1999 and 5% in
2000. Amounts paid to Bass pursuant to Franchise Agreements and
related marketing, advertising and reservation services were $18.0
million, including $11.2 million for franchise royalty and marketing
fees and $2.3 million of frequent guest program fees for the period
from Inception through December 31, 1998.
17. FAIR VALUE
The Company has estimated the fair value of its financial instruments
at December 31, 1998, as required by Statement of Financial Accounting
Standards No. 107, "Disclosure about Fair Value of Financial
Instruments." The carrying values of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses are
reasonable estimates of the fair values.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited consolidated quarterly results of operations for the
Company are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Inception - Third Fourth
June 30, 1998 Quarter Quarter
------------- ------- --------
<S> <C> <C> <C>
Revenues................................. $ 132 $ 121,126 $ 173,660
Operating income (loss).................. (59) 2,041 1,759
Net income (loss) ....................... (59) 1,176 1,528
Earnings per common share:
Net income:
Basic............................. n/a $ 0.09 $ 0.09
Diluted........................... n/a $ 0.09 $ 0.09
Weighted average number of common
and common equivalent shares:
Basic............................. n/a 12,753 17,778
Diluted........................... n/a 12,921 17,909
</TABLE>
Earnings per share and weighted average shares for the period from
Inception through June 30, 1998 are not presented. Prior to the
Spin-off, the Company was a wholly owned subsidiary of the
Predecessor.
Earnings per common share amounts and weighted average number of
common and common equivalent shares have been calculated in accordance
with SFAS 128. The sum of the earnings per common share for the
quarters differs from the annual earnings per common share due to the
required method of computing the weighted average number of shares in
the respective periods.
F-18
<PAGE> 46
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
REVENUE:
Rooms ............................................. $ 308,638 $ 377,380 $ 149,794
Food and beverage ................................. 68,999 92,596 44,344
Management fees ................................... 3,538 4,948 2,513
Other ............................................. 22,835 29,594 15,189
--------- --------- ---------
Total revenue .......................... 404,010 504,518 211,840
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Departmental expenses:
Rooms ......................................... 89,721 105,063 37,706
Food and beverage ............................. 54,751 69,766 31,282
Other ......................................... 5,424 9,326 4,528
Undistributed operating expenses:
Administrative and general .................... 41,517 44,255 18,266
Marketing ..................................... 29,169 34,439 15,555
Property operating costs ...................... 35,306 44,303 17,499
Property taxes, rent and insurance ............ 30,601 35,330 10,903
Depreciation and amortization ................. 34,300 39,690 18,377
Corporate expense ............................. 27,676 24,450 10,958
--------- --------- ---------
Operating income ...................................... 55,545 97,896 46,766
--------- --------- ---------
Other (income) expense:
Interest expense .................................. 30,892 44,591 18,616
Equity in income of joint ventures ................ (783) (1,916) --
--------- --------- ---------
Income before income taxes and extraordinary items .... 25,436 55,221 28,150
Income taxes .......................................... 10,175 22,007 10,401
--------- --------- --------
Income before extraordinary items ..................... 15,261 33,214 17,749
Extraordinary loss on early extinguishment
of debt, net of tax ............................... (25,689) (12,741) --
--------- --------- ---------
Net income (loss) ..................................... $ (10,428) $ 20,473 $ 17,749
========= ========= =========
Earnings (loss) per common and common equivalent share:
Income before extraordinary item:
Basic ......................................... $ 0.34 $ 0.89 $ 0.71
Diluted ....................................... $ 0.34 $ 0.87 $ 0.70
Net income (loss):
Basic ......................................... $ (0.23) $ 0.55 $ 0.71
Diluted ....................................... $ (0.23) $ 0.53 $ 0.70
Weighted average number of common and common
equivalent shares outstanding:
Basic ............................................. 44,380 37,359 24,849
Diluted ........................................... 45,194 38,332 25,526
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 47
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
ASSETS 1997
------------
<S> <C>
Current assets
Cash and cash equivalents ................................................. $ 86,167
Accounts receivable (net of allowance of $2,259) .......................... 31,305
Inventory ................................................................. 8,286
Deposits .................................................................. 7,569
Other current assets ...................................................... 1,729
----------
Total current assets ........................................... 135,056
----------
Property and equipment (net of accumulated depreciation of $76,172) ........... 1,439,167
Other assets
Restricted cash ........................................................... 9,283
Investments in joint ventures (net of accumulated amortization of $308) ... 12,396
Goodwill (net of accumulated amortization of $891) ........................ 52,773
Deferred charges and other non-current assets (net of
accumulated amortization of $1,965) ................................... 17,963
----------
Total assets ................................................... $1,666,638
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt ......................................... $ 8,455
Accounts payable and accrued expenses ..................................... 27,366
Accrued construction costs ................................................ 1,330
Accrued property, sales and use taxes ..................................... 15,911
Accrued insurance reserves ................................................ 9,530
Advance deposits .......................................................... 1,156
----------
Total current liabilities ...................................... 63,748
----------
Long-term debt, excluding current portion ..................................... 708,864
Deferred income taxes ......................................................... 242,530
Other liabilities ............................................................. 2,702
----------
Total liabilities .............................................. 1,017,844
----------
Common stock ($.01 par value; 150,000,000 shares authorized,
45,734,472 shares issued and 43,641,401 shares outstanding) ................ 436
Additional paid-in capital .................................................... 606,935
Other accumulated comprehensive income ........................................ 286
Retained earnings ............................................................. 41,137
----------
Total stockholders' equity ..................................... 648,794
----------
Total liabilities and stockholders' equity ..................... $1,666,638
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE> 48
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ (10,428) $ 20,473 $ 17,749
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.............................. 34,300 39,690 18,377
Amortization of deferred financing fees.................... 1,609 2,749 2,062
Equity in earnings of joint ventures....................... 616 (1,399) --
Compensation expense recognized for
employee stock options.................................. 130 410 216
Unrealized gain on marketable securities................... -- (378)
Non-cash portion of extraordinary item, net of tax......... 5,095 11,009 --
Non-cash portion of foreign currency translation........... 1,276 -- --
Changes in assets and liabilities:
Changes in working capital................................. 5,791 1,645 (684)
Decrease (increase) in restricted cash..................... 1,263 (6,214) (2,449)
Distributions from joint ventures.......................... 90 650 --
Increase (decrease) in other liabilities................... (785) 217 (460)
Deferred tax provision..................................... 1,143 5,805 6,171
----------- ----------- ----------
Net cash provided by operating activities............... 40,100 75,035 40,604
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to property and equipment......................... (102,283) (54,071) (93,936)
Purchases of property and equipment, net
of associated debt.......................................... (9,000) (86,977) (6,300)
Sales of property and equipment................................ 4,750 -- --
Holiday Inn Acquisition, net of costs.......................... -- (400,159) --
Omaha Acquisition, net of assumed debt......................... (20,043) -- --
HI-Thomas Circle Settlement.................................... 4,100 -- --
Sales of marketable securities................................. -- -- 726
----------- ----------- ----------
Net cash used in investing activities................... (122,476) (541,207) (99,510)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Nomura Credit Facility........................... -- 600,000 --
Proceeds from New Credit Facility.............................. -- 560,000 --
Repayment of New Credit Facility............................... -- (560,000) --
Paydown of Senior Notes........................................ (30,000) (40,000) --
Proceeds from Offering, net of costs........................... -- 107,852 --
Early extinguishment of long-term debt......................... -- (133,540) --
Repayment of debt assumed in Omaha Acquisition................. (25,329) -- --
Borrowings under FelCor Facility............................... 120,000 -- --
Proceeds from BT Loan.......................................... 490,000 -- --
Repayment of Nomura Credit Facility............................ (455,000) -- --
Proceeds from exercise of employee stock options............... 1,633 -- --
Principal payments and extinguishment of long-term debt........ (13,508) (7,058) (4,826)
Proceeds from issuance of long-term debt....................... -- 43,410 66,976
Payment of offering costs...................................... -- -- (1,342)
Increase in deferred charges and other non-current assets...... (4,021) (22,991) (5,142)
----------- ----------- ----------
Net cash provided by financing activities............... 83,775 547,673 55,666
----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE> 49
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents............... $ 1,399 $ 81,501 $ (3,240)
Cash and cash equivalents at beginning of period................... 86,167 4,666 7,906
----------- ----------- ----------
Cash and cash equivalents at end of period......................... $ 87,566 $ 86,167 $ 4,666
=========== =========== ==========
Supplemental cash flow information:
Interest paid.................................................. $ 28,955 $ 39,706 $ 17,696
=========== =========== ==========
Income taxes paid.............................................. $ 6,524 $ 10,942 $ 3,543
=========== =========== ==========
Non-cash investing and financing activities:
Debt assumed to acquire property and equipment................. $ 15,125 $ 21,813 $ --
=========== =========== ==========
Sale of non-hotel properties for assumption of liabilities..... $ -- $ -- $ --
=========== =========== ==========
Purchase of minority interest for common stock................. $ -- $ -- $ --
=========== =========== ==========
Common stock issued in Holiday Inn Acquisition..................... $ -- $ 267,967 $ --
=========== =========== ==========
Common stock issued in Omaha Acquisition........................... $ 40,000 $ -- $ --
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE> 50
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER
COMMON STOCK ADDITIONAL UNREALIZED ACCUMULATED
--------------------- PAID-IN GAIN (LOSS) COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL ON SECURITIES INCOME EARNINGS TOTAL
-------- -------- ---------- ------------- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995............ 16,565,840 $ 166 $ 232,633 $ 262 $ -- $ 3,061 $ 236,122
Reclass securities to trading........ -- -- -- (262) -- -- (262)
Employee stock options............... -- -- 216 -- -- -- 216
Adjustment to offering costs for
1995 common stock issuance........ -- -- (1,668) -- -- -- (1,668)
Net income........................... -- -- -- -- -- 17,749 17,749
----------- ---------- --------- ----------- ----------- --------- -----------
Balance at December 31, 1996............ 16,565,840 166 231,181 -- -- 20,810 252,157
Employee stock options............... -- -- 296 -- -- -- 296
Exercise of employee stock options... 6,619 -- 114 -- -- -- 114
Issuance of stock in Holiday Inn
Acquisition....................... 9,361,308 93 267,874 -- -- -- 267,967
Issuance of common stock, net of costs 3,162,500 31 107,470 -- -- -- 107,501
Stock split.......................... 14,545,134 146 -- -- -- (146) --
Foreign currency translation
adjustment........................ -- -- -- -- 286 -- 286
Net income........................... -- -- -- -- -- 20,473 20,473
----------- ---------- --------- ----------- ----------- --------- -----------
Balance at December 31, 1997............ 43,641,401 436 606,935 -- 286 41,137 648,794
Employee stock options............... -- -- 130 -- -- -- 130
Exercise of employee stock options 165,000 2 1,631 -- -- -- 1,633
Issuance of stock in Omaha
Acquisition....................... 1,428,571 14 39,986 -- -- -- 40,000
Foreign currency translation
adjustment........................ -- -- -- -- 1,276 -- 1,276
Net loss............................. -- -- -- -- -- (10,428) (10,428)
----------- ---------- --------- ----------- ----------- ---------- ------------
Balance at July 27, 1998................ 45,234,972 $ 452 $ 648,682 $ -- $ 1,562 $ 30,709 $ 681,405
=========== ========== ========= =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE> 51
BRISTOL HOTEL COMPANY (PREDECESSOR)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Net income (loss)..................................... $ (10,428) $ 20,473 $ 17,749
Other items of comprehensive earnings:
Cumulative foreign currency translation
adjustments................................... 1,276 286 --
----------- ------------ ------------
Comprehensive income (loss)........................... $ (9,152) $ 20,759 $ 17,749
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE> 52
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Bristol Hotel Company (the "BHC" or "Predecessor") is a Delaware
corporation which was incorporated in November 1994 and began
operations after the acquisitions of Harvey Hotel Company, Ltd. and
its subsidiaries. As of July 27, 1998, BHC owned 107 hotels and
managed 16 additional hotels, one of which was owned by joint ventures
in which BHC owned a 50% interest. The properties, which contain
approximately 32,700 rooms, are located in 27 states, the District of
Columbia and Canada. BHC acquired the ownership and/or management of
60 of these properties on April 28, 1997 (the "Holiday Inn
Acquisition").
On July 27, 1998, BHC's hotel operating business was spun off (the
"Spin-off") as a separate publicly traded company, Bristol Hotels &
Resorts ("BH&R"). Prior to the Spin-off, BH&R was a wholly owned
subsidiary of the Company. Following the Spin-off, BHC merged (the
"FelCor Merger") with FelCor Lodging Trust Incorporated ("FelCor").
The accompanying consolidated statements of operations, cash flows,
changes in stockholders' equity and comprehensive income (loss) for
the period from January 1, 1998, through July 27, 1998, are presented
as if the FelCor Merger and the Spin-off had not occurred. Therefore,
the effect of the gain on the Spin-off is not reflected in these
financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of BHC and its subsidiaries up to the date of the FelCor
Merger. The results of operations of the hotels acquired during the
period are included in the Predecessor's financial statements from the
date of acquisition. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include unrestricted cash in banks and cash
on hand. Liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable in the balance sheet are net of estimated
uncollectible amounts of $2,259,000 at December 31, 1997.
INVENTORY
Inventory, consisting primarily of food and beverage products as well
as consumable supplies, is carried at the lower of cost or market.
Cost is determined on the first-in, first-out basis.
DEFERRED CHARGES AND OTHER NON-CURRENT ASSETS
Deferred charges and other non-current assets consist primarily of
financing costs which are amortized over the life of the related loan.
The amounts reported in the balance sheet at December 31, 1997, are
net of accumulated amortization of $1,965,000.
F-25
<PAGE> 53
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The Predecessor records acquisitions on the basis of an allocation of
the purchase price based on the fair market value of the assets
acquired at the date of acquisition. Subsequent additions and
improvements are capitalized at their cost, including interest costs
associated with the renovation of certain hotels. Interest capitalized
during the period January 1, 1998, through July 27, 1998, and the year
ended December 31, 1997, was $6.4 million and $1.6 million,
respectively.
The cost of normal repairs and maintenance that does not significantly
extend the life of the property and equipment is expensed as incurred.
Depreciation is computed on a straight-line method over the estimated
useful lives of the assets, as follows:
<TABLE>
<S> <C>
Buildings 35-40 years
Furniture, fixtures and equipment 3-15 years
Automobiles and trucks 5 years
Leasehold improvements Lease term or useful life,
whichever is less
</TABLE>
Depreciation and amortization expense recorded for the period ended
July 27, 1998 and the years ended December 31, 1997 and 1996 was $34.3
million, $39.7 million, and $18.4 million, respectively.
RESTRICTED CASH
Restricted cash consists of (i) funds placed in reserve for the
replacement of furniture, fixtures and equipment, and (ii) tax and
insurance reserves. The Predecessor is required to deposit monthly
with various lenders amounts of three to four percent of hotel
revenues for replacement reserves plus the tax and insurance escrow,
and as tax and insurance payments are made and improvements are
completed, the Predecessor is reimbursed from the reserves.
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
The Predecessor adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The objective
of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of
the period other than transactions with owners. Due to the Company's
Canadian operations, it engaged in transactions involving foreign
currency resulting in translation adjustments of approximately $1.6
million and $286,000 for the period January 1, 1998, through July 27,
1998, and the year ended December 31, 1997, respectively, which
resulted in a comprehensive loss of $9.2 million for the period
January 1, 1998, through July 27, 1998, and comprehensive income of
$20.8 million for the year ended December 31, 1997.
FOREIGN CURRENCY TRANSACTIONS
The Predecessor operates six hotels in Canada for which results of
operations are maintained in Canadian dollars and translated using
average exchange rates during the period. Currency transaction gains
and losses are included in net income and were a gain of $265,000 and
a loss of $303,000 for the period January 1, 1998, through July 27,
1998, and the year ended December 31, 1997, respectively. Assets and
liabilities are translated to U.S. dollars using the exchange rate in
effect at the balance sheet date. Cumulative currency translation
gains included in stockholders' equity at July 27, 1998, and December
31, 1997, were $1.6 million and $286,000, respectively.
F-26
<PAGE> 54
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Predecessor accounts for income taxes under the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities using currently enacted tax rates
in effect for the years in which the differences are expected to
reverse.
EARNINGS PER SHARE
Earnings per share ("EPS") is determined by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during the year. All weighted average share and per share
data presented are calculated in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128"), which calls for both basic and diluted weighted average share
presentation. Weighted average shares is calculated using the treasury
stock method, giving effect to the common equivalent shares
outstanding as of July 27, 1998, and December 31, 1997 and 1996. The
common equivalent shares include officer and director stock options
which have been deemed exercised at the issue date using the treasury
method for the purposes of computing earnings per share. The
Predecessor has no other potentially dilutive securities.
The following table reconciles the computation of basic EPS to diluted
EPS:
<TABLE>
<CAPTION>
PER SHARE
NET INCOME SHARES AMOUNT
--------------- ------ -------
($ in thousands)
<S> <C> <C> <C>
For the period January 1, 1998, through
July 27, 1998:
Income before extraordinary item per share......... $ 15,261 44,379,739 $ 0.34
Effect of options.................................. - 814,744
---------- --------------
Income before extraordinary item per
share, assuming dilution........................ $ 15,261 45,194,483 $ 0.34
========== ==============
Net loss per share................................. $ (10,428) 44,379,739 $ (0.23)
Effect of options.................................. - 814,744
---------- --------------
Net loss per share, assuming dilution.............. $ (10,428) 45,194,483 $ (0.23)
=========== ==============
For the year ended December 31, 1997:
Income before extraordinary item
per share.................................... $ 33,214 37,359,364 $ 0.89
Effect of options............................... - 972,938
---------- --------------
Income before extraordinary item per
share, assuming dilution..................... $ 33,214 38,332,302 $ 0.87
========== ==============
Net income per share............................ $ 20,473 37,359,364 $ 0.55
Effect of options............................... - 972,938
---------- --------------
Net income per share, assuming dilution......... $ 20,473 38,332,302 $ 0.53
========== ==============
</TABLE>
F-27
<PAGE> 55
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (continued)
<TABLE>
<CAPTION>
PER SHARE
NET INCOME SHARES AMOUNT
--------------- ------ -------
($ in thousands)
<S> <C> <C> <C>
For the year ended December 31, 1996:
Income before extraordinary item
per share.................................... $ 17,749 24,848,760 $ 0.71
Effect of options............................... - 677,653
---------- --------------
Income before extraordinary item per
share, assuming dilution..................... $ 17,749 25,526,413 $ 0.70
========== ==============
Net income per share............................ $ 17,749 24,848,760 $ 0.71
Effect of options............................... - 677,653
---------- --------------
Net income per share, assuming dilution......... $ 17,749 25,526,413 $ 0.70
========== ==============
</TABLE>
Earnings per share have been retroactively adjusted for the effect of
stock splits.
USE OF ESTIMATES
The Predecessor has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues
and expenses to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain financial statement items from the prior years for the
Predecessor have been reclassified to conform to the current
presentation.
3. FELCOR MERGER AND THE SPIN-OFF
On July 27, 1998, the Predecessor's hotel operating business was spun
off as a separate publicly traded company, Bristol Hotels & Resorts.
The FelCor Merger was consummated following the Spin-off.
In the Spin-off, the Predecessor's stockholders received one common
share of BH&R stock for every two of their shares in the Predecessor.
In the FelCor Merger, the Predecessor's stockholders received 0.685
FelCor common shares for each of their existing shares in the
Predecessor. As a result of these transactions, former stockholders of
the Predecessor own all of BH&R's equity and 44% of FelCor's
outstanding common equity. The Spin-off was taxable to the Predecessor
and its stockholders, while the FelCor Merger was tax-free to FelCor
and Predecessor's stockholders.
After the FelCor Merger, all of Predecessor's hotels acquired by
FelCor are leased to and operated by BH&R.
F-28
<PAGE> 56
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FELCOR MERGER AND THE SPIN-OFF (CONTINUED)
The assets spun off to BH&R by the Predecessor subsequent to July 27,
1998 consisted of (in thousands):
<TABLE>
<S> <C>
Cash........................................ $ 48,988
Non-cash assets............................. 75,834
Liabilities................................. (94,708)
--------------
Net assets to BH&R.......................... $ 30,114
=============
</TABLE>
4. ACQUISITIONS
Holiday Inn Acquisition
On April 28, 1997, the Predecessor acquired the ownership of 45
full-service Holiday Inns and the management of an additional 15
Holiday Inn properties, three of which were owned by joint ventures in
which the Predecessor acquired a 50% interest (the owned hotels,
management contracts and joint venture interests, collectively
referred to as the "Holiday Inn Assets"). As consideration for the
Holiday Inn Acquisition, the Predecessor paid $398 million in cash and
issued 9,361,308 shares (pre-Stock Split) of its common stock. The
acquisition was accounted for as a purchase and the results of
operations of the Holiday Inn Assets have been included in the
consolidated financial statements since April 28, 1997. The purchase
price, including liabilities assumed in the acquisition (principally
deferred tax liabilities) was allocated to the assets acquired, based
upon their fair market values. The excess of the purchase price over
the estimated fair market value of the net assets acquired was
recorded as goodwill and is being amortized over 40 years.
Omaha Acquisition
On April 30, 1998, the Predecessor acquired 20 Midwestern hotels (the
"Omaha Acquisition"). The total consideration for these assets was
$40.4 million of assumed debt (of which $25.3 million was paid off at
closing), $20 million in cash and 1.43 million shares of the
Predecessor's common stock. The portfolio consists of nine
full-service Holiday Inns; five Holiday Inn Express hotels; five
Hampton Inns and one Homewood Suites, with locations in Omaha,
Nebraska; Moline, Illinois; Davenport, Iowa; central Kansas and
Midland/Odessa, Texas. The pro forma impact of this acquisition is not
material to the Predecessor's financial statements. BHC funded the
cash portion of the purchase price with borrowings under the FelCor
Facility (as defined in Note 6).
F-29
<PAGE> 57
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
Single-Asset Acquisitions
Owned Hotels
The Predecessor completed the following single-asset acquisitions:
<TABLE>
<CAPTION>
Date Number Purchase Debt
Acquired Location of Rooms Price Assumed
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
April 1998 Leominster, MA 187 $ 9.0 million $ --
December 1997 San Jose, CA 305 $ 4.25 million (1) $ --
December 1997 Philadelphia, PA 364 $ 25.50 million $ 13.4 million
October 1997 St. Louis, MO 318 $ 18.00 million $ 8.4 million
January 1997 Chicago, IL 444 $ 35.00 million $ --
May 1996 Plano, TX 161 $ 6.30 million $ --
</TABLE>
(1) The Holiday Inn - San Jose North was previously owned by a
joint venture in which the Predecessor owned a 50% interest.
The Predecessor purchased the remaining 50% interest in the
venture for $4.25 million and, concurrent with the
acquisition, repaid all outstanding debt associated with the
property of $25.7 million.
Management Contracts and Leased Hotels
The Predecessor began operating the following hotels during 1998:
<TABLE>
<CAPTION>
Number Managed/
Date Location of Rooms Leased
---- -------- -------- -------
<S> <C> <C> <C>
May 1998 Secaucus, NJ 301 Managed
May 1998 Las Vegas, NV 128 Leased
</TABLE>
5. PROPERTY AND EQUIPMENT
The Predecessor's properties are predominantly full-service hotels
that operate in the upscale and midprice with food and beverage
segments of the lodging industry under franchise agreements primarily
with Holiday Inn. The Predecessor maintained a geographically diverse
portfolio of hotels to offset the effects of regional economic cycles.
As of July 27, 1998, the Predecessor operated properties in 27 states,
the District of Columbia and Canada, including 13 hotels in
California, 11 in Georgia, 30 in Texas, six in Florida, and six in
Canada.
On June 9, 1998, the Predecessor sold the Holiday Inn - Winter Park
for $4.75 million cash.
As a result of the FelCor Merger, all of the Predecessor's hotels were
owned by FelCor subsequent to July 27, 1998.
6. LONG-TERM DEBT
The Predecessor obtained the financing for the Holiday Inn Acquisition
in 1997 under a senior term facility which provided for up to $560
million aggregate amount of term loan borrowings (the "New Credit
Facility"). The New Credit Facility was utilized to repay existing
debt of approximately $134
F-30
<PAGE> 58
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
million and to fund the cash portion of the Holiday Inn Acquisition
and related closing costs. The Predecessor repaid $108 million of
borrowings from the New Credit Facility in May 1997 with proceeds from
the Offering (as defined in Note 9). The Predecessor recognized an
extraordinary loss of $2.2 million ($1.3 million, net of tax) related
to the early extinguishment of debt with proceeds from the New Credit
Facility. The Predecessor incurred $479,000 of prepayment penalties
and wrote off $1.7 million in deferred financing costs.
On October 28, 1997, the Predecessor completed the refinancing of the
existing $560 million New Credit Facility. The new financing (the
"Nomura Credit Facility") has two tranches: (a) $145 million at a
fixed interest rate of 7.458%, a term of 10 years, and secured by 15
hotel properties; and, (b) $455 million at a fixed interest rate of
7.66%, a term of 12 years, and secured by 62 hotel properties. The
Predecessor recognized an extraordinary loss of $14.0 million ($8.4
million, net of tax) related to the early extinguishment of the New
Credit Facility. The loss on extinguishment reflects the write-off of
deferred financing fees related to the New Credit Facility.
The Predecessor prepaid $40 million of its 11.22% Senior Secured Notes
(the "Senior Notes") in December 1997. In conjunction with the
prepayment, the Predecessor amended the Senior Note indenture to allow
for a more flexible prepayment schedule. The Predecessor recognized an
extraordinary loss of $5.0 million ($3.0 million, net of tax). The
extraordinary loss reflects the $2.4 million in prepayment penalties
paid by the Company for the Senior Notes, as well as the write-off of
approximately $2.6 million of deferred financing fees and discount on
the Senior Notes.
On April 21, 1998, the Predecessor entered into an interim credit
facility with FelCor pursuant to which the Predecessor could borrow up
to $120 million (the "FelCor Facility"). The FelCor Facility bears
interest at a rate of LIBOR plus 2% and matures on December 31, 2003.
As of July 27, 1998, the Predecessor had borrowed the entire $120
million available under this credit facility.
On May 11, 1998, the Predecessor refinanced $455 million of the Nomura
Credit Facility with a new $455 million loan from Bankers Trust
Company (the "BT Loan"). The BT Loan is secured by a pledge of stock
in the subsidiaries of BHC, bears interest at LIBOR plus 1-3/4% and
matures on May 11, 2001. The Predecessor incurred approximately $33.1
million in yield maintenance costs and prepayment penalties related to
the payoff of the existing facility which, along with $6.9 million of
deferred financing charges, resulted in an extraordinary loss of $40.1
million ($24.0 million, net of tax) in 1998. On July 24, 1998, the
Predecessor amended the BT Loan to provide for additional borrowing of
$35 million from Bankers Trust.
On June 15, 1998, the Predecessor prepaid the remaining $30 million of
its Senior Notes, and recognized an extraordinary loss of $2.8 million
($1.7 million, net of tax). The Predecessor paid $1.2 million in
prepayment penalties and wrote-off $1.6 million of deferred financing
fees and unamortized discount related to the Senior Notes.
As discussed in Note 13, portions of the mortgage loans associated
with three of the Predecessor's properties have been allocated to a
third party.
F-31
<PAGE> 59
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Components of income tax expense from continuing operations for the
period from January 1, 1998, through July 27, 1998, and the years
ended December 31, 1997 and 1996, consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current..................................... $ 4,797 $ 12,683 $ 4,486
Deferred.................................... 3,631 4,637 5,301
State:
Current..................................... 866 1,837 282
Deferred.................................... 655 509 332
Canada:
Current..................................... 226 1,618 --
Deferred.................................... -- 723 --
----------- ----------- -----------
$ 10,175 $ 22,007 $ 10,401
=========== =========== ===========
</TABLE>
Components of income tax benefit from extraordinary items for the
period from January 1, 1998, through July 27, 1998, and the year ended
December 31, 1997, consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Federal:
Current.................................... $ 13,422 $ 7,358
Deferred................................... -- --
State:
Current.................................... 2,422 1,098
Deferred................................... -- --
Canada:
Current.................................... 1,281 --
Deferred................................... -- --
-------------- -------------
$ 17,125 $ 8,456
============== =============
</TABLE>
The Predecessor estimates that its effective tax rate for 1998
approximated 41.24%. The actual income tax expense for the period from
January 1, 1998, through July 27, 1998, is computed by applying the
U.S. federal statutory income tax rate, adjusted as follows:
<TABLE>
<S> <C>
Income tax expense at the U. S. federal statutory rate................... 35.00%
State income taxes, net of federal benefit
and permanent differences............................................. 5.17%
Effect of higher Canadian tax rates...................................... 1.07%
---------
41.24%
=========
</TABLE>
F-32
<PAGE> 60
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Accounts payable.............................................. $ 2,921
Accrued payroll, payroll taxes and benefits................... 15,480
Accrued interest.............................................. 3,738
Accrued Holiday Inn Acquisition
costs/conversion costs..................................... 1,104
Other......................................................... 4,123
------------
$ 27,366
============
</TABLE>
9. STOCKHOLDERS' EQUITY
On May 16, 1997, the Predecessor issued 2,750,000 (pre-Stock Split)
shares of its common stock at a price of $36 per share (the
"Offering"). The Predecessor issued an additional 412,500 shares
(pre-Stock Split) on May 28, 1997, pursuant to an over-allotment
agreement with the underwriters of the Offering. Proceeds from the
issuances were approximately $108 million (net of costs of $6.3
million).
On June 23, 1997, the Predecessor's Board of Directors declared a
three-for-two stock split, effective in the form of a stock dividend
for shareholders of record June 30, 1997, which was distributed July
15, 1997 (the "Stock Split"). All per share data and the average
common and common equivalent shares issued and outstanding have been
adjusted to reflect the Stock Split for all periods presented.
NON-EMPLOYEE DIRECTOR OPTIONS
The Predecessor instituted a Stock Option Plan for Non-Employee
Directors in 1995. Only members of the board who are not employees of
the Predecessor or an employee of a 10% beneficial owner or an
affiliate thereof will be eligible for option grants thereunder (an
"Eligible Director"). An Eligible Director receives an option to
purchase 7,500 shares of Common Stock at an exercise price equal to
the market value on the date the individual becomes a director, and
those options shall become exercisable 34% at the first next annual
shareholders' meeting at which the individual is a director, and 33%
at each of the next two consecutive years during which the individual
is a director. In addition, the Eligible Director will receive options
to purchase 7,500 shares at each annual meeting during which the
individual is a director, exercisable on the date of the next annual
shareholders' meeting at which the individual is a director. As of
July 27, 1998, a total of 52,500 options had been granted to the three
Eligible Directors on the board, 32,550 of which are currently
exercisable.
EMPLOYEE OPTIONS
Under the Amended and Restated 1995 Equity Incentive Plan, the
Predecessor could award options to purchase the Predecessor's stock to
participating officers and employees. Employee stock options may be
granted to officers and employees with an exercise price generally not
less than the fair market value of the common stock at the date of
grant. Options expire at 10 years from date of
F-33
<PAGE> 61
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE OPTIONS (continued)
grant. Options issued prior to December 31, 1995, have cliff vesting
from 1998 - 2000 and options issued on or after January 1, 1996, vest
ratably over a four- or five-year period from the date of the grant.
There were 1,803,141 employee options outstanding at July 27, 1998, of
which 597,900 were exercisable.
SFAS 123 DISCLOSURE
The Predecessor accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Pronouncement Bulletin
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the market price of the Predecessor's stock at the
date of the grant over the amount the employee must pay to acquire the
stock.
However, had compensation cost for these plans been determined
consistent with the method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Predecessor's net income (loss) and earnings (loss) per
share would have been reduced to the following pro forma amounts
(dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEAR ENDED YEAR ENDED
TO JULY 27, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Net income (loss) As reported $ (10,428) $ 20,473 $ 17,749
Pro forma (11,435) 19,060 16,865
Basic EPS As reported (0.23) 0.55 0.71
Pro forma (0.26) 0.51 0.68
Diluted EPS As reported (0.23) 0.53 0.70
Pro forma (0.26) 0.50 0.67
</TABLE>
A summary of the status of the Predecessor's stock option plan at July
27, 1998, December 31, 1997 and 1996, and changes during the period
from January 1, 1998, through July 27, 1998, and the years ended
December 31, 1997 and 1996, are presented in the table and narrative
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1.............. 2,121,941 $ 14.10 1,613,363 $ 10.57 1,190,766 $ 8.41
Options granted....................... -- -- 520,400 25.06 435,000 16.39
Options exercised..................... (165,000) 9.18 (6,929) 16.47 -- --
Options expired....................... (101,300) 12.25 (4,893) 9.78 (12,403) 8.33
---------- -------- --------- -------- ----------- --------
Options outstanding at
period end......................... 1,855,641 $ 14.64 2,121,941 $ 14.10 1,613,363 $ 10.57
========= ======== ========= ======== ========= ========
Options exercisable at
period end......................... 630,450 $ 11.03 107,850 $ 16.60 5,100 $ 15.00
========= ======== ========= ========= ========= ========
Weighted average fair value of
options granted at issue date..... $ -- $ 14.23 $ 10.22
======== ========= ========
</TABLE>
F-34
<PAGE> 62
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
The 1,855,641 options outstanding at July 27, 1998, have exercise
prices between $8.33 and $28.25 (pre-merger) with a weighted average
exercise price of $14.64 and a weighted average remaining contractual
life of 7.6 years. At July 27, 1998, 630,450 of these options (with a
weighted average exercise price of $11.03) are exercisable.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996:
risk-free interest rates from 5.99% to 7.04%; no expected dividend
yields; expected lives of one to nine years; and expected volatility
of 33.75%.
10. MANAGEMENT CONTRACTS
The Predecessor acquired the management of 15 hotels in the Holiday
Inn Acquisition, three of which were owned by joint ventures in which
the Predecessor owned a 50% interest. The purchase price allocated to
these contracts at April 28, 1997, was $4.4 million and is being
amortized on a straight-line basis over the remaining lives of the
agreements, which range from one to 11 years. The amortization of the
purchase price recorded for the period January 1, 1998, through July
27, 1998, and the year ended December 31, 1997, was $1.5 million and
$878,000, respectively.
Management fee income for the period January 1, 1998, through July 27,
1998 and the years ended December 31, 1997 and 1996, was $3.5 million,
$4.9 million, and $2.5 million, respectively. These management
contracts may contain provisions which allow the third-party owner to
terminate the contract for such reasons as sale of the property, for
cause or without cause. Therefore, the Predecessor cannot guarantee
that it will continue to manage these properties to the contract
expiration date.
11. INVESTMENTS IN JOINT VENTURES
The Predecessor acquired 50% interests in three joint ventures in the
Holiday Inn Acquisition. The purchase price allocated to these joint
ventures was approximately $12 million and is being amortized on a
straight-line basis over the estimated life of the assets acquired.
Amortization expense of $45,000 and $308,000 was recorded in the
period January 1, 1998, through July 27, 1998, and the year ended
December 31, 1997. The Predecessor purchased its joint venture
partner's interest in Milpitas Joint Venture during 1997.
On July 24, 1998, in settlement of a dispute with its joint venture
partner, the Predecessor sold its 50% interest in the HI - Thomas
Circle Joint Venture to an affiliate of John Hancock Life Insurance
Company, its joint venture partner, for $4.1 million, resulting in a
loss of $664,000. The Predecessor continued to manage the property for
the owner.
12. BENEFITS
Health (including fully insured term life and accidental death and
dismemberment), dental and disability coverage is provided to the
Predecessor's employees through the Welfare Benefit Trust (the
"Trust"). The Predecessor maintains varying levels of stop-loss and
umbrella insurance policies to limit the Predecessor's per-occurrence
and aggregate liability in any given year. Actual claims and premiums
on stop-loss insurance, medical and disability policies are paid from
the Trust. The Trust is funded through a combination of employer and
employee contributions. The Trust also pays work-related injury
claims, which are funded by the employer for its employees in Texas.
Since
F-35
<PAGE> 63
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. BENEFITS (CONTINUED)
April 1, 1995, all employees have been eligible for participation in
the benefits provided through the Trust. The Predecessor provided $5.4
million, $6.1 million and $2.9 million related to these benefits for
period January 1, 1998, through July 27, 1998, and the years ended
December 31, 1997 and 1996, respectively.
The Predecessor offers a Profit Sharing Plan and Trust ("401(k) Plan")
to certain employees. The 401(k) Plan is designed to be a qualified
trust under Section 401 of the Internal Revenue Code. Under the 401(k)
Plan, eligible employees are allowed to defer up to 16% of their
income on a pretax basis through contributions to the 401(k) Plan;
however, only the first 6% of pretax income is subject to matching by
the Predecessor. Effective January 1, 1998, the Predecessor
automatically makes matching contributions of up to 50% of the
employees' matchable contributions, and may elect to make matching
contributions of an additional 50% of the employees' matchable
contributions, subject to certain performance measures of the
Predecessor. The Predecessor provided for matching contributions for
period January 1, 1998, through July 27, 1998, and the years ended
December 31, 1997 and 1996, totaling $2.5 million, $1.5 million and
$135,000, respectively.
13. COMMITMENTS AND CONTINGENCIES
Substantially all of the Predecessor's hotel properties are operated
pursuant to franchise or license agreements ("Franchise Agreements"),
primarily with Holiday Inn Franchising, Inc. or its affiliates. The
Predecessor also operates hotels under franchise agreements with
Marriott International, Inc., Hampton Inn (a division of Promus
Hotels, Inc.), Ramada Franchise Systems, Inc., Days Inns of America,
Inc., Promus Hotels, Inc. and Hilton Inns, Inc. The Franchise
Agreements generally require the payment of a monthly royalty fee
based on gross room revenue and various other fees associated with
certain marketing or advertising and centralized reservation services,
also generally based on gross room revenues. The Franchise Agreements
have various durations through the year 2018, and generally may not be
terminated without the payment of substantial fees. Franchise fees of
$18.0 million, $19.5 million and $4.1 million were paid during the
period January 1, 1998, through July 27, 1998, and the years ending
December 31, 1997 and 1996, respectively.
The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the
hotels which are established by the franchisors to maintain uniformity
in the system created by each such franchisor. Such standards
generally regulate the appearance of the hotel, quality and type of
goods and services offered, signage and protection of trademarks.
Compliance with such standards may from time to time require
significant expenditures for capital improvements.
The Predecessor is currently involved in certain guest and customer
claims, employee wage claims and other disputes arising in the
ordinary course of business. In the opinion of management, the pending
litigation will not have a materially adverse effect on the
Predecessor's financial position or results of operations.
All of the owned hotels of the Predecessor have undergone Phase I
environmental assessments which generally provide a physical
inspection and data base search, but not soil or groundwater analysis.
In addition, most of the Predecessor's hotels have been inspected to
determine the presence of asbestos-containing materials ("ACM's").
While ACM's are present in certain of the Predecessor's properties,
operations and maintenance programs for maintaining such ACM's have
F-36
<PAGE> 64
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
been implemented, or the ACM's have been scheduled to be or have been
abated, at such hotels. None of the environmental assessments
conducted to date have revealed any environmental condition that
management believes would have a material adverse effect on the
Predecessor's business, assets or results of operations, nor is
management aware of any such condition. However, it is possible that
these assessments have not revealed all potential environmental
liabilities or that there are material environmental liabilities of
which management is not aware.
In September 1995, the Predecessor disposed of certain of its
non-hotel properties to HH Land Company, L.P. ("HH Land Company").
Upon acquisition of the non-hotel properties, HH Land Company assumed
all liabilities associated with the non-hotel properties through a
formal indemnification agreement, including environmental liabilities
associated with the properties. The Predecessor remains contingently
liable for the environmental costs associated with the properties. At
such time that the Predecessor determines that it is not probable that
HH Land Company will fully pay the remediation costs related to the
disposed properties, the Predecessor will recognize such liabilities.
The Predecessor leases the land underlying several of its hotels under
various long-term leases through the year 2063. Lease payments under
the agreements were $9.4 million, $11.0 million and $2.6 million for
the period January 1 through July 27, 1998, and the years ended
December 31, 1997 and 1996, respectively.
The Predecessor and H. K. Huie, Jr., representing various land
ventures, are co-borrowers of funds secured by Harvey Hotel - DFW
Airport, Harvey Hotel - Dallas, Crowne Plaza Suites - Dallas, and the
various related land parcels. The Predecessor and Mr. Huie agreed to
an assignment of the debt to the various unrelated land ventures
resulting in the assignment of 23.73%, 24.24% and 22.18% of the debt
associated with the borrowings for each property, respectively. The
related land parcels underlying each hotel are owned by Mr. Huie
through the land ventures. The total debt and the amount allocated to
Mr. Huie are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
---------------------
Amount
Total Allocated
Debt to Huie
----- ---------
<S> <C> <C>
Harvey Hotel - DFW Airport.............. $ 24,275 $ 5,762
Harvey Hotel - Dallas................... 7,442 1,802
Crowne Plaza Suites - Dallas............ 19,378 4,298
</TABLE>
The Predecessor is jointly and severally liable in the event of
nonpayment by Mr. Huie of the debt allocated. The allocated amounts
have not been reflected in the consolidated financial statements of
the Predecessor. However, the Predecessor does not record interest
expense on the allocated debt because payments made to Mr. Huie are
appropriately recorded as rental expense under the related land
leases. The land parcels at the respective hotels are security for the
additional liability.
F-37
<PAGE> 65
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS
Concurrently with the Holiday Inn Acquisition, the Predecessor and
Holiday Corporation and its affiliates (collectively, "HC") entered
into a hotel properties agreement (the "Hotel Properties Agreement").
Pursuant to the Hotel Properties Agreement, the Predecessor will offer
to HC the opportunity to enter into a standard HC franchise agreement
for each hotel that Bristol acquires, manages or develops that meets
specified criteria. The Hotel Properties Agreement requires that 85%
of the rooms in the Predecessor's owned, leased and managed hotels be
operated under a Holiday Inn brand, subject to certain limitations and
approvals. Additionally, the Predecessor has a right of first refusal
on any entity or other interest meeting certain criteria that HC
wishes to acquire or develop, subject to certain limitations. The
above provisions of the Hotel Properties Agreement will expire the
earlier of (i) the date that HC terminates its obligation at any time
following 24 months after the Holiday Inn Acquisition (the "Holiday
Notice") or (ii) the date that HC no longer holds a controlling
interest in the franchisor of the Holiday Inn brands.
The Predecessor agreed to enter into Franchise Agreements with HC
pursuant to which certain Bristol properties will be rebranded to
Holiday Inn brands, subject to normal franchising procedures.
Franchise fees for these rebranded hotels will equal 0% of room
revenue for 1997, 1% in 1998, 3% in 1999 and 5% in 2000. Amounts paid
to HC pursuant to Franchise Agreements and related marketing,
advertising and reservation services were $27.1 million and $21.8
million in for the period January 1, 1998, through July 27, 1998, and
the year ended December 31, 1997, including $18.1 million and $17.6
million for franchise royalty and marketing fees.
15. FAIR VALUE
The Predecessor has estimated the fair value of its financial
instruments at December 31, 1997 and 1996, as required by Statement of
Financial Accounting Standards No. 107, "Disclosure about Fair Value
of Financial Instruments." The carrying values of cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses are reasonable estimates of the fair values. Marketable
securities are carried at fair value, which is determined based upon
quoted market prices. The carrying values of variable and fixed rate
debt are reasonable estimates of their fair values.
F-38
<PAGE> 66
BRISTOL HOTEL COMPANY (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited consolidated quarterly results of operations for the
Predecessor are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998
--------------------------------------
FIRST SECOND JULY 1 -
QUARTER QUARTER JULY 27
--------- --------- ----------
<S> <C> <C> <C>
Revenues........................................... $ 158,802 $ 182,159 $ 63,049
Operating income (loss)............................ 30,897 36,778 (12,130)
Income before extraordinary item................... 11,362 15,028 (11,129)
Net income (loss) ................................. 11,362 (10,661) (11,129)
Earnings (loss) per common share:
Income (loss) before extraordinary item:
Basic....................................... $ 0.26 $ 0.34 $ (0.25)
Diluted..................................... $ 0.26 $ 0.33 $ (0.24)
Net income (loss):
Basic....................................... $ 0.26 $ (0.24) $ (0.25)
Diluted..................................... $ 0.26 $ (0.23) $ (0.24)
Weighted average number of common and
common equivalent shares:
Basic.......................................... 43,719 44,780 45,235
Diluted........................................ 44,535 45,606 46,013
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues........................................... $ 58,261 $ 131,615 $ 163,005 $ 151,637
Operating income................................... 13,301 26,909 32,252 25,434
Income before extraordinary item................... 4,410 9,622 12,066 7,116
Net income (loss) ................................. 4,410 8,284 12,066 (4,287)
Earnings (loss) per common share:
Income before extraordinary item:
Basic....................................... $ 0.18 $ 0.26 $ 0.28 $ 0.16
Diluted..................................... $ 0.17 $ 0.25 $ 0.27 $ 0.16
Net income (loss):
Basic....................................... $ 0.18 $ 0.22 $ 0.28 $ (0.10)
Diluted..................................... $ 0.17 $ 0.22 $ 0.27 $ (0.10)
Weighted average number of common and
common equivalent shares:
Basic....................................... 24,849 37,041 43,635 43,636
Diluted..................................... 25,797 37,998 44,643 44,629
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues........................................... $ 49,677 $ 51,237 $ 58,571 $ 52,355
Operating income................................... 10,318 11,282 16,073 9,093
Net income ........................................ 3,863 4,375 6,835 2,676
Earnings per common share:
Net income:
Basic....................................... $ 0.16 $ 0.18 $ 0.28 $ 0.11
Diluted..................................... $ 0.15 $ 0.17 $ 0.27 $ 0.10
Weighted average number of common and
common equivalent shares:
Basic....................................... 24,849 24,849 24,849 24,849
Diluted..................................... 25,511 25,553 25,531 25,524
</TABLE>
The sum of the earnings (loss) per common share for the four quarters
differs from the annual earnings per common share due to the required
method of computing the weighted average number of shares in the
respective periods.
F-39
<PAGE> 67
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
2.1 Spin-Off Agreement among the Company, the Predecessor and Bristol
Hotel Management Corporation (incorporated by reference to Exhibit 2.1
of the Company's Registration Statement on Form 10 [Commission File
No. 1-14047]).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form 10 [Commission File No. 1-14047]).
3.3 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.4 of the Company's Registration Statement on Form 10
[Commission File No. 1-14047]).
4.1 Registration Rights Agreement among the Company, Bass America Inc.,
Holiday Corporation and United/Harvey Holdings (incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on
Form 10 [Commission File No. 1-14047]).
4.2 Form of Stockholders' Agreement among the Company, Holiday
Corporation, Bass America Inc., Bass plc and United/Harvey Holdings
(incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form 10 [Commission File No. 1-14047]).
9.1 Voting and Cooperation Agreement among FelCor, the Predecessor, Bass
America Inc., Holiday Corporation and United/Harvey Holdings
(incorporated by reference to Exhibit 9.1 of the Company's
Registration Statement on Form 10 [Commission File No. 1-14047]).
10.1 1998 Bristol Hotels & Resorts Stock Purchase Plan (incorporated by
reference to Exhibit 99.1 of the Company's Registration Statement on
Form S-8 [333-58519] dated July 6, 1998).
10.2 Master Hotel Agreement among the Company, FelCor and FelCor Suites
Limited Partnership (incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form 10 [Commission File No.
1-14047]).
10.3 Hotel Properties Agreement between Holiday Hospitality and the Company
(incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement on Form 10 [Commission File No. 1-14047]).
10.4 Employment Agreement between the Company and J. Peter Kline
(incorporated by reference to Exhibit 10.12 to the Annual Report on
Form 10-K of Bristol Hotel Company filed with the SEC on March 30,
1998).
10.5 Employment Agreement with John A. Beckert (incorporated by reference
to Exhibit 10.13 to the Annual Report on Form 10-K of Bristol Hotel
Company filed with the SEC on March 30, 1998).
10.6 1998 Equity Incentive Plan (incorporated by reference to Exhibit 10.5
of the Company's Registration Statement on Form 10 [Commission File
No. 1-14047])
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<CAPTION>
Exhibit
No. Description
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10.7 1998 Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit 10.5 of the Company's Registration Statement on
Form 10 [Commission File No. 1-14047]).
10.8 Credit Agreement dated as of July 28, 1998 between the Company, the
Lenders and Bankers Trust Company as arranging agent and
administrative agent (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
10.9 Form of Lease Agreement between the Company and FelCor.
10.10 Amended and Restated 1995 Equity Incentive Plan (incorporated by
reference to Exhibit 10.15 of the Predecessor's Form S-4).
10.11 Stock Option Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.16 of the Predecessor's Form S-4).
11.1 Computation of earnings per common share of the Company.
11.2 Computation of earnings per common share of the Predecessor.
21.1 List of subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial data schedule.
</TABLE>
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EXHIBIT 10.9
LEASE AGREEMENT
DATED AS OF _______________, 1998
BETWEEN
------------------------------
AS LESSOR
AND
------------------------------
AS LESSEE
FOR
---------------------------------------
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TABLE OF CONTENTS
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HEADING OR SECTION PAGE
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SCHEDULE OF BASIC TERMS.......................................................................................1
RECITALS 1
ARTICLE 1 LEASED PROPERTY AND OTHER DEFINITIONS...............................................................1
1.1 Leased Property.............................................................................1
1.2 Other Definitions...........................................................................3
ARTICLE 2 TERM, EXTENSION AND TERMINATION....................................................................18
2.1 Term.......................................................................................18
2.2 First Extension of the Term................................................................18
2.3 Second Extension of the Term...............................................................18
2.4 Performance Failure........................................................................19
2.5 Lessor's Option to Terminate Lease upon Sale...............................................20
2.6 Transition Procedures......................................................................21
2.7 Holding Over...............................................................................22
ARTICLE 3 RENT, RENT ADJUSTMENTS AND PERFORMANCE STANDARDS...................................................23
3.1 Rent.......................................................................................23
3.2 Confirmation of Percentage Rent............................................................26
3.3 Additional Charges.........................................................................27
3.4 Net Lease Provision........................................................................28
3.5 Material Changes in Economic Climate.......................................................29
3.6 Rent Adjustment: Basic Assumptions Incorrect...............................................30
3.7 Allocation of Rent.........................................................................31
ARTICLE 4 BUDGETS AND FINANCIAL REPORTING....................................................................31
4.1 Revenue Budgets............................................................................31
4.2 Operating Budgets..........................................................................32
4.3 Capital Budget.............................................................................33
4.4 Annual Budget Approval; Budget Disputes....................................................33
4.5 Disclosure of Financial and Portfolio Information.................................34
4.6 Confidentiality...................................................................37
ARTICLE 5 IMPOSITIONS........................................................................................37
5.1 Payment of Impositions.....................................................................37
5.2 Notice of Impositions......................................................................39
5.3 Adjustment of Impositions..................................................................39
5.4 Utility Charges............................................................................39
5.5 Insurance Premiums.........................................................................39
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5.6 Franchise Fees.............................................................................40
5.7 Ground Rent................................................................................40
ARTICLE 6 OWNERSHIP OF LEASED PROPERTY.......................................................................40
6.1 Ownership of the Leased Property...........................................................40
6.2 Lessee's Personal Property.................................................................40
6.3 Lessor's Lien..............................................................................41
6.4 Lessor's Option to Purchase Lessee=s Personal Property.....................................41
ARTICLE 7 CONDITION AND USE OF LEASED PROPERTY...............................................................41
7.1 Condition of the Leased Property...........................................................41
7.2 Use of the Leased Property.................................................................42
7.3 Lessor to Grant Easements, etc.............................................................43
ARTICLE 8 LESSEE'S COMPLIANCE WITH LAW; ENVIRONMENTAL COVENANTS..............................................44
8.1 Compliance with Legal and Insurance Requirements, etc......................................44
8.2 Legal Requirement Covenants................................................................44
8.3 Environmental Covenants....................................................................45
ARTICLE 9 MAINTENANCE, REPAIRS AND CAPITAL EXPENDITURES......................................................47
9.1 Maintenance, Repairs and Capital Expenditures..............................................47
9.2 Encroachments, Restrictions, Etc...........................................................49
ARTICLE 10 ALTERATIONS AND IMPROVEMENTS; LESSOR=S CAPITAL RESERVE............................................50
10.1 Alterations and Improvements...............................................................50
10.2 Salvage....................................................................................50
10.3 Initial Upgrades...........................................................................50
10.4 Lessor Approval of Capital Expenditures....................................................51
10.5 Lessor=s Capital Reserve...................................................................51
ARTICLE 11 FRANCHISE SYSTEM COMPLIANCE.......................................................................52
11.1 Assignment or Execution of Franchise Agreement or Guaranty of Franchise
Agreement by Lessor........................................................................52
11.2 Compliance with Franchise Agreement by Lessee..............................................52
11.3 Compliance with Franchise Agreement by Lessor..............................................53
11.4 Changes in Franchise.......................................................................53
ARTICLE 12 PERMITTED LIENS AND CONTESTS......................................................................53
12.1 Liens......................................................................................53
12.2 Permitted Contests.........................................................................54
ARTICLE 13 INSURANCE REQUIREMENTS............................................................................55
13.1 General Insurance Requirements.............................................................55
13.2 Replacement Cost...........................................................................56
13.3 Waiver of Claims and Subrogation...........................................................57
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13.4 Form Satisfactory, etc.....................................................................57
13.5 Increase in Limits.........................................................................57
13.6 Blanket Policy.............................................................................57
13.7 No Separate Insurance......................................................................58
13.8 Reports On Insurance Claims................................................................58
ARTICLE 14 CASUALTY INSURANCE PROCEEDS; RECONSTRUCTION.......................................................58
14.1 Insurance Proceeds.........................................................................58
14.2 Reconstruction in the Event of Damage or Destruction Covered by Insurance..................59
14.3 Reconstruction in the Event of Damage or Destruction Not Covered by Insurance..............60
14.4 Lessee's Personal Property and Business Interruption Insurance.............................60
14.5 Abatement of Rent Upon Casualty............................................................60
14.6 Damage Near End of Term....................................................................60
14.7 Waiver.....................................................................................60
ARTICLE 15 CONDEMNATION; AWARD ALLOCATION....................................................................60
15.1 Definitions................................................................................60
15.2 Parties' Rights and Obligations............................................................61
15.3 Total Taking...............................................................................61
15.4 Partial Taking.............................................................................61
15.5 Allocation of Award........................................................................62
15.6 Temporary Taking...........................................................................62
ARTICLE 16 DEFAULT BY LESSEE; LESSOR=S REMEDIES..............................................................63
16.1 Events of Default..........................................................................63
16.2 Surrender..................................................................................65
16.3 Damages....................................................................................65
16.4 Waiver.....................................................................................66
16.5 Application of Funds.......................................................................66
16.6 Lessor's Right to Cure Lessee's Default....................................................67
ARTICLE 17 DEFAULT BY LESSOR; LESSEE=S REMEDIES..............................................................67
17.1 Breach by Lessor...........................................................................67
ARTICLE 18 INDEMNIFICATION...................................................................................68
18.1 Indemnification............................................................................68
18.2 Indemnification Procedure..................................................................69
ARTICLE 19 REIT REQUIREMENTS AND RESTRICTIONS................................................................70
19.1 REIT Requirements..........................................................................70
19.3 Management Agreement.......................................................................71
19.4 Payments to Affiliates of Lessee...........................................................72
ARTICLE 20 SUBLETTING AND ASSIGNMENT BY LESSEE...............................................................72
20.1 Subletting and Assignment..................................................................72
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20.2 Subordination and Attornment...............................................................73
ARTICLE 21 LEASEHOLD MORTGAGES...............................................................................73
21.1 Lessee May Grant Leasehold Mortgages.......................................................73
ARTICLE 22 ARBITRATION.......................................................................................74
22.1 Arbitration................................................................................74
22.2 Alternative Arbitration....................................................................74
22.3 Arbitration Procedures.....................................................................74
ARTICLE 23 APPRAISAL.........................................................................................75
23.1 Appraisers; Appraisal Procedure............................................................75
ARTICLE 24 LESSOR MORTGAGES..................................................................................76
24.1 Lessor May Grant Liens.....................................................................76
24.2 Lessee's Right to Cure.....................................................................77
ARTICLE 25 QUIET ENJOYMENT...................................................................................78
25.1 Quiet Enjoyment............................................................................78
ARTICLE 26 CERTIFICATES......................................................................................78
26.1 Lessee Estoppel Certificates...............................................................78
26.2 Lessor Estoppel Certificates...............................................................78
26.3 Inspection Rights..........................................................................78
ARTICLE 27 NOTICES...........................................................................................79
27.1 Notices....................................................................................79
ARTICLE 28 GROUND LEASE......................................................................................79
28.1 The Ground Lease...........................................................................79
ARTICLE 29 MISCELLANEOUS.....................................................................................80
29.1 Enforceability.............................................................................80
29.2 Waiver of Trial by Jury....................................................................81
29.3 No Waiver..................................................................................81
29.4 Remedies Cumulative........................................................................81
29.5 Acceptance of Surrender....................................................................81
29.6 No Merger of Title.........................................................................81
29.7 Conveyance by Lessor.......................................................................81
29.8 Waiver of Presentment, etc.................................................................82
29.9 Standard of Discretion.....................................................................82
29.11 Lease Assumption in Bankruptcy Proceeding..................................................82
29.12 FelCor Intra-Family Transfers..............................................................82
29.13 Memorandum of Lease........................................................................82
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ARTICLE 30 NOTIFICATION OF PROPERTY HAZARDS..................................................................83
30.1 NOTIFICATION REGARDING ASBESTOS............................................................83
30.2 NOTIFICATION REGARDING RADON GAS...........................................................83
EXHIBIT A LEASED PROPERTY DESCRIPTION
EXHIBIT B EXCLUDED PROPERTY
EXHIBIT C CAPITAL EXPENDITURES POLICY
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<PAGE> 7
THIS LEASE AGREEMENT (hereinafter called "LEASE"), made as of 3:00 p.m.
Central Time on the Commencement Date set forth on the Schedule of Basic Terms
attached hereto, by and between the Lessor, as landlord, and the Lessee, as
tenant, each as designated in the Schedule of Basic Terms attached hereto,
provides as follows.
RECITALS:
A. In connection with the transactions contemplated by that certain
Agreement and Plan of Merger dated as of March 23, 1998 (the "MERGER
AGREEMENT"), Bristol Hotel Company, a Delaware corporation and the ultimate
parent of Lessor ("BRISTOL") is to be merged with and into FelCor. Prior to such
merger (i) Lessor and certain other direct or indirect subsidiaries of Bristol
(collectively, including Lessor, the "EXISTING LESSORS") that own hotel
properties have agreed to lease to Lessees (as defined in the Master Hotel
Agreement), and Lessees have agreed to lease from such Existing Lessors hereto
(including this Lease, the "EXISTING LEASES") the Existing Hotels listed on
Exhibit "A" attached to the Master Hotel Agreement, and (ii) all of the shares
of capital stock of Bristol Hotels & Resorts, Inc., a Delaware corporation that
intends to change its name to Bristol Hotels & Resorts ("BHR"), the immediate
parent of Lessee, will be distributed to the shareholders of Bristol. Following
the merger, the Existing Lessors will be direct or indirect subsidiaries of
FelCor.
B. Lessor and Lessee desire to provide for the general terms and
conditions upon which the Hotel covered by this Lease will be leased to and
operated by Lessee.
NOW, THEREFORE, intending to be legally bound, Lessor and Lessee agree
as follows:
Lessor, in consideration of the payment of rent by Lessee to Lessor,
the covenants and agreements to be performed by Lessee, and upon the other terms
and conditions hereinafter stated, does hereby rent and lease unto Lessee, and
Lessee does hereby rent and lease from Lessor, the Leased Property.
Attached hereto above as the Schedule of Basic Terms is a summary of
the basic economic and certain other fundamental terms and provisions of this
Lease, which Schedule of Basic Terms is hereby incorporated herein by reference
to the same extent as if fully set out in the text hereof. In the event of
actual conflict between the Schedule of Basic Terms and the remainder of this
Lease, the Schedule of Basic Terms shall prevail.
ARTICLE 1
LEASED PROPERTY AND OTHER DEFINITIONS
1.1 Leased Property. The "LEASED PROPERTY" is comprised of Lessor's
interest in the following (other than any Excluded Property):
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<PAGE> 8
(a) the land or ground leasehold interest described in Exhibit
"A" attached hereto and by reference incorporated herein ("LAND").
(b) all buildings, structures and other improvements of every
kind including, but not limited to, alleyways and connecting tunnels, sidewalks,
utility pipes, conduits and lines (on-site and offsite), parking areas and
roadways appurtenant to, and any leasehold interest of Lessor as a tenant in,
such buildings and structures presently situated upon the Land (collectively,
the "IMPROVEMENTS");
(c) all easements, rights and appurtenances relating to the
Land and the Improvements;
(d) all equipment, machinery, fixtures, and other items of
property required or incidental to the use of the Improvements as a hotel,
including all components thereof, now and hereafter permanently affixed to or
incorporated into the Improvements, including, without limitation, all furnaces,
boilers, heaters, electrical equipment, heating, plumbing, lighting,
ventilating, refrigerating, incineration, air and water pollution control, waste
disposal, air-cooling and air-conditioning systems and apparatus, sprinkler
systems and fire and theft protection equipment, wall coverings all of which to
the greatest extent permitted by law are hereby deemed by the parties hereto to
constitute real estate, together with all replacements, modifications,
alterations and additions thereto (collectively, the "FIXTURES");
(e) all equipment, machinery and other items of property
incidental to the use of the Improvements as a hotel, including all components
thereof, now or hereafter located at the Improvements or used exclusively in
connection therewith, including, without limitation, all computer and front desk
equipment, such as reservations systems, accounting systems, printers and other
office equipment, all equipment and systems required for the operation of
kitchens, bars and Restaurants, if any, and laundry and dry cleaning facilities,
dining room wagons, materials, handling equipment, cleaning and engineering
equipment, and vehicles, but excluding the Fixtures, Furniture and Inventory
(collectively, the "EQUIPMENT");
(f) all furniture and furnishings and all other items of
personal property (excluding Inventory and personal property owned by Lessee)
located on, and used in connection with, the operation of the Improvements as a
hotel, together with all replacements, modifications, alterations and additions
thereto (collectively, "FURNITURE"); and
(g) the lessor's interest in, to and under all existing leases
of space within the Leased Property (including any security deposits or
collateral held by Lessor pursuant thereto), which interests shall be
conditionally assigned to Lessee if required by applicable law or the terms and
conditions of such leases.
EXCEPT AS EXPRESSLY SET FORTH HEREIN, THE LEASED PROPERTY IS DEMISED IN ITS
PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY
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<PAGE> 9
(EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF HOTEL GUESTS AND
TENANTS IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL
COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD
INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS,
MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH
WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE
SURVEY THEREOF.
1.2 Other Definitions. For all purposes of this Lease, except as
otherwise expressly provided or unless the context otherwise requires, (1) the
terms defined in this Article have the meanings assigned to them in this Article
and include the plural as well as the singular, (2) all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
GAAP, (3) all references in this Lease to designated "ARTICLES," "SECTIONS" and
other subdivisions are to the designated Articles, Sections and other
subdivisions of this Lease and (4) the words "herein," "hereof" and "hereunder"
and other words of similar import refer to this Lease as a whole and not to any
particular Article, Section or other subdivision:
Additional Charges: As defined in Section 3.3.
Affiliate: As used in this Lease the term "Affiliate" of a Person shall
mean (1) any Person that, directly or indirectly, controls or is controlled by
or is under common control with such Person, (2) any other Person that owns,
beneficially, directly or indirectly, fifty percent (50%) or more of the
outstanding capital stock, shares or equity interests of such Person, or (3) any
officer, director, employee, partner or trustee of such Person (or any Person
controlling, controlled by or under common control with such Person), excluding
trustees and Persons serving in similar capacities who are not otherwise an
Affiliate of such Person). For the purposes of this definition, "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the ownership
of voting securities, partnership interests or other equity interests.
Annual Budget: As defined in Subsection 4.4(a).
Average Daily Rate: Total Room Revenues divided by occupied rooms at
the Hotel.
Award: As defined in Section 15.1.
Base Rate: The rate of interest announced publicly by The Chase
Manhattan Bank in New York, New York, from time to time, as such bank's base
rate. If no such rate is announced or becomes discontinued, then such other rate
as Lessor may reasonably designate.
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<PAGE> 10
Base Rent: As defined in Article 3.
Beverage Sale Revenues: Shall mean Gross Revenue from (i) the sale of
wine, beer, liquor or other alcoholic beverages, whether sold in the bar or
lounge, delivered to a guest room, sold at meetings or banquets or at any other
location at the Leased Property or (ii) non-alcoholic beverages sold in the bar
or lounge. Such revenues shall not include Sublease Rent or the following:
(1) Any gratuity or service charge added to a customer's bill
or statement in lieu of a gratuity which is paid to an employee;
(2) Any revenues that are subsequently credited, rebated or
refunded in the ordinary course of business; and
(3) Sales taxes or taxes of any other kind imposed on the sale
of alcoholic or other beverages.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which national banks in the City of New York, New York, or in
the municipality wherein the Leased Property is located are closed.
Capital Budget: As defined in Section 4.3.
Capital Expenditures: Amounts advanced to pay the costs of Capital
Improvements.
Capital Impositions: Taxes, assessments or similar charges imposed upon
or levied against the Leased Property for the costs of public improvements,
including, without limitation, roads, sidewalks, public lighting fixtures,
utility lines, storm sewers, drainage facilities and similar improvements.
Capital Improvements: Improvements to the Leased Property and repair,
replacement or refurbishing of the Improvements, Fixtures, Equipment and
Furniture and of equipment and systems that constitute portions of the Leased
Property in connection with its Primary Intended Use, and the cost of all
approvals, licenses, permits and other authorizations necessary to complete such
improvements, repairs, replacements and refurbishing, all as, and to the extent,
(i) designated as capital improvements by and determined in accordance with GAAP
and (ii) of the types described in the capital improvements policy set forth on
Exhibit " C" attached hereto as "capital".
Capital Reserve: As defined in Subsection 10.5(a).
CERCLA: The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
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Claim: As defined in Section 12.2.
COBRA: As defined in Subsection 8.2(b).
Code: The Internal Revenue Code of 1986, as amended.
Commencement Date: The date set forth on the Schedule of Basic Terms
attached hereto as the commencement date with respect to the Hotel.
Competitive Set: As defined in the STR Reports. Lessor and Lessee shall
work in good faith to determine any additions and deletions to the Hotel's
Competitive Set, on or before November 15th of each Lease Year, with such
changes to be applicable for the following Lease Year. In the event Lessor and
Lessee cannot agree to the Hotel's Competitive Set by November 15th of any Lease
Year, such unagreed items shall be determined by Smith Travel Research (or, if
it refuses or is unable to do so, by arbitration pursuant to Section 22.2). The
costs of resetting the Hotel's Competitive Set shall be borne equally by the
parties.
Condemnation, Condemnor: As defined in Section 15.1.
Consolidated Financials: For any Fiscal Year or other accounting period
for Lessee and BHR's consolidated Subsidiaries, if any, that lease hotel
properties from Lessor or any of FelCor's Subsidiaries, statements of
operations, retained earnings and cash flow (or, in the case of a partnership,
statements of operations, partners' capital and cash flow) for such period and
for the period from the beginning of the respective Fiscal Year to the end of
such period, and the related balance sheet as at the end of such period,
together with the notes to any such yearly statements, all in such detail as may
be required by the SEC with respect to filings made by FelCor, FSLP or Lessor,
and setting forth in comparative form the corresponding figures for the
corresponding period in the preceding Fiscal Year, and prepared in accordance
with GAAP and audited annually (and quarterly if required by the SEC) by
nationally recognized independent certified public accountants.
Construction Services Agreement: As defined in Subsection 10.3(c).
Consumer Price Index: Consumer Price Index, U.S. City Average, All
Items for all Urban Consumers, published by the Bureau of Labor Statistics of
the United States Department of Labor, as reported in the Wall Street Journal.
Contemplated Renovations: As defined in Subsection 10.3(b).
Cumulative Monthly Portion: As defined in Subsection 3.1(b).
Date of Taking: As defined in Section 15.1.
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<PAGE> 12
Emergency Capital Expenditures: Capital Expenditures required to take
necessary or appropriate actions to respond to Emergency Situations.
Emergency Situations: Fire, flood, earthquake or any other casualty, or
any other events, circumstances or conditions, which threaten the safety or
physical well-being of the Hotel's guests or employees or which involve the risk
of material property damage or material loss to the Hotel.
Encumbrance: As defined in Section 24.1.
Environmental Authority: Any department, agency or other body or
component of any Government that exercises any form of jurisdiction or authority
under any Environmental Law.
Environmental Authorization: Any license, permit, order, approval,
consent, notice, registration, filing or other form of permission or
authorization required under any Environmental Law.
Environmental Laws: All applicable federal, state, local and foreign
laws and regulations relating to pollution of the environment (including without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata), including without limitation laws and regulations relating to
emissions, discharges, Releases or threatened Releases of Hazardous Materials or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials. Environmental
Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA and TSCA.
Environmental Liabilities: Any and all obligations to pay the amount of
any judgment or settlement, the cost of complying with any settlement, judgment
or order for injunctive or other equitable relief, the cost of compliance or
corrective action in response to any notice, demand or request from an
Environmental Authority, the amount of any civil penalty or criminal fine, and
any court costs and reasonable amounts for attorney's fees, fees for witnesses
and experts, and costs of investigation and preparation for defense of any claim
or any Proceeding, regardless of whether such Proceeding is threatened, pending
or completed, that may be or have been asserted against or imposed upon Lessor,
Lessee, any Predecessor, the Leased Property or any property used therein and
arising out of:
(1) Failure of Lessee, Lessor, any Predecessor or the Leased
Property to comply at any time with all Environmental Laws;
(2) Presence of any Hazardous Materials on, in, under, at or
in any way affecting the Leased Property;
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<PAGE> 13
(3) A Release at any time of any Hazardous Materials on, in,
at, under or in any way affecting the Leased Property;
(4) Identification of Lessee, Lessor or any Predecessor as a
potentially responsible party under CERCLA or under any Environmental Law
similar to CERCLA;
(5) Presence at any time of any above-ground and/or
underground storage tanks, as defined in RCRA or in any applicable Environmental
Law on, in, at or under the Leased Property or any adjacent site or facility; or
(6) Any and all claims for injury or damage to persons or
property arising out of exposure to Hazardous Materials originating or located
at the Leased Property or any adjoining property, or resulting from the
operation thereof.
Equipment: As defined in Section 1.1.
Event of Default: As defined in Section 16.1.
Excluded Lease Year: As defined in Subsection 2.4(a).
Excess Capital Expenditures: As defined in Subsection 4.4(b).
Excluded Property: Any and all of the rights, titles, and interests in,
to and under any real property, buildings and other improvements (or the
respective portion thereof) listed or described on Exhibit B attached hereto,
together with any and all leases or other contract rights related thereto and
personalty appurtenant thereto.
Existing Leases: As defined in Recital A.
Existing Lessors: As defined in Recital A.
Expiration Date: The date set forth on the Schedule of Basic Terms
attached hereto as the expiration date of the original Term with respect to the
Hotel.
FelCor: FelCor Suite Hotels, Inc., a Maryland corporation, and its
successors and assigns. FelCor had advised Lessor and Lessee that FelCor will
change its name to "FelCor Lodging Trust Incorporated" effective on July 28,
1998.
FIFRA: The Federal Insecticide, Fungicide, and Rodenticide Act, as
amended.
First Extension: As defined in Section 2.2.
First Tier Room Revenue Percentage: As defined in Section 3.1(b).
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Fiscal Year: The 12-month period from January 1 to December 31.
Fixtures: As defined in Section 1.1.
Food Sale Revenues: Shall mean Gross Revenue from the sale, for on-site
consumption, of food and non-alcoholic beverages sold at the Leased Property,
including in respect to guest rooms, banquet rooms, ballrooms, meeting rooms and
other similar rooms, including the rentals with respect to banquets, meetings
and other functions held in such banquet rooms, ballrooms, meeting rooms and
other similar rooms. Such revenues shall not include Sublease Rent or the
following:
(1) Vending machine sales;
(2) Any gratuities or service charges added to a customer's
bill or statement in lieu of a gratuity which is paid to an employee;
(3) Non-alcoholic beverages sold from the bar or lounge;
(4) Sales taxes or taxes of any other kind imposed on the sale
of food or non-alcoholic beverages; and
(5) Any revenues that are subsequently credited, refunded or
rebated in the ordinary course of business.
Force Majeure: An Unavoidable Occurrence, generally affecting travel
and/or the hotel or lodging business in the market and/or submarket in which the
Hotel is located.
Franchise Agreement: Any franchise or license agreement with a
Franchisor under which the Hotel is operated as a hotel facility under a
registered service mark or other brand name or "flag" approved by Lessor (not to
be unreasonably withheld).
Franchise Event of Default: As defined in Subsection 16.1(g).
Franchisor: The franchisor or licensor under any Franchise Agreement.
FSLP: FelCor Suites Limited Partnership, a Delaware limited
partnership, of which FelCor is the general partner. FSLP had advised Lessor and
Lessee that FSLP will change its name to "FelCor Lodging Limited Partnership"
effective on July 28, 1998.
Furniture: As defined in Section 1.1.
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<PAGE> 15
GAAP: GAAP shall mean, as of any date of determination, accounting
principles (a) set forth as generally accepted in then currently effective
Opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants, (b) set forth as generally accepted in then
currently effective Statements of the Financial Accounting Standards Board or
(c) that are then approved by such other entity as may be approved by a
significant segment of the accounting profession in the United States of
America. The term "consistently applied," as used in connection therewith, means
that the accounting principles applied are consistent in all material respects
to those applied at prior dates or for prior periods.
Government: The United States of America, any state, district or
territory thereof, any foreign nation, any state, district, department,
territory or other political division thereof, or any agency or political
subdivision of any of the foregoing.
Gross Operating Expenses: The term "Gross Operating Expenses" shall
include (i) all costs and expenses of operating the Hotel included within the
meaning of the term "Total Costs and Expenses" contained in the Uniform System
and, (ii) without duplication, the following: all salaries and employee expenses
and payroll taxes (including salaries, wages, bonuses and other compensation of
all employees of the Hotel, and benefits including life, medical and disability
insurance and retirement benefits), expenditures described in Section 9.1 (other
than Capital Expenditures required to be paid for by Lessor), operating lease
payments for Office Machines acquired after the Commencement Date operational
supplies, utilities, governmental fees and assessments, common area assessments,
costs of food and beverages, laundry service expense, the cost of Inventory,
license fees, advertising, marketing, reservation systems and any and all other
operating expenses as are reasonably necessary for the proper and efficient
operation of the Hotel incurred by Lessee in accordance with the provisions
hereof (excluding, however, (i) federal, state and municipal excise, sales and
use taxes collected directly from patrons and guests or as a part of the sales
price of any goods, services or displays, such as gross receipts, admissions,
cabaret or similar or equivalent taxes paid over to federal, state or municipal
governments, (ii) the cost of insurance to be provided by Lessor under
Subsection 13.1(a), (iii) Real Estate Taxes, Capital Impositions and Personal
Property Taxes, (iv) payments on any Ground Lease, Mortgage or other Encumbrance
on, the Land or Improvements approved by Lessor, and (v) depreciation and
amortization; all determined in accordance with the Uniform System).
Gross Revenues: All revenues, receipts, and income of any kind derived
directly or indirectly by Lessee from or in connection with the Hotel (including
rentals or other payments from tenants, lessees, licensees or concessionaires
but not including their gross receipts) whether on a cash basis or credit, paid
or collected, determined in accordance with the Uniform System, excluding,
however: (i) funds furnished by Lessor, (ii) federal, state and municipal
excise, sales, and use taxes collected directly from patrons and guests or as a
part of the sales price of any goods, services or displays, such as gross
receipts, admissions, cabaret or similar or equivalent taxes and paid over to
federal, state or municipal governments, (iii) the amount of all credits,
rebates or refunds to customers, guests or patrons in the ordinary course of
business, and all
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service charges, finance charges, interest and discounts attributable to charge
accounts and credit cards, to the extent same are paid to Lessee by its
customers, guests or patrons, or to the extent the same are paid for by Lessee
to, or charged to Lessee by, credit card companies, (iv) gratuities paid to
employees, (v) proceeds of insurance (including business interruption insurance
payable to Lessee) and condemnation, (vi) proceeds from sales other than sales
in the ordinary course of business, (vii) complimentary meals and rooms to
Lessee's and Manager's employees, and charitable, promotional and other
complimentary meals and rooms given by Lessee in the ordinary course of business
and in accordance with its normal policies for giving such meals and rooms, as
is customary for similar operations, (viii) receipts for returns to shippers,
manufacturers or suppliers, (ix) all loan proceeds from financing or refinancing
of its leasehold interest in the Hotel, or interests therein or components
thereof, including the Leased Property and Lessee's Personal Property, (x)
judgments and awards, except any portion thereof arising from normal business
operations of the Hotel, and (xi) items constituting "allowances" under the
Uniform System.
Ground Lease: As defined in Section 28.1.
Hazardous Materials: All chemicals, pollutants, contaminants, wastes
and toxic substances, including without limitation:
(a) Solid or hazardous waste, as defined in RCRA or in any
Environmental Law;
(b) Hazardous substances, as defined in CERCLA or in any
Environmental Law;
(c) Toxic substances, as defined in TSCA or in any
Environmental Law;
(d) Insecticides, fungicides, or rodenticide, as defined in
FIFRA or in any Environmental Law; and
(e) Gasoline or any other petroleum product or byproduct,
polychlorinated biphenols, asbestos, urea formaldehyde and radon gas.
Hotel: The hotel and/or other facility offering lodging and other
services or amenities being operated or proposed to be operated on the Leased
Property.
Hotel Market Decline: A period of six (6) consecutive calendar months
during which there is (i) a twenty percent (20%) decline in average hotel
occupancy for the Hotel from the average hotel occupancy levels for same period
during the prior calendar year and (ii) a twenty percent (20%) decline in
average hotel occupancy for the Hotel's Competitive Set from the average hotel
occupancy levels for the same period during the prior calendar year, as
published in the applicable STR Reports.
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Hotel Shortfall Cure Percentage: As defined in Subsection 2.4(c).
Impositions: Collectively, all taxes (including, without limitation,
all ad valorem, sales and use, single business, gross receipts, transaction
privilege, rent or similar taxes as the same relate to or are imposed upon
Lessee or its business conducted upon the Leased Property), assessments
(including, without limitation, all Capital Impositions, whether or not
commenced or completed prior to the date hereof and whether or not to be
completed within the Term), water, sewer or other utility rents and charges,
excises, tax inspection, authorization and similar fees and all other
governmental charges, in each case whether general or special, ordinary or
extraordinary, or foreseen or unforeseen, of every character in respect of the
Leased Property or the business conducted thereon by Lessee (including all
interest and penalties thereon caused by any failure in payment by Lessee),
which at any time prior to, during or with respect to the Term hereof may be
assessed or imposed on or with respect to or be a lien upon Lessor's interest in
the Leased Property, the Leased Property, or any part thereof or any rent
therefrom or any estate, right, title or interest therein, or
any occupancy, operation, use or possession of, or sales from, or activity
conducted on or in connection with the Leased Property, or the leasing or use of
the Leased Property or any part thereof by Lessee. Nothing contained in this
definition of Impositions shall be construed to require Lessee to pay (1) any
tax based on net income (whether denominated as a franchise or capital stock or
other tax) imposed on Lessor or any other Person, or (2) any net revenue tax of
Lessor or any other Person, or (3) any tax imposed with respect to the sale,
exchange or other disposition by Lessor of any Leased Property or the proceeds
thereof, or (4) any single business, gross receipts (other than a tax on any
rent received by Lessor from Lessee), transaction, privilege or similar taxes as
the same relate to or are imposed upon Lessor, except to the extent that any
tax, assessment, tax levy or charge that Lessee is obligated to pay pursuant to
the first sentence of this definition and that is in effect at any time during
the Term hereof is totally or partially repealed, and a tax, assessment, tax
levy or charge set forth in clause (1) or (2) is levied, assessed or imposed
expressly in lieu thereof.
Improvements: As defined in Section 1.1.
Indemnified Party: Either of a Lessee Indemnified Party or a Lessor
Indemnified Party.
Indemnifying Party: Any party obligated to indemnify an Indemnified
Party pursuant to Sections 8.3 or 18.1.
Insurance Requirements: All terms of any insurance policy required by
this Lease and all requirements of the issuer of any such policy.
Inventory: All "Inventories of Merchandise" and "Inventories of
Supplies" as defined in the Uniform System, as same may hereafter be revised,
including without limitation linens, china, silver, glassware and other
non-depreciable personal property, and including any property of the type
described in Section 1221(1) of the Code.
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Land: As defined in Section 1.1 above.
Lease Year: Any 12-month period from January 1 through December 31
during the Term, or any shorter period at the beginning or end of the Term.
Leased Property: As defined in Section 1.1.
Leasehold Mortgage: As defined in Section 21.1.
Legal Requirements: All federal, state, county, municipal and other
governmental statutes, laws, rules, orders, regulations, ordinances, judgments,
decrees and injunctions affecting either the Leased Property or the maintenance,
construction, use or alteration thereof (whether by Lessee or otherwise),
whether now in force or hereafter enacted and in force, including all laws,
rules or regulations pertaining to the environment, occupational health and
safety and public health, safety or welfare, and any laws, rules or regulations
that may (1) require repairs, modifications or alterations in or to the Leased
Property or (2) in any way adversely affect the use and enjoyment thereof; and
all permits, licenses and authorizations and regulations relating thereto and
all covenants, agreements, restrictions and encumbrances contained in any
instruments, either of record or known to Lessee (other than encumbrances
created by Lessor without the consent of Lessee), at any time in force affecting
the Leased Property.
Lessee: The Lessee designated on this Lease and its respective
permitted successors and assigns.
Lessee Indemnified Party: Lessee, any Affiliate of Lessee, any other
Person against whom any claim for indemnification may be asserted hereunder as a
result of a direct or indirect ownership interest (including a partner's,
limited liability company member's or stockholder's interest) in Lessee, the
officers, directors, stockholders, employees, agents and representatives of
Lessee (and any general partner of Lessee) and any stockholder, partner, limited
liability company member or manager of Lessee, and the respective heirs,
personal representatives, successors and assigns of any such officer, director,
stockholder, partner, limited liability company member or manager, employee,
agent or representative.
Lessee's Personal Property: As defined in Section 6.2.
Lessor: The Lessor designated on this Lease and its respective
successors and assigns.
Lessor Indemnified Party: Lessor, any Affiliate of Lessor, any other
Person against whom any claim for indemnification may be asserted hereunder as a
result of a direct or indirect ownership interest (including a partner's,
limited liability company member's or stockholder's interest) in Lessor, the
officers, directors, stockholders, employees, agents and representatives of
Lessor (and any general partner of Lessor), and any partner, limited liability
company member or
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manager of Lessor, and the respective heirs, personal representatives,
successors and assigns of any such officer, director, partner, stockholder,
partner, limited liability company member or manager, employee, agent or
representative.
Major Sublease. Any sublease of a portion of the Leased Property which
(i) is a Restaurant sublease or other retail sublease important to the
successful operation of the Hotel (other than leases of gift shop space or to a
service provider, such as a lease to an airline ticket agent or to an overnight
courier), (ii), individually (or in the aggregate with all other such
non-Restaurant subleases) generates two percent (2%) or more of the Gross
Revenues of the Hotel, or (iii) the loss of which could reasonably be expected
to cause a material adverse change in the Hotel or Lessee's business at the
Hotel.
Management Agreement: As defined in Section 19.3.
Manager: The manager of the Hotel, from time to time, as permitted
under this Lease.
Master Hotel Agreement: The Amended and Restated Master Hotel Agreement
dated as of July 27, 1998, among BHR, FelCor and FSLP, and certain of their
respective affiliates, as the same may be hereafter amended, restated,
supplemented or modified.
Mortgage: Any deeds to secure debt, deeds of trust, mortgages, or other
interests heretofore or hereafter granted by Lessor or which otherwise encumber
or affect the Leased Property and any and all renewals, modifications,
consolidations, replacements, substitutions, and extensions thereof.
National Economic Decline: A period of six (6) consecutive calendar
months during which there occurs or continues (i) a ten percent (10%) decline in
average hotel occupancy, from average hotel occupancy levels for the same period
during the prior calendar year, for all open and operating hotels in the United
States as determined from the applicable STR Reports or, if the STR Reports are
no longer published, other reputable national economic data regarding the
hospitality industry.
New Lease: Any Lease Agreement hereafter entered into between Lessor
(or another Subsidiary of FelCor) and Lessee (or another Subsidiary of BHR)
pursuant to, and to be governed by, the Master Hotel Agreement.
Notice: A notice given pursuant to Article 27.
Notice Period: As defined in Subsection 2.4(b).
Office Machines: As defined in Section 6.2.
Officer's Certificate: A certificate of Lessee, in form reasonably
acceptable to Lessor, signed by the chief financial officer, treasurer, chief
accounting officer, or another officer
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authorized so to sign such certificates by the board of directors or bylaws of
Lessee, or any other Person whose power and authority to act has been authorized
by delegation in writing by any such officer.
Operating Budget: As defined in Section 4.2.
Other Hotels: The hotel properties covered by the Existing Leases
(other than this Lease) and the New Leases.
Other Leases: The Existing Leases (other than this Lease) and the New
Leases.
Other Lessors: The Lessors under the Other Leases.
Other Percentages: As defined in Subsection 3.1(b).
Other Revenues. All revenues, receipts, and income of any kind derived
directly or indirectly from or in connection with the Hotel and included in
Gross Revenues (other than Room Revenues, Food Sale Revenues, Beverage Sale
Revenues and Telephone Revenues), including, without limitation, all Sublease
Rent, revenues, receipts and income derived from the Hotel's and Leased
Property's telephones, TV and movie rentals check room, washroom, laundry,
valet, and vending machines and all other services not expressly specified
herein as Room Revenues, Food Sale Revenues, Beverage Sale Revenues and
Telephone Revenues.
Overdue Rate: On any date, a rate equal to the Base Rate plus two
percent (2%) per annum, but in no event greater than the maximum rate then
permitted under applicable law.
Payment Date: Any due date for the payment of any installment of Base
Rent.
Percentage Rent: As defined in Subsection 3.1(b).
Performance Failure: A Revenue Performance Shortfall that has not been
cured in accordance with Section 2.4 of this Lease.
Person: The term "Person" means and includes individuals, corporations,
general and limited partnerships, stock companies or associations, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, or other entities and governments and agencies and political
subdivisions thereof.
Personal Property Taxes. All personal property taxes imposed on the
Furniture, Fixtures and Equipment and other items of personal property owned by
Lessor, located on, and used in connection with, the operation of the
Improvements as a Hotel (other than Inventory and the other Lessee's Personal
Property), together with all replacements, modifications, alterations and
additions thereto.
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PIP: As defined in Section 10.3.
Primary Intended Use: As defined in Subsection 7.2(b).
Proceeding: Any judicial action, suit or proceeding (whether civil or
criminal), any administrative proceeding (whether formal or informal), any
investigation by a governmental authority or entity (including a grand jury),
and any arbitration, mediation or other non-judicial process for dispute
resolution.
Quarterly Percentage Rent Computation: As defined in Subsection 3.1(b).
RCRA: The Resource Conservation and Recovery Act, as amended.
Real Estate Taxes: All real estate taxes, including general and special
assessments, if any, which are imposed upon the Land and the Improvements.
REIT Requirements: As defined in Section 19.1.
Regional Market Decline: A period of six (6) consecutive calendar
months during which there is a twenty percent (20%) decline in average hotel
occupancy from hotel occupancy levels for the same period during the then prior
calendar year, for all open and operating hotels in the Smith Travel Research
Region in which the Hotel is located, as determined from applicable STR Reports
or, if the STR Reports are no longer published, other reputable regional
economic data regarding the hospitality industry.
Release: A "Release" as defined in CERCLA or in any Environmental Law,
unless such Release has been properly authorized and permitted in writing by all
applicable Environmental Authorities or is allowed by such Environmental Law
without authorizations or permits.
Rent: Collectively, the Base Rent, Percentage Rent, and Additional
Charges.
Repositioning: As defined in Section 3.6.
Restaurant: Any restaurant or cocktail lounge, together with a kitchen
for those facilities, which may be located in the Hotel at any time and from
time to time.
Revenue Budget: As defined in Section 4.1.
Revenue Performance Shortfall: As defined in Subsection 2.4(a).
RevPAR: As defined in the STR Reports.
Room Revenue Breakpoint: As defined in Subsection 3.1(b).
<PAGE> 22
Room Revenues: Shall mean Gross Revenue from the rental of guest rooms
or suites, whether to individuals, groups or transients, but excluding Beverage
Sale Revenues, Food Sale Revenues and the following:
(a) The amount of all credits, rebates or refunds to customers, guests
or patrons;
(b) All sales taxes or any other taxes imposed on the rental of such
guest rooms; and
(c) Any fees collected for amenities including, but not limited to
telephone, laundry, movies or concessions.
SARA: The Superfund Amendments and Reauthorization Act of 1986, as
amended.
Second Tier Room Revenue Percentage: As defined in Section 3.1(b).
State: The State or Commonwealth of the United States or Province of
Canada in which the Leased Property is located.
SEC: The U.S. Securities and Exchange Commission or any successor
agency.
Second Extension: As defined in Section 2.3.
STR Reports: Reports compiled by Smith Travel Research, or its
successor, which contain historical supply and demand, occupancy, and average
rate information for the Hotel and hotels with which it competes (or, in the
event that Smith Travel Research discontinues providing such information,
reports of similar nature compiled by an authority recognized nationally in the
hospitality industry).
Sublease Rent: The entire net amount of rentals (including base rent
and percentage rent, but not including pre-paid rent (until earned) security or
other deposits and expense pass-through amounts), if any, received by Lessee
under any sublease (or similar agreement), and with any unaffiliated third party
(i) to which the Leased Property is subject on the date of this Lease, or (ii)
of a Restaurant or other retail space in the Hotel which may be entered into
from time to time.
Subsidiaries: Persons in which another Person owns, directly or
indirectly, more than 50% of the voting stock and control, as applicable
(individually, a "Subsidiary").
Taking: A taking or voluntary conveyance during the Term hereof of all
or part of the Leased Property, or any interest therein or right accruing
thereto or use thereof, as the result of, or in settlement of, any Condemnation
or other eminent domain Proceeding affecting the Leased Property whether or not
such Condemnation or other eminent domain Proceeding shall have actually been
commenced.
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Telephone Revenues. All revenues, receipts and income derived directly
from the Hotel's and Leased Property's telephones.
Term: As defined in Section 2.1.
Termination Fee: An amount with respect to the termination of this
Lease, if any, determined as set forth in the Master Hotel Agreement.
TSCA: The Toxic Substances Control Act, as amended.
Unavoidable Delays: Delays due to strikes, lock-outs, labor unrest,
inability to procure materials, power or other utility failure, acts of God
(such as hurricanes, tornados, earthquakes, floods and mud slides) governmental
restrictions, war or other enemy action, civil commotion, fire, casualty,
condemnation, the Year 2000 Problem or other similar causes, in each case, if
such cause is beyond the control of the party responsible for performing an
obligation hereunder, provided that lack of funds shall not be deemed a cause
beyond the reasonable control of either party hereto unless such lack of funds
is caused by the failure of the other party hereto to perform any obligations of
such party under this Lease or any guaranty of this Lease.
Unavoidable Occurrence: shall mean the occurrence of strikes, lockouts,
labor unrest, gasoline and other energy shortages, widespread disruption of air,
auto or other travel, inability to procure materials or services, power or other
utility failure, acts of God (such as hurricanes, tornados, earthquakes, floods
and mud slides), governmental restrictions, war or other enemy or terrorist
action, civil commotion, fire, casualty, condemnation, the Year 2000 Problem or
other similar causes, in each case, if such cause is beyond the reasonable
control of Lessee; provided that (i) lack of funds shall not be deemed a cause
beyond the reasonable control of either party hereto unless such lack of funds
is caused by the failure of the other party hereto to perform any obligations of
such party under this Lease or any guaranty of this Lease, and (ii) any such
occurrence is an extraordinary, as opposed to a routine or cyclical, material
event that was not reasonably foreseeable when the then-applicable Annual Budget
was prepared.
Uneconomic for its Primary Intended Use: A state or condition of the
Hotel such that, in the good faith judgment of Lessee, reasonably exercised and
evidenced by the resolution of the board of directors or other governing body of
Lessee (or its general partner), the Hotel cannot be operated on a commercially
practicable basis for its Primary Intended Use, taking into account, among other
relevant factors, the number of usable rooms and projected revenues, such that
Lessee intends to, and shall, complete the cessation of operations at the Hotel.
Uniform System: Shall mean the Uniform System of Accounts for Hotels
(9th Revised Edition, 1996) as published by the Hotel Association of New York
City, Inc., with such later revisions as may be agreed to by both Lessor and
Lessee.
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<PAGE> 24
Unsuitable for its Primary Intended Use: A state or condition of the
Hotel such that, in the good faith judgment of Lessor, reasonably exercised and
evidenced by the resolution of the board of directors or other governing body of
Lessor, due to casualty damage, loss through Condemnation or a Year 2000
Problem, the Hotel cannot function as an integrated hotel facility consistent
with standards applicable to a well maintained and operated hotel of the same
type as the Hotel.
WARN Act: As defined in Subsection 8.2(b).
Year 2000 Problem: Shall mean the malfunction of software, hardware or
an embedded technological system due to the failure to properly process any date
or input which includes an indication of or reference to a date, including
specifically but not limited to dates that represent or reference different
centuries or more than one century, if either (i) Lessor had previously refused
to make or approve a Capital Expenditure reasonably proposed by Lessee to avoid
such Year 2000 Problem, or (ii) such Year 2000 Problem results from a
governmental or other third party failure to be year 2000 compliant and Lessee
has not failed to take reasonable steps to seek assurances that such parties
will be year 2000 compliant.
ARTICLE 2
TERM, EXTENSION AND TERMINATION
2.1 Term. The term of this Lease (the "TERM") shall commence on the
Commencement Date and shall end on the Expiration Date, unless sooner terminated
in accordance with the provisions hereof or extended to an anniversary of the
Expiration Date pursuant to this Article 2.
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<PAGE> 25
2.2 First Extension of the Term. If so provided in the Schedule of
Basic Terms attached hereto, Lessee is granted the option to extend the Term of
this Lease for the period of years set forth in the Schedule of Basic Terms
attached hereto and designated as the First Extension (if applicable, the "FIRST
EXTENSION"), provided that Lessee is not in default hereunder either at the time
of deemed exercise of the option or at the end of the original Term, which
option shall be deemed exercised if Lessee fails to give written notice to
Lessor of its desire not to exercise the First Extension option at least one
hundred twenty (120) days prior to the expiration of the original Term. Lessee
shall be deemed to have exercised its First Extension option as of the date that
is one hundred twenty (120) days prior to the expiration of the original Term in
the event that no such written notice of non-exercise is received by Lessor by
such time. The First Extension shall be upon the same terms, conditions and
rentals as set forth herein for the original Term.
2.3 Second Extension of the Term. If so provided in the Schedule of
Basic Terms attached hereto, Lessee is granted an option to extend the Term for
a period of five (5) years following the end of the First Extension (if
applicable, the "SECOND EXTENSION"), provided that Lessee is not in default
hereunder either at the time of exercise of the option or at the end of the
First Extension, which option must be exercised by written notice to Lessor at
least one hundred twenty (120) days prior to the expiration of the First
Extension. If such option is exercised, Lessor and Lessee shall negotiate in
good faith modifications to the Rent for the Second Extension to adjust such
Rent to market rates for arms-length hotel REIT leases between unrelated parties
for similar hotel properties at that time. In the event Lessor and Lessee are
unable to agree upon Rent terms for the Second Extension at least ninety (90)
days prior to the expiration of the Term, the Rent terms for the Second
Extension shall be determined by a panel of three (3) persons who have generally
recognized expertise in evaluating hotel REIT leases and who are not Affiliates
of Lessor or Lessee. Lessee and the Lessor each shall have the right to
designate one panel member and the two (2) panel members so designated will
designate the third panel member. Rent terms approved by at least two (2) of the
three (3) panel members will be binding on Lessee and Lessor for the Second
Extension, which shall be otherwise on the terms set forth herein. In
determining the market rates for the Second Extension, the panel members shall
be instructed to consider hotel REIT lease terms with respect to similar hotel
property types. The Second Extension shall be otherwise upon the same terms and
conditions as set forth herein for the original Term.
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<PAGE> 26
2.4 Performance Failure.
(a) If, with respect to any three (3) consecutive Lease Years
during the Term commencing on or after January 1, 1998, Lessee shall fail to
realize from the operation of the Hotel an amount equal to at least eighty
percent (80%) of Room Revenues as set forth in the Revenue Budget for such Lease
Year, such failure shall constitute a "REVENUE PERFORMANCE SHORTFALL" under this
Lease, except to the extent such failure is caused by an Unavoidable Occurrence.
In determining whether Lease Years are consecutive for such purpose, Excluded
Lease Years will be ignored. The existence of a Revenue Performance Shortfall
for any Lease Year shall be determined by Lessor on the basis of the first
Officer's Certificate delivered by Lessee to Lessor in the subsequent Lease Year
pursuant to the requirements of Subsection 3.1(c) and shall be subject to
confirmation pursuant to Section 3.2. Notwithstanding the foregoing, no Lease
Year that would otherwise be included in the period of a Revenue Performance
Shortfall shall be so included if Lessor and the Other Lessors receive Rent
payments from Lessee and the other Lessees under this Lease and the Other Leases
which, in the aggregate, amount equal to at least ninety percent (90%) (the
"OVERALL SHORTFALL CURE PERCENTAGE") of the aggregate Rent budgeted for such
Lease Year in the Revenue Budgets for the Hotel and the Other Hotels leased
under the Other Leases (each such Lease Year, an "EXCLUDED LEASE YEAR"). Lessee
may rely on the foregoing for a total of three (3) Excluded Lease Years and,
thereafter, the Overall Shortfall Cure Percentage shall increase to one hundred
percent (100%).
(b) Upon the occurrence of a Revenue Performance Shortfall,
Lessor shall have the right, subject to subsection (c) of this Section 2.4, at
Lessor's option, to terminate this Lease upon thirty (30) days' notice (the
"NOTICE PERIOD") to Lessee, in which event Lessee shall immediately surrender
the Leased Property to Lessor, and, if Lessee fails to so surrender, Lessor
shall have the right, without notice, to enter upon and take possession of the
Leased Property and to expel or remove Lessee and its effects without being
liable for prosecution or any claim for damages therefor; and Lessee shall, and
hereby agrees to, pay (or, as the case may be, indemnify) Lessor for the total
amount of (i) in the event that Lessee does not promptly surrender the Leased
Property, the reasonable costs of recovering the Leased Property and all other
losses, liabilities and reasonable expenses incurred by Lessor in connection
with Lessee's failure to surrender; (ii) the unpaid Rent earned as of the date
of termination (and for any period following the termination date during which
Lessee retains possession and control of the Leased Property), plus interest at
the Overdue Rate accruing after the earlier of the due date or such termination
date; and (iii) all other sums of money then owing by Lessee to Lessor. Except
as provided in the Master Hotel Agreement, termination of this Lease and
recovery of the Rent and other amounts as aforesaid shall constitute Lessor's
sole remedy for the Revenue Performance Shortfall, and Lessee shall not be
liable to Lessor for damages arising therefrom.
(c) Lessor's right to terminate this Lease pursuant to
subsection (b) above, following any Lease Year, shall be subject to Lessee's
right to cure the Revenue Performance Shortfall occurring thereunder with
respect to such Lease Year by making a cash payment to Lessor during the Notice
Period equal to the difference between the Percentage Rent actually
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<PAGE> 27
paid for the Lease Year and eighty percent (80%) (the "HOTEL SHORTFALL CURE
PERCENTAGE") of the Percentage Rent budgeted for the Lease Year in the Revenue
Budget for the Lease Year. Any payment made by Lessee under this subsection (c)
shall be deemed Rent paid with respect to the Lease Year. Lessor shall have no
obligation to repay any amount advanced by Lessee to cure a Revenue Performance
Shortfall. Lessee may only cure two Revenue Performance Shortfalls, occurring
under subsection (a) by paying Lessor based on a eighty percent (80%) Hotel
Shortfall Cure Percentage. Thereafter, the Hotel Shortfall Cure Percentage shall
be ninety percent (90%).
2.5 Lessor's Option to Terminate Lease upon Sale.
(a) In the event Lessor enters into a bona fide contract to
sell all or substantially all of the Leased Property to a non-Affiliate of
Lessor or Lessee, then Lessor may terminate this Lease by giving not less than
thirty (30) days prior Notice to Lessee of Lessor's election to terminate this
Lease upon the closing under such sale contract (the "TERMINATION DATE");
provided, however, for purposes of this Section 2.5 only, the percentage in the
definition of "AFFILIATE" herein shall be deemed to be ten percent (10%) rather
than fifty percent (50%). Effective upon the Termination Date, this Lease shall
terminate and be of no further force and effect except as to any obligations of
the parties existing as of such date that survive termination of this Lease, and
all Rent including Percentage Rent and Additional Charges shall be adjusted as
of the Termination Date. For purposes of this Article, Lessor will be deemed to
have "sold" the Leased Property if it (i) sells, or transfers by long-term
ground lease, the Leased Property for cash, a promissory note or other
consideration, (ii) contributes the Leased Property to a Person in exchange for
stock, partnership interests, membership interests or other equity interests,
provided that after such transaction the Person who will own the Leased Property
is not and will not thereby become an Affiliate of FelCor, FSLP, Lessor or any
of their Subsidiaries, or (iii) merges (except a merger involving FelCor or
FSLP) or combines with any Person, provided that after such transaction the
Person who will own the Leased Property is not and will not thereby become an
Affiliate of FelCor, FSLP, Lessor or any of their Subsidiaries.
(b) As compensation for the early termination of its leasehold
estate under this Section 2.5 because of a sale of the Leased Property, Lessor
shall pay to Lessee the Termination Fee, as and when provided in the Master
Hotel Agreement, unless the Lessee accepts a New Lease or a substitute for this
Lease as provided in the Master Hotel Agreement.
(c) In the event that Lessor terminates this Lease upon less
than sixty (60) days written notice pursuant to the provisions of this Section
2.5 (or pursuant to any other provisions of this Lease except for the provisions
allowing Lessor to terminate this Lease under Article 14 or Article 15 and
except upon the occurrence of an Event of Default), the parties agree that on
and after the effective date of such termination, Hotel personnel employed by
Lessee immediately prior to the effective date of termination will either be
employed by Lessor's Manager or designee, or Lessor or its designee will take
such other action with respect to their employment, which may include
notification of the prospective termination of their employment, so as, in any
case, to attempt to prevent any liability pursuant to the WARN Act. In that
event,
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Lessor hereby agrees to defend, indemnify and hold harmless Lessee from and
against any and all manner of claims, actions, liabilities, costs and expenses
(including, without limitation, reasonable attorneys' fees and disbursements)
relating to or arising from Lessor's breach of this covenant, including, without
limitation, any liability, costs and expenses arising out of asserted or actual
violation of the requirements of the WARN Act. Further, Lessor's Manager or
designee shall assume all COBRA liabilities and COBRA obligations to the Hotel's
personnel, which Lessee shall or may incur in connection with such termination
of this Lease, and Lessor hereby agrees to defend, indemnify and hold harmless
Lessee from and against any and all manner of claims, actions, liabilities,
costs and expenses (including, without limitation, reasonable attorneys' fees
and disbursements) relating to or resulting from Lessor's breach of the
foregoing covenant with respect to COBRA matters, including, without limitation,
any liability, costs and expenses arising out of any asserted or actual
violation of the requirements of the COBRA any legislation. Upon Lessor's
written request to Lessee, Lessee shall take all action that is reasonable to
notify, advise and cooperate with Lessor in order to assist Lessor in complying
with the WARN Act or COBRA legislation and to mitigate Lessor's expense or
liability with respect to the WARN Act and COBRA legislation.
2.6 Transition Procedures. Upon any expiration or termination of the
Term, but without prejudice to Lessor's remedies upon the occurrence of an Event
of Default, Lessor and Lessee shall do the following and, in general, shall
cooperate in good faith to effect an orderly transition of the management or
lease of the Hotel:
(a) Transfer of Licenses. Lessee shall use its reasonable best
efforts (i) to transfer to Lessor or Lessor's designee any Franchise Agreement,
all licenses, operating permits and other governmental authorizations and all
contracts, including contracts with governmental or quasi-governmental entities,
that may be necessary for the operation of the Hotel (collectively, "LICENSES"),
or (ii) if such transfer is prohibited by law or Lessor otherwise elects, to
cooperate with Lessor or Lessor's designee in connection with the processing by
Lessor or Lessor's designee of any applications for all Licenses, including
Lessee (or its Affiliate) continuing to operate the liquor operations under its
licenses with Lessor agreeing to indemnify and hold Lessee (or its Affiliate)
harmless as a result thereof (except for the gross negligence or willful
misconduct of Lessee); provided, in either case, that the costs and expenses of
any such transfer or the processing of any such application shall be paid by
Lessor or Lessor's designee.
(b) Leases and Concessions. Lessee shall assign to Lessor or
Lessor's designee simultaneously with the termination of this Agreement, and the
assignee shall assume, all leases, contracts, concession agreements and
agreements in effect with respect to the Hotel then in Lessee's name which are
designated by Lessor.
(c) Books and Records. To the extent that Lessor has not
already received copies thereof, all books and records (including computer and
computer-generated records) for the Hotel kept by Lessee pursuant to Article 4
hereof or Section 7 of the Master Hotel Agreement (or copies thereof) shall be
delivered to Lessor or Lessor's designee simultaneously with the
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termination of this Lease, but such books and records shall thereafter be
available at all reasonable times for inspection, audit, examination and
transcription for a period of one (1) year and Lessee may retain (on a
confidential basis) copies of computer records thereof.
(d) Receivables and Payables, etc. Lessee shall be entitled to
retain all cash, bank accounts and house banks, and to collect all Gross
Revenues and accounts receivable accrued through the termination date. Lessee
shall be responsible for the payment of Rent, all Gross Operating Expenses and
all other obligations of Lessee accrued under this Lease as of the termination
date, and Lessor shall be responsible for all Gross Operating Expenses of the
Hotel accruing after the termination date.
(e) Final Accounting. Lessee shall, within forty five (45)
days after the expiration or termination of the Term, prepare and deliver to
Lessor a final accounting statement, dated as of the date of the expiration or
termination, as more particularly described in Article 4, along with a statement
of any sums due from Lessee to Lessor pursuant hereto and payment of such funds.
(f) Inventory. Lessee shall insure that the Leased Property,
at the date of such termination or expiration, has Inventory of a substantially
equivalent nature and amount as exists at the Leased Property on the
Commencement Date, and Lessor shall acquire such Inventory from Lessee at
Lessee's cost.
(g) Surrender. Lessee shall peacefully and immediately vacate
and surrender the Leased Property to Lessor or Lessor's designee, shall turn
over all keys to Lessor and Lessor's designee and shall not interfere with
Lessor or any new Lessee or Manager.
The provisions of this Section 2.6 shall survive the expiration or
termination of this Lease until they have been fully performed. Nothing
contained herein shall limit Lessor's rights and remedies under this Lease if
such termination occurs as the result of an Event of Default.
2.7 Holding Over. If Lessee for any reason remains in possession of the
Leased Property after the expiration or earlier termination of the Term, such
possession shall be as a tenant at sufferance during which time Lessee shall pay
as rental each month one hundred fifty percent of the aggregate of (a)
one-twelfth (1/12) of the aggregate Base Rent and Percentage Rent payable with
respect to the last full Fiscal Year of the Term, (b) all Additional Charges
accruing during the applicable month and (c) all other sums, if any, payable by
Lessee under this Lease with respect to the Leased Property. During such period,
Lessee shall be obligated to perform and observe all of the terms, covenants and
conditions of this Lease, but shall have no rights hereunder other than the
right, to the extent given by law to tenancies at sufferance, to continue its
occupancy and use of the Leased Property. Nothing contained herein shall
constitute the consent, express or implied, of Lessor to the holding over of
Lessee after the expiration or earlier termination of this Lease.
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ARTICLE 3
RENT, RENT ADJUSTMENTS AND PERFORMANCE STANDARDS
3.1 Rent. Lessee will pay to Lessor in lawful money of the United
States which shall be legal tender for the payment of public and private debts,
in immediately available funds, at Lessor's address set forth in the Schedule of
Basic Terms attached hereto or at such other place or to such other Person as
Lessor from time to time may designate in a Notice, all Base Rent, Percentage
Rent and Additional Charges, during the Term, as follows:
(a) Payment of Rent.
(i) Monthly Payments in Respect of Base Rent: With
respect to each calendar month during the Term, Lessee shall pay to Lessor, in
advance, on or before the last day of the calendar month immediately preceding
the calendar month to which such payment relates (except as otherwise expressly
provided in the Master Hotel Agreement), an amount equal to the portion of the
annual sum (except for 1998) set forth on the Schedule of Basic Terms attached
hereto as the "BASE RENT" for the Leased Property ("BASE RENT") included in the
Annual Budget for such calendar month (which amount shall be fully earned by
Lessor and shall not be subject to adjustment or reduction, except as expressly
set forth in this Article III, during any subsequent month, quarter or Fiscal
Year); provided, however, that the first and last monthly payments in respect of
Base Rent shall be pro rated as to any partial month (subject to adjustment as
provided in Sections 5.3, 14.5, 15.3, 15.5, and 15.6); and
(ii) Monthly Payments in Respect of Budgeted Percentage
Rent: With respect to each calendar month during the Term, commencing with the
calendar month in which the Commencement Date occurs, Lessee shall pay to Lessor
(on or before the last day of the month) an amount equal to the excess, if any,
of (i) seventy-five percent (75%) of the amount of Lessee's budgeted Percentage
Rent payable with respect to the then current calendar month (which budgeted
amount shall be equal to one-third (1/3) of the quarterly estimate of Percentage
Rent included in the Annual Budget for the calendar quarter in which such
calendar month occurs) over (ii) Base Rent for such calendar month; and
(iii) Quarterly Payments in Respect of Percentage Rent:
With respect to each calendar quarter of each Lease Year during the Term (on or
before the fifteenth (15th) day following the end of the first three (3)
calendar quarters and on or before the twentieth (20th) day following the end of
the final calendar quarter), Lessee shall pay to Lessor an amount equal to the
amount, if any, by which the aggregate of all payments in respect of Base Rent
and Percentage Rent for such calendar quarter shall be less than the amount
determined pursuant to the Quarterly Percentage Rent Computation for such
calendar quarter.
(b) Quarterly Computation of Percentage Rent. For each
calendar quarter of each Lease Year of the Term, the aggregate amount of
Percentage Rent that shall be fully earned
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by Lessor, which amount shall not be subject to adjustment or reduction (except
as expressly set forth in this Article III) during any subsequent quarter or
Lease Year, shall be the amount determined by the following calculation
("QUARTERLY PERCENTAGE RENT COMPUTATION"):
An amount equal to the sum of: (i) the product of the First
Tier Room Revenue Percentage, set forth for the applicable
Lease Year in the Schedule of Basic Terms attached hereto,
times the aggregate Room Revenues during such calendar quarter
up to and including that portion of the Room Revenue
Breakpoint allocated to such calendar quarter in the Annual
Budget (the "QUARTERLY ROOM REVENUE BREAKPOINT"); plus (ii)
the product of the Second Tier Room Revenue Percentage, set
forth for the applicable Lease Year in the Schedule of Basic
Terms attached hereto, times the aggregate Room Revenues
during such calendar quarter in excess of the Quarterly Room
Revenue Breakpoint; plus (iii) the product of each of the
Other Percentages, set forth for the applicable Lease Year in
the Schedule of Basic Terms attached hereto, times (as
applicable) the Food Sale Revenues, Beverage Sale Revenues,
Telephone Revenues and Other Revenues during such calendar
quarter.
For the purpose of defining the Quarterly Percentage Rent Computation:
(i) "FIRST TIER ROOM REVENUE PERCENTAGE," "SECOND TIER ROOM
REVENUE PERCENTAGE" and "OTHER PERCENTAGES" shall mean the then
applicable percentages corresponding to each of such terms as set forth
in the Schedule of Basic Terms attached hereto; and
(ii) "ROOM REVENUE BREAKPOINT" shall mean the amount of Room
Revenues for the applicable Lease Year corresponding to such term as
set forth in Schedule of Basic Terms attached hereto (which amount
shall always be equal to the sum of the Quarterly Room Revenue
Breakpoint amounts for each calendar quarter during such Lease Year);
except that for each Lease Year from and after the CPI Adjustment Year,
the Room Revenue Breakpoint shall be adjusted by the same percentage
that the Base Rent is adjusted pursuant to Subsection 3.1(d) of this
Lease.
In no event will the amount of Rent payable for any calendar quarter or the
result of any Quarterly Percentage Rent Computation be less than zero, and there
shall be no reduction in the Base Rent regardless of the result of any Quarterly
Percentage Rent Computation.
(c) Officer's Certificates. An Officer's Certificate shall be
delivered to Lessor, together with each such quarterly payment based upon the
Quarterly Percentage Rent
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Computation, which Officer's Certificate shall set forth the calculation of the
Quarterly Percentage Rent Computation and all prior payments of Rent in respect
of such calendar quarter.
If the Percentage Rent earned by Lessor for such calendar quarter (as
shown in the applicable Officer's Certificate) exceeds the amount actually paid
as Percentage Rent by Lessee for such calendar quarter, Lessee also shall pay
such excess to Lessor at the time such Officer's Certificate is delivered. If
the aggregate Percentage Rent earned by Lessor for such calendar quarter (as
shown by such Officer's Certificate) is less than the amount actually paid as
Percentage Rent for the applicable calendar quarter, Lessor will reimburse such
amount to Lessee within five (5) Business Days after such Officer's Certificate
is delivered to Lessor.
Any amount to be paid or reimbursed as provided above that is not paid
when due, whether in favor of Lessor or Lessee, shall bear interest at the
Overdue Rate, which interest shall accrue from the twentieth (20th) day after
the end of the respective calendar quarter of such Lease Year for which such
Percentage Rent is due until the amount of such difference shall be paid or
otherwise discharged. Any such interest payable to Lessor shall be deemed to be
and shall be payable as Additional Charges.
The obligation to pay Percentage Rent shall survive the expiration or
earlier termination of the Term, and a final reconciliation (taking into
account, among other relevant adjustments, any adjustments which are accrued
after such expiration or termination date but which related to Percentage Rent
accrued prior to such expiration or termination date, and adjustments required
as a result of mathematical error, mistake, the use of preliminary, rather than
final, revenue figures in performing earlier computations, or other similar
factor) shall be made not later than two (2) years after such expiration or
termination date, but Lessee shall advise Lessor within sixty (60) days after
such expiration or termination date of Lessee's best estimate at that time of
the approximate amount of such adjustments, which estimate shall not be binding
on Lessee or have any legal effect whatsoever.
(d) CPI Adjustments to Rent. If the Schedule of Basic Terms
attached hereto designates a CPI Adjustment for the Leased Property, then, for
each Lease Year of the Term beginning on or after the CPI Adjustment Year (as
defined in said Schedule of Basic Terms), the Base Rent then in effect, and the
Room Revenue Breakpoint then applicable shall be adjusted from time to time
beginning in the CPI Adjustment Year as follows:
(1) The average Consumer Price Index for the most recently
ended Lease Year shall be divided by the average Consumer Price Index for the
immediately preceding Lease Year.
(2) The new Base Rent for the then current Lease Year shall be
the adjusted amount obtained by multiplying the Base Rent for the immediately
preceding Lease Year by the quotient obtained in subparagraph (d)(1) above.
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(3) The new Room Revenue Breakpoint for the then current Lease
Year shall be the product of the Room Revenue Breakpoint in effect in the most
recently ended Lease Year and the quotient obtained in subparagraph (d)(1)
above.
(4) By way of example, if the CPI Adjustment Year were 2001,
the amount of Base Rent and the Room Revenue Breakpoint amounts (and Food Sale
Revenue and Beverage Sale Revenue amounts, if applicable) for purposes of the
computation of Rent for the Lease Year commencing January 1, 2001 would be
adjusted to reflect any change in the Average Consumer Price Index from the
Lease Year ended December 31, 1999 as compared to the Lease Year ended December
31, 2000. Base Rent and Room Revenue Breakpoint amounts (and Food Sale Revenue
and Beverage Sale Revenue amounts, if applicable) for purposes of the
computation of Rent for the Lease Year commencing January 1, 2002 would be the
Base Rent and Room Revenue Breakpoint amounts (and Food Sale Revenue and
Beverage Sale Revenue amounts, if applicable) applicable for the fiscal year
ended December 31, 2001 as further adjusted to reflect any change in the
Consumer Price Index from December 31, 2000 as compared to December 31, 2001.
(5) Lessor shall calculate the annual adjustments as soon as
reasonably possible after the Consumer Price Index becomes available and shall
notify Lessee in writing of the amount of the annual adjustment, together with a
copy of the computation showing the adjustment amount. Adjustments calculated as
set forth above in the Base Rent and Room Revenue Breakpoint amounts (and Food
Sale Revenue and Beverage Sale Revenue amounts, if applicable) shall be
effective on January 1 of the Lease Year to which such adjusted amounts apply.
If rent is paid in any Lease Year prior to the determination of the amount of
any adjustment to Base Rent or Room Revenue Breakpoint amounts applicable for
such Lease Year, payment adjustments for any shortfall in or overpayment of rent
paid shall be made with the first Base Rent payment due after the amount of the
adjustments are determined.
(6) The "AVERAGE CONSUMER PRICE INDEX" for any period shall be
the average of the Consumer Price Index for each month during the period.
(7) If (i) a significant change is made in the number or
nature (or both) of items used in determining the Consumer Price Index, or (ii)
the Consumer Price Index shall be discontinued for any reason, the Bureau of
Labor Statistics shall be requested to furnish a new index comparable to the
Consumer Price Index, together with information which will make possible a
conversion to the new index in computing the adjusted Base Rent hereunder. If
for any reason the Bureau of Labor Statistics does not furnish such an index and
such information, the parties will instead mutually select, accept and use such
other index or comparable statistics on the cost of living that is computed and
published by an agency of the United States or a responsible financial
periodical of recognized authority.
3.2 Confirmation of Percentage Rent. Lessee shall utilize, or cause to
be utilized, an accounting system for the Leased Property in accordance with its
usual and customary practices,
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and in accordance with GAAP and the Uniform System, that will accurately record
all data necessary to compute Percentage Rent, and Lessee shall retain, for at
least four (4) years after the expiration of each Lease Year (and in any event
until the reconciliation described in Subsection 3.1(c) for each calendar
quarter of such Lease Year has been made), reasonably adequate records
conforming to such accounting system showing all data necessary to compute
Percentage Rent for each calendar quarter of the applicable Lease Years. Lessor,
at its expense (except as provided hereinbelow), shall have the right from time
to time by its accountants or representatives to audit the information that
formed the basis for the data set forth in any Officer's Certificate provided
under Subsection 3.1(c) and, in connection with such audits, to examine all
Lessee's records (including supporting data, Franchisor reports and sales and
excise tax returns) reasonably required to verify Percentage Rent (and for no
other purpose), subject to any prohibitions or limitations on disclosure of any
such data under applicable law. If any such audit discloses an overpayment of
Percentage Rent, and either Lessor agrees with the result of such audit or the
matter is otherwise determined or compromised, Lessor shall forthwith pay to
Lessee the amount of the deficiency, as finally agreed or determined. If any
such audit discloses a deficiency in the payment of Percentage Rent, and either
Lessee agrees with the result of such audit or the matter is otherwise
determined or compromised, Lessee shall forthwith pay to Lessor the amount of
the deficiency, as finally agreed or determined, together with interest at the
Overdue Rate from the date when said payment should have been made to the date
of payment thereof; provided, however, that as to any audit that is commenced
more than two (2) years after the date Percentage Rent for the final quarter of
any Lease Year is reported by Lessee to Lessor, the deficiency, if any, with
respect to such Percentage Rent shall bear interest at the Overdue Rate only
from the date such determination of deficiency is made unless such deficiency is
the result of gross negligence or willful misconduct on the part of Lessee, in
which case interest at the Overdue Rate will accrue from the date such payment
should have been made to the date of payment thereof. If any such audit
discloses that the Percentage Rent actually due from Lessee for any Lease Year
exceeds that reported and paid by Lessee by more than three percent (3%), Lessee
shall pay the cost of such audit and examination. In no event shall Lessor
undertake an audit more than four (4) years after the last day of the Lease Year
for which such audit is requested. Any proprietary information obtained by
Lessor pursuant to the provisions of this Section shall be treated as
confidential, except that such information may be used, subject to appropriate
confidentiality safeguards, in any litigation between the parties and except
further that Lessor may disclose such information to prospective lenders,
investors, and underwriters who have a need to know such information and to
other Persons to whom disclosure is required by applicable law if such persons
are advised of and agree to maintain the confidentiality of such information.
The obligations of Lessee contained in this Section shall survive the expiration
or earlier termination of this Lease. Any dispute as to the existence or amount
of any deficiency in the payment of Percentage Rent as disclosed by such audit
shall, if not otherwise settled by the parties, be submitted to arbitration
pursuant to the provisions of Section 22.2.
3.3 Additional Charges. In addition to the Base Rent and Percentage
Rent, (a) Lessee also will pay and discharge as and when due and payable all
other amounts, liabilities, obligations and Impositions that Lessee assumes or
agrees to pay under this Lease, and (b) in the
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event of any failure on the part of Lessee to pay any of those items referred to
in clause (a) of this Section 3.3, Lessee also will promptly pay and discharge
every fine, penalty, interest and cost that may be added for non-payment or late
payment of such items (the items referred to in clauses (a) and (b) of this
Section 3.3 being additional rent hereunder and being referred to herein
collectively as the "ADDITIONAL CHARGES"), and Lessor shall have all legal,
equitable and contractual rights, powers and remedies provided either in this
Lease or by statute or otherwise in the case of non-payment of the Additional
Charges as in the case of non-payment of the Base Rent, including, but not
limited to, the right, but not the obligation to pay such Additional Charges on
behalf of Lessee and to require reimbursement thereof by Lessee, together with
interest thereon at the Overdue Rate. If any installment of Base Rent,
Percentage Rent or Additional Charges (but only as to those Additional Charges
that are payable directly to Lessor) shall not be paid on its due date, Lessee
will pay Lessor on demand, as Additional Charges, a late charge (to the extent
permitted by law) computed at the Overdue Rate on the amount of such
installment, from the due date of such installment to the date of payment
thereof. To the extent that Lessee pays any Additional Charges to Lessor
pursuant to any requirement of this Lease, Lessee shall be relieved of its
obligation to pay such Additional Charges to the entity to which they would
otherwise be due and Lessor shall pay same from monies received from Lessee.
3.4 Net Lease Provision.
(a) The Rent shall be paid absolutely net to Lessor, so that this Lease
shall yield to Lessor the full amount of the installments of Base Rent,
Percentage Rent and Additional Charges throughout the Term, all as more fully
set forth below, but subject to any other provisions of this Lease that
expressly provide for adjustment or abatement of Rent or other charges or
expressly provide that certain Impositions (including without limitation Real
Estate Taxes, Capital Impositions and Personal Property Taxes), Capital
Expenditures and other expenses or maintenance shall be paid or performed by
Lessor.
(b) Except as otherwise specifically provided in this Lease, and except
for loss of any Franchise Agreement solely by reason of any action or inaction
by Lessor, Lessee, to the extent permitted by law, shall remain bound by this
Lease in accordance with its terms and shall neither take any action without the
written consent of Lessor to modify, surrender or terminate the same, nor seek
nor be entitled to any abatement, deduction, deferment or reduction of the Rent,
or set off against the Rent, nor shall the obligations of Lessee be otherwise
affected by reason of (a) any damage to, or destruction of, any Leased Property
or any portion thereof from whatever cause or any Taking of the Leased Property
or any portion thereof, (b) the lawful or unlawful prohibition of, or
restriction upon, Lessee's use of the Leased Property, or any portion thereof,
or the interference with such use by any Person or by reason of eviction other
than by paramount title except as otherwise specifically provided in this Lease
and except to the extent that a court of competent jurisdiction has issued a
final, nonappealable order determining that Lessee was constructively evicted
from the Leased Property, (c) any claim which Lessee has or might have against
Lessor by reason of any default or breach of any warranty by Lessor under this
Lease or any other agreement between Lessor and Lessee, or to which Lessor and
Lessee are parties,
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(d) any bankruptcy, insolvency, reorganization, composition, readjustment,
liquidation, dissolution, winding up or other proceedings affecting Lessor or
any assignee or transferee of Lessor, or (e) for any other cause whether similar
or dissimilar to any of the foregoing other than a discharge of Lessee from any
such obligations as a matter of law. Lessee hereby specifically waives all
rights, arising from any occurrence whatsoever, which may now or hereafter be
conferred upon it by law to (1) modify, surrender or terminate this Lease or
quit or surrender the Leased Property or any portion thereof, or (2) entitle
Lessee to any abatement, reduction, suspension or deferment of the Rent or other
sums payable by Lessee hereunder, except as otherwise specifically provided in
this Lease and except to the extent that a court of competent jurisdiction has
issued a final, nonappealable order determining that Lessee was constructively
evicted from the Leased Property. The obligations of Lessee hereunder shall be
separate and independent covenants and agreements and the Rent and all other
sums payable by Lessee hereunder shall continue to be payable in all events
unless the obligations to pay the same shall be terminated pursuant to the
express provisions of this Lease or by termination of this Lease other than by
reason of an Event of Default.
3.5 Material Changes in Economic Climate.
(a) In the event of the occurrence of a Force Majeure and a
Hotel Market Decline, Lessor and Lessee shall, in good faith, negotiate possible
modifications to the Base Rent and Percentage Rent to reduce such Base Rent and
Percentage Rent to recent market rates for hotel REIT leases for similar hotel
properties in the Hotel's Competitive Set, retroactively effective as of the
first calendar month of the Term following the last day of the six-month period
during which such Hotel Market Decline has occurred with the excess of Base Rent
and Percentage Rent actually paid for such period over the reduced Base Rent and
Percentage Rent, plus interest thereon at the Base Rate, to be credited to the
next payments of Rent due and owing hereunder. If Lessor and Lessee are unable
to agree that a Force Majeure or a Hotel Market Decline has occurred, within
thirty (30) days after the date of written certification from Lessee to Lessor
that a Force Majeure and Hotel Market Decline has occurred (accompanied by
reasonably detailed computations and documentation to support such assertion),
the matter may be submitted by either party to arbitration under Section 22.2
hereof for resolution (during which period Lessee shall continue to pay Base
Rent and Percentage Rent as required under Section 3.1 of this Lease). If,
within ninety (90) days (during which period Lessee shall continue to pay Base
Rent and Percentage Rent as required under Section 3.1 of this Lease) following
the date of such written certification from Lessee (or the date of a decision of
an arbitrator if required hereunder to determine that a Force Majeure and Hotel
Market Decline has occurred), Lessor and Lessee are unable to agree upon the
amount of reduction in Base Rent and Percentage Rent contemplated hereby, Lessee
shall have the option to terminate this Lease upon not less than thirty (30)
days prior written notice to Lessor.
(b) In the event of the occurrence of a National Economic
Decline and a Regional Market Decline, Lessor and Lessee shall, in good faith,
negotiate (i) possible modifications to the Base Rent and Percentage Rent to
reduce such Base Rent and Percentage
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Rent to recent market rates for hotel REIT leases for similar hotel properties
in the Hotel's Competitive Set, and (ii) possible modifications to the Base and
Percentage Rent payable under each of the Other Leases for Other Hotels in the
same Region (as defined in the STR Reports) as the Hotel to reduce such Base
Rent and Percentage Rent to recent market rates for hotel REIT leases for
similar hotel properties in the Hotel's Competitive Set, in each case
retroactively effective as of the first calendar month of the Term following the
last day of the six-month period during which such Regional Market Decline has
occurred with the excess of Base Rent and Percentage Rent actually paid for such
period over the reduced Base Rent and Percentage Rent, plus interest thereon at
the Base Rate, to be credited to the next payments of Rent due and owing
hereunder. If, within thirty (30) days after the date of written certification
from Lessee to Lessor that a National Economic Decline and Regional Market
Decline has occurred (accompanied by reasonably detailed computations and
documentation to support such assertion), Lessor and Lessee are unable to agree
that a National Economic Decline or Regional Market Decline has occurred, the
matter may be submitted by either party to arbitration under Section 22.2 hereof
for resolution (during which period Lessee shall continue to pay Base Rent and
Percentage Rent as required under Section 3.1 of this Lease). If, within ninety
(90) days (during which period Lessee shall continue to pay Base Rent and
Percentage Rent as required under Section 3.1 of this Lease) following the date
of such initial written certification from Lessee (or the date of a decision of
an arbitrator if required hereunder to determine that a National Economic
Decline and Regional Market Decline has occurred), Lessor and Lessee are unable
to agree upon the amount of reduction in Base Rent and Percentage Rent
contemplated hereby, Lessee shall have the option, upon not less than sixty (60)
days prior written notice to Lessor, to terminate all (but not less than all) of
the Existing Leases of hotels in the same Region as the Hotel, including this
Lease.
3.6 Rent Adjustment: Basic Assumptions Incorrect. Except to the extent
that doing so would cause Lessor to recognize income other than "rents from real
property" as defined in Section 856(d) of the Code, notwithstanding anything
herein (other than Article 19) to the contrary, if (i) the facts and
circumstances underlying the documented, basic assumptions (as set forth in the
Master Hotel Agreement or the schedules thereto) upon which both Lessor and
Lessee have relied in determining the Base Rent, Room Revenue Breakpoint and
Percentage Rent payable hereunder become materially incorrect solely as a result
of (A) a material change occurring after the Commencement Date in the timing
(whether as to the commencement, duration and/or completion date) of any
Contemplated Renovations that were planned as of the Commencement Date, (B) a
decision to re-brand the Hotel that is made after the Commencement Date, (C) the
scope or cost of substantial renovations or other capital improvements (other
than Contemplated Renovations that were planned as of the Commencement Date) to
the Hotel, or (D) the implementation of any other hotel repositioning strategies
(that were not planned as of the Commencement Date) resulting in significant
disruption of the operations of the Hotel (collectively, a "REPOSITIONING"), and
(ii) Lessor and Lessee so agree in writing (or, with respect to Repositionings
(i) during the years 1999 and 2000 or (ii) that are approved by both Lessor and
Lessee, are directed to do so by an arbitrator, as set forth below), then Lessor
and Lessee shall, in good faith, negotiate modifications to the Base Rent, Room
Revenue Breakpoint and Percentage
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Rent to adjust (i.e., increase, decrease or reallocate among revenue categories)
such Base Rent, Room Revenue Breakpoint and Percentage Rent to reflect such
change in basic assumptions for the affected periods, using the same methodology
and other basic assumptions as were initially utilized in determining the Base
Rent, Room Revenue Breakpoint and Percentage Rent hereunder. If Lessor and
Lessee are unable to agree, within thirty (30) days after the date of written
certification from either Lessee or Lessor to the other party that a good faith
dispute exists as to the existence of the occurrence of a Repositioning during
1999 or 2000, or the adjustments to be made to the amounts or percentages for
the Base Rent, Room Revenue Breakpoint and Percentage Rent hereunder as a result
of any Repositioning, the dispute may be submitted by either party to
arbitration under Section 22.2 hereof for resolution (during which period Lessee
shall continue to pay Base Rent and Percentage Rent as required under Section
3.1 of this Lease); provided, however, that for purposes of applying the
procedures in Section 22.3 to such arbitration, the target deadline therein for
concluding the arbitration shall be shortened from ninety (90) days to thirty
(30) days.
3.7 Allocation of Rent. The parties hereto acknowledge and agree that
the Base Rent paid or payable by Lessee to Lessor hereunder shall, to the extent
relevant, be allocated between the personal property and real property
constituting Leased Property hereunder in direct proportion to the then
recognizable fair market value of such personal property and real property.
Percentage Rent in excess of Base Rent shall be allocated solely to real
property.
ARTICLE 4
BUDGETS AND FINANCIAL REPORTING
4.1 Revenue Budgets. Not later than ninety (90) days prior to the
commencement of each Lease Year, Lessee shall prepare and submit to Lessor a
proposed Gross Revenue target for the following Lease Year. Not later than sixty
(60) days prior to the commencement of each Lease Year, Lessee shall prepare and
submit to Lessor for its review a proposed Gross Revenue budget for the
following Lease Year (the "REVENUE BUDGET"), prepared in accordance with the
requirements of this Section 4.1. The Revenue Budget shall be prepared in
accordance with the Uniform System to the extent applicable and show by month
and quarter and for the Lease Year to date the degree of detail specified by the
Uniform System for monthly statements, and in accordance with the detail level
of monthly financial statements, the following:
(a) Lessee's good faith reasonable estimate of Gross Revenues,
Room Revenues (including room rates), Food Sales Revenues, Beverage Sale
Revenues, Telephone Revenues and Other Revenues for the Hotel for the
forthcoming Lease Year itemized on schedules on a monthly and quarterly basis,
as approved by Lessor and Lessee, together with the assumptions, in narrative
form, forming the basis of such schedules and a cash flow projection;
(b) A narrative description of the program for advertising and
marketing the Hotel for the forthcoming Lease Year, including a narrative
description of the program for marketing and managing the Hotel for the
forthcoming Lease Year, including, among other
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things, details as to significant accounts and customers, competitor performance
(to the extent available), existing, new and projected supply analysis, demand
analysis, estimated market penetration by market segment (to the extent
available), target accounts, marketing and advertising budgets, changes in
personnel policies, staffing levels, major events plans, franchise issues and
other matters affecting the performance and operation of the Hotel and
containing a detailed budget itemization of proposed expenditures by category
and the assumptions, in narrative form, forming the basis of such budget
itemization; and
(c) Lessee's good faith proposal for (i) the apportionment of
Base Rent to be included in the Annual Budget for each calendar quarter (and for
each calendar month during such quarter) of such Lease Year, (ii) the
apportionment of the Room Revenue Breakpoint to be included in the Annual Budget
as the Quarterly Room Revenue Breakpoint for each calendar quarter of such Lease
Year, and (iii) the resulting computation of Percentage Rent payable for each
calendar quarter of such Lease Year. (In apportioning Base Rent for each month
and in setting the Quarterly Room Revenue Breakpoint for each quarter, Lessor
and Lessee will attempt to ensure, to as great a degree as is possible during
the preparation of the Annual Budget, that the sum of the Rent projected to be
paid for each calendar quarter will equal the amount of projected Rent that
would have been paid had the amount of projected Rent been calculated on an
annual basis rather than on a quarterly basis. Without limiting the generality
of the foregoing: (1) the amount of Base Rent apportioned to each month will be
the amount, based on the agreed projections that form the basis for the Annual
Budget, that is least likely to result in the Base Rent apportioned to any month
exceeding one-third of the Quarterly Percentage Rent Computation for the quarter
in which such month falls, and (2) the Quarterly Room Revenue Breakpoint will be
the amount that is expected, based on such projections, to maximize the amount
of any Percentage Rent projected to be paid based on the First Tier Room Revenue
Percentage during any Lease Year and to minimize the amount of any Percentage
Rent projected to be paid based on the Second Tier Room Revenue Percentage in
any Lease Year. The parties anticipate that their compliance with the foregoing
objectives will typically result in Base Rent for each month and the Quarterly
Room Revenue Breakpoint for each quarter being generally based upon the
proportion of projected Room Revenues for such month or quarter, respectively,
compared to projected Room Revenues for the applicable Lease Year. This
Subsection 4.1(c) is intended to express the parties' mutual intent as to the
agreed objective with respect to the apportionment of the then applicable amount
of the annual Base Rent and the Room Revenue Breakpoint for purposes of
preparation of the Annual Budget for each Lease Year, and shall not constitute a
modification of any provision of this Lease regarding the accrual or payment of
Rent hereunder.)
4.2 Operating Budgets. Not later than the commencement of each Lease
Year, Lessee shall have prepared and submitted to Lessor an operating budget in
form reasonably acceptable to Lessor (the "OPERATING BUDGET") for that Lease
Year prepared in accordance with the Uniform System to the extent applicable and
that includes, without limitation, an amount equal to not less than four and
one-half percent (4.5%) of estimated Gross Revenues allocated for estimated cost
("M&R EXPENSE") of maintenance and repairs (other than Capital Improvements)
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to the Hotel during such Lease Year. Unless required by the terms of any
Franchise Agreement, Lessee shall not make any changes to the current methods or
categories by which Gross Revenues are budgeted or accounted for by Lessee or
its Manager in its Revenue Budget for calendar year 1998 without the prior
written consent of Lessor, which consent shall not be unreasonably withheld. In
the event that the amount actually incurred by Lessee for M&R Expense for the
Hotel for any Lease Year (the "M&R SHORTFALL YEAR") is less than four and
one-half percent (4.5%) of Gross Revenues for such Lease Year ("MINIMUM M&R"),
notwithstanding the foregoing provisions of this Section 4.2, Lessee shall be
obligated (i) to prepare and submit to Lessor for its approval the Operating
Budget for the Lease Year following the Shortfall Year (the "M&R CURE YEAR"), at
the same time as, and according to the procedure herein provided for, review and
approval of the Annual Budget for such subsequent Lease Year, and (ii) without
limiting the generality of the foregoing, to include in such Operating Budget
Lessee's good faith reasonable estimate of Gross Operating Expenses for the
Hotel for such M&R Cure Year, itemized on schedules on a monthly and quarterly
basis, in accordance with the Uniform System and as approved by Lessor and
Lessee, including without limitation an amount, allocated for M&R Expense equal
to not less than the sum of (A) four and one-half percent (4.5%) of estimated
Gross Revenues, plus (B) the amount by which Lessee failed to incur Hotel M&R
Expense at least equal to the Minimum M&R for the M&R Shortfall Year, together
with the assumptions, in narrative form, forming the basis of such schedules
(unless Lessor agrees to a lesser amount in the exercise of its reasonable
discretion).
4.3 Capital Budget. Not later than sixty (60) days prior to the
commencement of each Lease Year, Lessee shall prepare and submit to Lessor a
capital budget (the "CAPITAL BUDGET") prepared in accordance with this Section
4.3. The Capital Budget shall be prepared in accordance with the Uniform System
to the extent applicable and shall set forth proposed Capital Expenditures for
the ensuing Lease Year, including without limitation an emergency fund in the
amount of approximately fifteen percent (15%) of the Capital Reserve for such
Lease Year, together with an estimate of the amounts to be spent for the repair,
replacement, or refurbishment of Furniture, Fixtures and Equipment and an
estimate of the amounts to be spent on Capital Improvements during the current
and the next three (3) Lease Years, including a project-by-project schedule of
estimated start and completion dates. The Capital Budget will include, without
limitation, all Capital Expenditures that Lessor is required to make hereunder,
including expenditures for compliance with any PIP or Contemplated Renovations.
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4.4 Annual Budget Approval; Budget Disputes.
(a) Lessor shall have thirty (30) days after the date on which
it receives the Revenue Budget and the Capital Budget (collectively, the "ANNUAL
BUDGET") to review, approve, disapprove or change the entries and information
appearing in the Annual Budget. If the parties are not able to reach agreement
on the Annual Budget for any Lease Year during Lessor's thirty (30) day review
period, the parties shall attempt during the subsequent fifteen (15) day period
to resolve any disputes, which attempt shall include, if requested by either
party, at least one (1) meeting of executive-level officers of Lessor and
Lessee. Lessor and Lessee shall act promptly, reasonably and in good faith in
seeking to resolve such disputes and in arriving at a mutually acceptable Annual
Budget on or before December 15th prior to the respective Lease Year. In the
event the parties are still not able to reach agreement on the Annual Budget for
any particular Lease Year after complying with the foregoing requirements of
this Section 4.4, the parties shall adopt such portions of the Revenue Budget
and the Capital Budget as they may have agreed upon, and any matters not agreed
upon shall be referred to arbitration as provided for in Section 22.2 hereof.
Pending the results of such arbitration or the earlier agreement of the parties,
(i) if the Revenue Budget has not been agreed upon, for the first ninety (90)
days of the new Lease Year the Leased Property will be operated in a manner
reflecting the prior Fiscal Year's actual Gross Revenues, and thereafter the
Leased Property will be operated for the full Lease Year (including the first 90
days thereof) in a manner consistent with the prior Lease Year's Operating
Budget, in each case adjusted pursuant to Subsection 3.1(d) hereof until a new
Revenue Budget is adopted, and (ii) if the Capital Budget has not been agreed
upon, no Capital Expenditures shall be made unless the same are set forth in a
previously approved Capital Budget or are specifically required by Lessor or are
otherwise required to comply with this Lease, ground or building leases,
Mortgages or Legal Requirements or are Emergency Capital Expenditures.
(b) The Capital Budget, once approved and as approved, shall
form the basis on which Capital Expenditures for the Leased Property shall be
made. Unless such Capital Expenditures are otherwise permitted in writing by
Lessor or are otherwise required to comply with Legal Requirements or are
Emergency Capital Expenditures, Lessee agrees to use reasonable best efforts not
to cause or permit any Capital Expenditures for a Lease Year in excess of those
set forth in the Capital Budget ("EXCESS CAPITAL Expenditures"). If,
notwithstanding Lessee's reasonable best efforts, Excess Capital Expenditures
are contemplated, Lessee shall provide Lessor a written explanation of such
expenditures, which shall include (a) estimates of the Excess Capital
Expenditures, (b) the basis upon which such estimates were made, (c) the reasons
for such variances from the budgeted Capital Expenditures for such items and (d)
the Lessee's plan, if any, to reduce such Capital Expenditures in the future or
avoid Capital Expenditures on such items which are in excess of the amounts
budgeted for such items in the future. Lessee shall provide Lessor any
additional information regarding Excess Capital Expenditures, and from time to
time provide Lessor with status reports on the Excess Capital Expenditures and
the implementation of any plan to reduce or avoid such Excess Capital
Expenditures, each as reasonably requested by Lessor or its representatives.
Notwithstanding the foregoing, expenditures in excess of 105% of the amount
budgeted for an item in a Capital Budget may be made by Lessee (i) for Real
Estate Taxes, Personal Property Taxes, Capital Impositions and insurance and
utility expenses resulting from unanticipated rate changes, and
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(ii) if such expenditures are Emergency Capital Expenditures. Lessee shall
promptly report to Lessor in writing any actual or anticipated deviation from
the Capital Budget resulting from the application of the preceding sentence. In
the event that Lessee fails to provide the Notices, information or reports
required under this Section 4.4, then Lessor, in addition to its other rights
and remedies under this Lease and under applicable law, shall have the right to
submit the matter to arbitration under Section 22.2 hereof.
(c) Lessee will, upon request from time to time, provide
information regarding the Hotel's status with respect to the Operating Budget,
the Revenue Budget and the Capital Budget and will make available its financial
officers for personal or telephone meetings to discuss such matters.
4.5 Disclosure of Financial and Portfolio Information.
(a) At any time and from time to time upon not less than ten
(10) days Notice by Lessor, Lessee will furnish to Lessor or any Person
designated by Lessor an Officer's Certificate certifying that this Lease is
unmodified and in full force and effect (or that this Lease is in full force and
effect as modified and setting forth the modifications), the date to which the
Rent has been paid, whether to the knowledge of Lessee there is any existing
default or Event of Default hereunder by Lessor or Lessee, and such other
information as may be reasonably requested by Lessor. Any such certificate
furnished pursuant to this Section may be relied upon by Lessor, any
underwriter, lender, investor and prospective purchaser of the Leased Property.
(b) At any time and from time to time upon not less than ten
(10) days notice by Lessee, Lessor will furnish to Lessee or to any Person
designated by Lessee an estoppel certificate certifying that this Lease is
unmodified and in full force and effect (or that this Lease is in full force and
effect as modified and setting forth the modifications), the date to which Rent
has been paid, whether to the knowledge of Lessor there is any existing default
or Event of Default on Lessee's part hereunder, and such other information as
may be reasonably requested by Lessee. Any such certificate furnished pursuant
to this Section may be relied upon by Lessee, any underwriter, lender, investor
and prospective purchaser of the assets of Lessee.
(c) Throughout the Term, Lessee will furnish to Lessor all
financial statements and financial information, and access to Lessee's books and
records as, when and to the extent required pursuant to Section 7 of the Master
Agreement. Lessee agrees to notify Lessor, from time to time at the request of
Lessor, of the location of any hotel or motel property Lessee or any Subsidiary
thereof owns, leases, operates, manages or has an interest in.
(d) Lessee will furnish, at Lessee's cost and expense, the
following statements and operating information to Lessor, each in a form
reasonably satisfactory to Lessor:
(i) to the extent available electronically to Lessee, each
Monday, a statement showing Gross Revenues by category, occupancy and revenue
per available room for
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(a) the Hotel and (b) the Hotel and any Other Hotels, for both (i) each day in
the seven (7) day period ended the immediately preceding Friday, (ii) such seven
(7) day period in the aggregate, and (iii) Lease Year to date;
(ii) on or before the 30th day of each calendar month,
average daily rate, occupancy and RevPAR for the Hotel for such preceding month
(including a comparison to the Operating Budget);
(iii) on or before the 30th day of each calendar quarter,
detailed profit and loss and cash flow statements showing the results of
operation of the Hotel for such preceding quarter and the Lease Year to date
(including a comparison to the Operating Budget);
(iv) upon reasonable request, a written critique by the
general manager of the Hotel's revenue performance by category, setting forth in
narrative form any variations during the preceding month from the current Annual
Budget amount for such month (and the prior year's Annual Budget amount for the
same month) and including a preview of the Hotel's financial operations during
the current month;
(v) on or before the 15th day of each April, July and
October during the Term, an updated estimate for each calendar quarter remaining
in the Lease Year of the information required by Sections 4.1(a) and 4.3 hereof;
(vi) monthly STR Reports within five (5) days of Lessee's
receipt thereof;
(vii) within fifteen (15) days of Lessee's receipt
thereof, any inspection reports received from the Franchisor under any Franchise
Agreement;
(viii) with reasonable promptness, such financial and
other information (subject to a confidentiality agreement if required because of
the confidential or proprietary nature of the information) respecting the
financial condition and affairs of BHR and Lessee (A) as Lessor, FelCor or FSLP
may reasonably require or deem desirable in its discretion to file with or
provide to the SEC or any other governmental agency or any other Person, all in
the form, and either audited or unaudited, as Lessor may request in Lessor's
reasonable discretion, and (B) as may be reasonably necessary to confirm
compliance by Lessee and its Affiliates with the requirements of this Lease; and
(ix) such other information related to this Lease or the
Hotel as Lessor may reasonably request and that Lessee can provide without
unreasonable expense.
(e) If FelCor, FSLP or Lessor proposes to include in any
submission or filing with its lender, stock exchange or the SEC, Consolidated
Financials of Lessee delivered or required to be delivered hereunder and the
consent of Lessee's auditor is required for such inclusion, Lessee shall use
commercially reasonable efforts to cause its auditor to deliver
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promptly to Lessor the auditor's consent, in the form required, to the inclusion
in the submission or filing of the Consolidated Financials (including the report
of the auditor, if the Consolidated Financials to be included are audited).
Lessee shall reasonably cooperate with Lessor regarding Lessee's auditor's
compliance with such requests with the purpose of minimizing costs and delays.
Lessee shall reasonably cooperate with all requests made by its auditor, Lessor,
FelCor, FSLP or the SEC to promptly provide to the auditor, Lessor, FelCor, FSLP
or the SEC such information or documents, including consents and representation
letters, as may be reasonably necessary or desirable in connection with the
preparation, delivery, audit or inclusion in SEC filings, submissions or other
public documents, of information, including financial information, related to
the Leased Property, the operation and financial results of the Leased Property,
and the financial results and condition of the Lessee. Without limiting the
foregoing, the information shall be sufficient to permit the preparation of a
Management's Discussion and Analysis of Results of Operations and Financial
Condition with respect to the Lessee as may be required to be included in
reports and documents filed by FelCor or FSLP with the SEC. Lessee shall not be
obligated to incur material, additional, unreimbursed expense to prepare any
reports or information not specifically provided for herein that Lessor, FelCor
or FSLP may be required or elect to file with the SEC, and such material
additional third-party costs shall be paid or reimbursed by Lessor.
(f) If BHR or Lessee proposes to include in any submission or
filing with its lender, stock exchange or the SEC, Consolidated Financials of
Lessor delivered or required to be delivered hereunder and the consent of
Lessor's auditor is required for such inclusion, Lessor shall use commercially
reasonable efforts to cause its auditor to deliver promptly to Lessee the
auditor's consent, in the form required, to the inclusion in the submission or
filing of the Consolidated Financials (including the report of the auditor, if
the Consolidated Financials to be included are audited). Lessor shall reasonably
cooperate with Lessee regarding Lessor's auditor's compliance with such requests
with the purpose of minimizing costs and delays. Lessor shall reasonably
cooperate with all requests made by its auditor, Lessee, BHR or the SEC to
promptly provide to the auditor, BHR or the SEC such information or documents,
including consents and representation letters, as may be reasonably necessary or
desirable in connection with the preparation, delivery, audit or inclusion in
SEC filings, submissions or other public documents, of information, including
financial information, related to the Leased Property, the operation and
financial results of the Leased Property, and the financial results and
condition of the Lessor. Without limiting the foregoing, the information shall
be sufficient to permit the preparation of a Management's Discussion and
Analysis of Results of Operations and Financial Condition with respect to the
Lessor as may be required to be included in reports and documents filed by BHR
with the SEC. Lessor shall not be obligated to incur material, additional,
unreimbursed expense to prepare any reports or information not specifically
provided for herein that Lessee or BHR may be required or elect to file with the
SEC, and such material additional third-party costs shall be paid or reimbursed
by Lessee.
4.6 Confidentiality. Lessor and Lessee agree to, and agree to use
reasonable efforts to cause their Affiliates to, keep any non-public or
proprietary information delivered or made
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available to any other party or their Affiliates pursuant to this Article 4 or
otherwise in connection with the Lease or the Hotel confidential from any Person
other than (1) Persons employed by or retained by Lessor, Lessee or their
Affiliates, (2), subject to an appropriate confidentiality agreement, current
or prospective underwriters, lenders, investors and, prospective investors or
purchasers of the Hotel (provided, however, that any such non-public or
proprietary information delivered or made available to any such prospective
investor or purchaser of the Hotel may only consist of operational and
performance information about the Hotel and the Lease unless BHR and Lessee
otherwise consent, not to be unreasonably withheld) and (3) other Persons who
are expressly authorized in this Lease to receive such information (in each
case, each of whom shall be advised of, and shall agree to maintain, the
confidentiality of such information); provided, however, nothing herein shall
prevent any such Person from disclosing such information after prior notice to
Lessee or Lessor, as the case may be, as and to the extent required or requested
by applicable law, any Government or pursuant to legal process or in connection
with the exercise of any remedy under this Lease.
ARTICLE 5
IMPOSITIONS AND OTHER HOTEL COSTS
5.1 Payment of Impositions.
(a) Subject to the right of Lessor to contest same and
Subsection 5.1 (f) below, Lessor shall pay all Real Estate Taxes, Personal
Property Taxes and Capital Impositions before the fine, penalty, interest or
cost may be added for non-payment, to the extent the failure to do so could
materially and adversely affect the rights of the Lessee under this Lease, such
payments to be made directly to the taxing or other authorities where feasible.
(b) Subject to Article 12 relating to permitted contests and
Subsection 5.1 (f) below, Lessee will pay, or cause to be paid, all Impositions
(other than Real Estate Taxes, Personal Property Taxes and Capital Impositions,
which shall be paid by Lessor) before any fine, penalty, interest or cost may be
added for non-payment, such payments to be made directly to the taxing or other
authorities where feasible, and will promptly furnish to Lessor copies of
official receipts or other satisfactory proof evidencing such payments. Lessee's
obligation to pay such Impositions shall be deemed absolutely fixed upon the
date such Impositions become a lien upon the Leased Property or any part
thereof. If any such Imposition may, at the option of the taxpayer, lawfully be
paid in installments (whether or not interest shall accrue on the unpaid balance
of such Imposition), Lessee may exercise the option to pay the same (and any
accrued interest on the unpaid balance of such Imposition) in installments and
in such event, shall pay such installments occurring during the Term hereof
(subject to Lessee's right of contest pursuant to the provisions of Article 12
as the same respectively become due and before any fine, penalty, premium,
further interest or cost may be added thereto.
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(c) Lessor, at its expense, shall, to the extent required or
permitted by applicable law, prepare and file all tax returns in respect of
Lessor's net income, gross receipts, sales and use, single business, transaction
privilege, rent, ad valorem, franchise taxes, Real Estate Taxes, Personal
Property Taxes, Capital Impositions and taxes on its capital stock, and Lessee,
at its expense, shall, to the extent required or permitted by applicable laws
and regulations, prepare and file all other tax returns and reports in respect
of any other, Imposition as may be required by governmental authorities. If any
refund shall be due from any taxing authority in respect of any Imposition paid
by Lessee, the same shall be paid over to or retained by Lessee if no Event of
Default shall have occurred hereunder and be continuing. If an Event of Default
shall have occurred and be continuing, any such refund shall be paid over to or
retained by Lessor. Any such funds retained by Lessor due to an Event of Default
shall be applied as provided in Article 16. Lessor and Lessee shall, upon
request of the other, provide such data as is maintained by the party to whom
the request is made with respect to the Leased Property as may be necessary to
prepare any required returns and reports. Lessee shall file all personal
property tax returns with respect to Lessee's Personal Property in such
jurisdictions where it is legally required to so file. Lessor, to the extent it
possesses the same, and Lessee, to the extent it possesses the same, will
provide the other party, upon request, with cost and depreciation records
necessary for filing returns for any property so classified as personal
property. Where Lessor is legally required to file personal property tax
returns, Lessor shall provide Lessee with copies of assessment notices in
sufficient time for Lessee to file a protest.
(d) Lessor may, upon notice to Lessee, at Lessor's option and
at Lessor's sole expense, protest, appeal, or institute such other proceedings
(in its or Lessee's name) as Lessor may deem appropriate to effect a reduction
of Real Estate Taxes or Personal Property Taxes or Capital Impositions to be
paid by Lessor, and Lessee (at Lessor's expense as aforesaid) shall fully
cooperate with Lessor in such protest, appeal, or other action. Lessor hereby
agrees to indemnify, defend, and hold harmless Lessee from and against any
claims, obligations, and liabilities against or incurred by Lessee in connection
with such cooperation. Lessee may, upon notice to Lessor, at Lessee's option and
at Lessee's sole expense, protest, appeal, or institute such other proceedings
(in its or Lessor's name) as Lessee may deem appropriate to effect a reduction
of those Impositions to be paid by Lessee, and Lessor (at Lessee's expense as
aforesaid) shall fully cooperate with Lessee in such protest, appeal, or other
action. Lessee hereby agrees to indemnify, defend, and hold harmless Lessor from
and against any claims, obligations, and liabilities against or incurred by
Lessor in connection with such cooperation.
(e) Billings for any reimbursement of Personal Property Taxes
by Lessee to Lessor shall be accompanied by copies of a bill therefor and
payments thereof which identify the personal property with respect to which such
payments are made. Lessor, however, reserves the right to effect any such
protest, appeal or other action and, upon notice to Lessee, shall control any
such activity, which shall then go forward at Lessor's sole expense. Upon such
notice, Lessee, at Lessor's expense, shall cooperate fully with such activities.
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(f) Subject to the rights of Lessor and Lessee to contest same
as provided herein, Lessee shall pay thirteen percent (13%) and Lessor shall pay
eighty-seven (87%) of any sales or use taxes imposed by the State of Florida on
any of the payments of Rent by Lessee under this Lease. Lessee shall be solely
responsible for all sales or use taxes in imposed by any other State or taxing
jurisdiction upon the payments of Rent by Lessee under this Lease.
5.2 Notice of Impositions. To the extent Lessor is notified of any
Impositions, Lessor shall give prompt Notice to Lessee of such Impositions
payable by Lessee hereunder, provided that Lessor's failure to give any such
Notice shall in no way diminish Lessee's obligations hereunder to pay any such
Impositions that are Lessee's responsibility hereunder, but such failure shall
obviate any default hereunder for a reasonable time after Lessee receives Notice
of any Imposition which it is obligated to pay during the first taxing period
applicable thereto. To the extent received by it, Lessee shall give prompt
notice to Lessor and furnish Lessor with copies of all assessment notices for
Real Estate Taxes, Personal Property Taxes and Capital Impositions in sufficient
time for Lessor to file a protest and pay such taxes without penalty. Lessor
shall furnish Lessee with evidence of payment of Real Estate Taxes, Personal
Property Taxes and Capital Impositions upon request.
5.3 Adjustment of Impositions. Impositions payable by Lessee that are
imposed in respect of the tax-fiscal period during which the Term terminates
shall be adjusted and prorated between Lessor and Lessee, whether or not such
Imposition is imposed before or after such termination, and Lessee's obligation
to pay its prorated share thereof after termination shall survive such
termination.
5.4 Utility Charges. Lessee will be solely responsible for obtaining
and maintaining utility services to the Leased Property and will pay or cause to
be paid all charges for electricity, gas, oil, water, sewer and other utilities
used in the Leased Property during the Term.
5.5 Insurance Premiums. Each of Lessor and Lessee will pay or cause to
be paid all premiums for the insurance coverages required to be maintained by it
under Article 13.
5.6 Franchise Fees. Lessee will maintain in full force and effect, and
pay or cause to be paid all fees and other charges payable pursuant to, any
Franchise Agreement with respect to the Hotel (unless same constitute Capital
Expenditures or are otherwise Lessor's responsibility hereunder).
5.7 Ground Rent. In the event that Lessor's interest in the Land is
pursuant to a Ground Lease or sublease, Lessor shall be solely responsible for
the payment of any ground rent, building rent or subrent, as the case may be,
due with respect to the Leased Property.
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ARTICLE 6
OWNERSHIP OF LEASED PROPERTY; LESSEE'S PERSONAL PROPERTY
6.1 Ownership of the Leased Property. Lessee acknowledges that the
Leased Property is the property of Lessor and that Lessee has only the right to
the possession and use of the Leased Property upon the terms and conditions of
this Lease.
6.2 Lessee's Personal Property. Lessee will acquire and maintain
throughout the Term such Inventory and replacement photocopy, fax machines and
postage machines (collectively, "OFFICE MACHINES") as is required to operate the
Leased Property in the manner contemplated by this Lease. The Inventory,
including any additions thereto and/or replacements thereof, will be supplied
by, and remain the property of, Lessee. Lessee may (and shall as provided
hereinbelow), at its expense, install, affix or assemble or place on any parcels
of the Land or in any of the Improvements, any items of personal property
(including Inventory and Office Machines) owned by Lessee. Lessee, at the
commencement of the Term, and from time to time thereafter, shall provide Lessor
with an accurate list of all such items of Lessee's personal property
(collectively, including the Inventory and Office Machines, the "LESSEE'S
PERSONAL PROPERTY"). Lessee may, subject to the first sentence of this Section
6.2 and the conditions set forth below, remove any of Lessee's Personal Property
at any time during the Term or upon the expiration or any prior termination of
the Term. All of Lessee's Personal Property, other than Inventory, not removed
by Lessee within thirty (30) days following the expiration or earlier
termination of the Term shall be considered abandoned by Lessee and may be
appropriated, sold, destroyed or otherwise disposed of by Lessor without first
giving Notice thereof to Lessee, without any payment to Lessee and without any
obligation to account therefor. Lessee will, at its expense, repair and restore
the Leased Property to the condition required by Subsection 9.1(d), including
repair of all damage to the Leased Property caused by the removal of Lessee's
Personal Property, whether effected by Lessee or if permitted hereunder by
Lessor. Upon the expiration or earlier termination of the Term, Lessor, or its
designee, shall have the option to purchase all Inventory on hand at the Leased
Property at the time of such expiration or termination for a sale price equal to
Lessee's actual cost of such Inventory, as evidenced by invoices, receipts, or
other reasonable documentation or as reasonably estimated by Lessor in the
absence of such documentation. Lessee may make such financing arrangements,
title retention agreements, leases or other agreements with respect to Lessee's
Personal Property as it sees fit provided that Lessee first advises Lessor of
any such arrangement and such arrangement expressly provides that in the event
of Lessee's default thereunder, Lessor (or its designee) may assume Lessee's
obligations and rights under such arrangement.
6.3 Lessor's Lien. To the fullest extent permitted by applicable law,
Lessor is granted a lien and security interest on all Lessee's Personal Property
now or hereinafter placed in or upon the Leased Property, and such lien and
security interest shall remain attached to such Lessee's Personal Property until
payment in full of all Rent and other amounts due to Lessor hereunder; provided,
however, Lessor's lien and security interest shall be subordinate to that of any
non-Affiliate of Lessee which finances such Lessee's Personal Property or any
non-Affiliate
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conditional seller of such Lessee's Personal Property. Upon request, Lessor will
execute a subordination agreement containing terms and conditions satisfactory
to Lessor in the exercise of reasonable discretion. Lessee shall, upon the
request of Lessor and to the extent such action does not breach any of Lessee's
financing, execute such financing statements or other documents or instruments
reasonably requested by Lessor to perfect the lien and security interests herein
granted.
6.4 Lessor's Option to Purchase Lessee's Personal Property. Effective
on not less than thirty (30) days prior Notice given at any time within ninety
(90) days before the scheduled expiration of the Term, or upon at least ten (10)
days Notice if this Lease is terminated prior to the expiration date of the
final extension Term (or of the initial Term, if there are no extension Terms),
Lessor or its designee shall have the option to purchase all (but not less than
all) of Lessee's Personal Property relating to the Leased Property (other than
its interest under this Lease), at the expiration or termination of this Lease
for an amount (payable in cash on the expiration date of this Lease) equal to
(i) the Lessee's cost of the Inventory and (ii) the lesser of Lessee's cost, or
the fair market value, of all other of Lessee's Personal Property.
Notwithstanding any such purchase, Lessor shall obtain no rights to any service
mark, trade name, logo or other intellectual property used in connection with
the operation of the Hotel or the franchise system under the Franchise Agreement
unless separate agreement as to such use is reached with the Lessee and/or
applicable Franchisor or other owner of such franchise system as applicable.
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ARTICLE 7
CONDITION AND USE OF LEASED PROPERTY
7.1 Condition of the Leased Property. Lessee acknowledges receipt and
delivery of possession of the Leased Property. Lessee has examined and otherwise
has knowledge of the condition of the Leased Property and has found the same to
be satisfactory for its purposes hereunder. Lessee is leasing the Leased
Property "as is" in its present condition. Except as otherwise expressly
provided herein, Lessee waives any claim or action against Lessor in respect of
the condition of the Leased Property. LESSOR MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY
PART THEREOF, EITHER AS TO ITS MERCHANTABILITY OR FITNESS FOR USE, DESIGN OR
CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF
THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT
LESSEE TAKES THE LEASED PROPERTY SUBJECT TO ALL SUCH RISKS. LESSEE ACKNOWLEDGES
THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT.
Provided, however, to the extent permitted by law, Lessor hereby assigns to
Lessee all of Lessor's rights to proceed against any predecessor in title other
than Lessee (or an Affiliate of Lessee which conveyed the Property to, or was
the predecessor-by-merger to, Lessor or an Affiliate thereof) for breaches of
warranties or representations or for latent defects in the Leased Property.
Lessor shall fully cooperate with Lessee in the prosecution of any such claim,
in Lessor's or Lessee's name, all at Lessee's sole cost and expense. Lessee
hereby agrees to indemnify, defend and hold harmless Lessor from and against any
claims, obligations and liabilities against or incurred by Lessor in connection
with such cooperation.
7.2 Use of the Leased Property.
(a) Lessee covenants that it will proceed with all due
diligence and will exercise its reasonable best efforts to obtain and to
maintain all approvals needed to use and operate the Leased Property and the
Hotel under applicable local, state and federal law. Lessor covenants that it
will cooperate in good faith in all respects, at Lessee's expense, in connection
with Lessee's efforts to obtain and maintain such approvals.
(b) Lessee shall use or cause to be used the Leased Property
only as a hotel facility of the class and quality at least equal to that of the
Hotel as of the Commencement Date, and for such other uses as may be necessary
or incidental to such hotel facility use or such other or additional use as
otherwise approved in writing by Lessor (the "PRIMARY INTENDED USE"). Lessee
shall not use the Leased Property or any portion thereof for any other use
without the prior written consent of Lessor, which consent may be granted,
denied or conditioned in Lessor's sole discretion. No use shall be made or
permitted to be made of the Leased Property, other than the Primary Intended
Use, which will cause the cancellation or increase the premium of any insurance
policy covering the Leased Property or any part thereof (unless another adequate
policy satisfactory to Lessor is available and Lessee pays any premium
increase), nor shall Lessee sell or permit to be kept, used or sold in or about
the Leased Property any article which may be prohibited by Legal Requirements or
fire underwriter's regulations. Lessee shall, at its sole cost, comply with all
of the requirements pertaining to the Leased Property of any insurance
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board, association, organization or company necessary for the maintenance of
insurance, as herein provided, covering the Leased Property and Lessee's
Personal Property, unless such compliance requires the performance of a Capital
Improvement or the payment of a Capital Imposition, in which case Lessor shall
pay the cost of such Capital Improvement or Capital Imposition in order for
Lessee so to comply.
(c) Subject to any provisions of this Lease to the contrary,
Lessee covenants and agrees that during the Term it will (i) continuously
operate the Leased Property for the Primary Intended Use (subject to closures of
all or part of the Hotel during Unavoidable Occurrences and by prior agreement
with Lessor during the construction of PIP improvements and Contemplated
Renovations), (ii) keep in full force and effect and comply with all the
provisions of any Franchise Agreement (other than requirements with respect to
Capital Improvements and other obligations of Lessor hereunder), (iii) not
terminate or amend any Franchise Agreement without the consent of Lessor (which
consent shall not be unreasonably withheld), (iv) maintain appropriate
certifications and licenses for such use, (v) seek to maximize the Gross
Revenues generated therefrom consistent with sound business practices and
Lessee's concurrent goal of maximizing its net operating income therefrom and
(vi) upon request, keep Lessor advised of the status of any material or
uninsured litigation affecting the Leased Property.
(d) Lessor covenants and agrees that during the Term it will
(1) not take or allow any Affiliate to take or fail to take any action that
would interfere with, restrict or prohibit Lessee's operation of the Leased
Property as the Primary Intended Use, including, without limitation, modifying,
amending or terminating any Franchise Agreement or any licenses, Franchises,
permits, easements, leases, undertakings or agreements held by Lessor or such
Affiliate and pertaining to the Leased Property, and (2) comply with all the
provisions of any Franchise Agreement relating to Capital Improvements, the
payment of Real Estate Taxes, Personal Property Taxes, Capital Impositions and
other requirements thereof that are not the responsibility of Lessee hereunder.
(e) Lessee shall not commit or suffer to be committed any
waste on the Leased Property, or in the Hotel, nor shall Lessee cause or permit
any nuisance thereon. Lessee shall neither suffer nor permit the Leased Property
or any portion thereof, or Lessee's Personal Property, to be used in such a
manner as (1) might reasonably tend to impair Lessor's (or Lessee's, as the case
may be) title thereto or to any portion thereof, or (2) may reasonably make
possible a claim or claims of adverse usage or adverse possession by the public,
as such, or of implied dedication of the Leased Property or any portion thereof,
except as necessary in the ordinary and prudent operation of the Hotel (or other
Primary Intended Use) on the Leased Property.
7.3 Lessor to Grant Easements, etc. Lessor will, from time to time, so
long as no Event of Default has occurred and is continuing, at the request of
Lessee and at Lessee's cost and expense (but subject to the approval of Lessor,
which approval shall not be unreasonably withheld), (a) grant easements and
other rights in the nature of easements with respect to the
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Leased Property to third parties, (b) release existing easements or other rights
in the nature of easements which are for the benefit of the Leased Property, (c)
dedicate or transfer unimproved portions of the Leased Property for road,
highway or other public purposes, (d) execute petitions to have the Leased
Property annexed to any municipal corporation or utility district, (e) execute
amendments to any covenants and restrictions affecting the Leased Property and
(f) execute and deliver to any Person any instrument appropriate to confirm or
effect such grants, releases, dedications, transfers, petitions and amendments
(to the extent of its interests in the Leased Property), but only upon delivery
to Lessor of an Officer's Certificate stating that such grant, release,
dedication, transfer, petition or amendment is not detrimental to the proper
conduct of the business of Lessee on the Leased Property and (unless Lessor is
otherwise receiving fair value for any reduction in value of the Leased
Property) does not materially reduce the value of the Leased Property.
ARTICLE 8
LESSEE'S COMPLIANCE WITH LAW; ENVIRONMENTAL COVENANTS
8.1 Compliance with Legal and Insurance Requirements, etc. Subject to
Subsections 8.2(b) and 8.3(b) below and Article 12 relating to permitted
contests, and subject further to the obligations of Lessor with respect to
Capital Improvements as set forth in Subsection 9.1(b), Lessee, at its expense,
will promptly (a) comply with all applicable Legal Requirements and Insurance
Requirements in respect of the use, operation, maintenance, repair and, to the
extent of its obligations hereunder, restoration of the Leased Property, and (b)
procure, maintain and comply with all appropriate permits, licenses and other
authorizations required for any use of the Leased Property and Lessee's Personal
Property then being made, and for the proper operation, maintenance and repair
of the Leased Property or any part thereof.
8.2 Legal Requirement Covenants.
(a) Subject to Subsection 8.3(b) below, Lessee covenants and
agrees that the Leased Property and Lessee's Personal Property shall not be used
for any unlawful purpose, and that Lessee shall not permit or suffer to exist
any unlawful use of the Leased Property by others. Lessee shall acquire and
maintain all appropriate licenses, certifications, permits and other
authorizations and approvals needed to operate the Leased Property in its
customary manner for the Primary Intended Use. Lessee further covenants and
agrees that Lessee's use of the Leased Property and maintenance, alteration, and
operation of the same, and all parts thereof, shall at all times conform to all
Legal Requirements, unless the same are finally determined by a court of
competent jurisdiction to be unlawful (and Lessee shall use its reasonable best
efforts to cause all such sub-tenants, invitees or others to so comply with all
Legal Requirements). Lessee may, however, upon prior Notice to Lessor, contest
the legality or applicability of any such Legal Requirement or any licensure or
certification decision if Lessee maintains such action in good faith, with due
diligence, without prejudice to Lessor's rights hereunder, and at Lessee's sole
expense. If by the terms of any such Legal Requirement compliance therewith
pending the
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prosecution of any such proceeding may legally be delayed without the incurrence
of any lien, charge or liability of any kind against the Hotel or Lessee's
leasehold interest therein and without subjecting Lessee or Lessor to any
liability, civil or criminal, for failure so to comply therewith, Lessee may
delay compliance therewith until the final determination of such proceeding. If
any lien, charge or civil or criminal liability would be incurred by reason of
any such delay, Lessee, with the prior written consent of Lessor, which consent
shall not be unreasonably withheld, may nonetheless contest as aforesaid and
delay as aforesaid provided that such delay would not subject Lessor to criminal
liability and Lessee both (a) furnishes to Lessor security reasonably
satisfactory to Lessor against any loss or injury by reason of such contest or
delay and (b) prosecutes the contest with due diligence and in good faith.
(b) As between Lessor and Lessee, Lessee is solely responsible
for all liabilities or obligations of any kind with respect to employees at the
Leased Property during the Term, except to the extent such compliance requires,
and Lessor fails to pay the cost of, the performance of a Capital Improvement,
or remediation or other action with respect to an Environmental Liability for
which Lessee is indemnified under Subsection 8.3(b) or the payment of a Capital
Imposition. Without limiting the generality of the foregoing sentence, and
except as otherwise provided in Section 2.5(c) hereof, Lessee is solely
responsible for any required compliance with the Worker Adjustment, Retraining
and Notification Act of 1988 (the "WARN ACT") or any similar state law
applicable to the Leased Property; any required compliance with the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"); and all alleged
and actual obligations and claims arising from or relating to any employment
agreement, collective bargaining agreement or employee benefit plans, any
grievances, arbitrations, or unfair labor practice charges, and relating to
compliance with any applicable state or federal labor employment law, including
but not limited to all laws pertaining to discrimination, workers' compensation,
unemployment compensation, occupational safety and health, unfair labor
practices, family and medical leave, and wages, hours or employee benefits.
Lessee agrees to indemnify and defend and hold harmless Lessor from and against
any claims relating to any of the foregoing matters. Lessee further agrees to
reimburse Lessor for any and all losses, damages, costs, expenses, liabilities
and obligations of any kind, including without limitation reasonable attorneys'
fees and other legal costs and expenses, incurred by Lessor in connection with
any of the foregoing matters.
Notwithstanding the Lessee's obligations under Section 8.1 to
obtain and maintain all permits and licenses required for the use of the Leased
Property, and without limiting any obligations of Lessee hereunder, if (i)
applicable law requires that the owner (rather than a lessee) of a hotel be the
licensee under the required liquor license for the Hotel or (ii) the former
owner of the Hotel is holding the liquor license and continuing to exercise
management and supervision of the liquor services at the Hotel pending transfer
of the license to Lessor or Lessee, the Lessee shall indemnify and hold Lessor
harmless from any liability, damages or claims (a) arising in connection with
liquor operations at the Hotel during such period of time following the
Commencement Date, except to the extent caused by Lessor's gross negligence or
willful
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misconduct or (b) made by or through the former owner with respect to liquor
operations at the Hotel following the Commencement Date.
8.3 Environmental Covenants. Lessor and Lessee (in addition to, and not
in diminution of, Lessor's and Lessee's covenants and undertakings in Sections
8.1 and 8.2 hereof) covenant and agree as follows:
(a) At all times hereafter until such time as all liabilities,
duties or obligations of Lessee to Lessor under this Lease have been satisfied
in full, Lessee shall fully comply with all Environmental Laws applicable to the
Leased Property and the operations thereon, except to the extent that compliance
would require Lessee to incur an obligation for a Capital Improvement or for
remediation of Environmental Liabilities for which Lessee is indemnified under
this Section 8.3. Lessee agrees to give Lessor Notice of the following, promptly
after Lessee receives knowledge thereof: (1) all Environmental Liabilities; (2)
all pending, threatened or anticipated Proceedings, and all notices, demands,
requests or investigations, relating to any Environmental Liability or relating
to the issuance, revocation or change in any Environmental Authorization
required for operation of the Leased Property; (3) all Releases at, on, in,
under or in any way affecting the Leased Property, or any Release at, on, in or
under any property adjacent to the Leased Property; and (4) all facts, events or
conditions that could reasonably lead to the occurrence of any of the
above-referenced matters.
(b) Lessor hereby agrees to defend, indemnify and save
harmless any and all Lessee Indemnified Parties from and against any and all
Environmental Liabilities (including, without limitation, Environmental
Liabilities to the extent resulting from conditions existing at the Leased
Property at the Commencement Date or from Releases or other violations of
Environmental Laws (without fault on the part of Lessee) originating on other
property but affecting the Leased Property) other than Environmental Liabilities
to the extent caused by the grossly negligent acts or failures to act or wilful
misconduct of Lessee, Manager or subtenants of Lessee or Manager, and their
respective employees, agents or independent contractors.
(c) Lessee hereby agrees to defend, indemnify and save
harmless any and all Lessor Indemnified Parties from and against any and all
Environmental Liabilities to the extent caused by the grossly negligent acts or
failures to act or wilful misconduct of Lessee, Manager or subtenants of Lessee
or Manager, and their respective employees, agents or independent contractors.
(d) At any time any Indemnified Party has reason to believe
circumstances exist which could reasonably result in an Environmental Liability
(or in the event Lessor or its lender requires such access in connection with a
sale or financing of the Leased Property), upon reasonable prior written notice
to Lessee stating such Indemnified Party's basis for such belief, an Indemnified
Party shall be given immediate access to the Leased Property (including, but not
limited to, the right to enter upon, investigate, drill wells, take soil
borings, excavate, monitor, test, cap and use available land for the testing of
remedial technologies), Lessee's employees, and
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to all relevant documents and records regarding the matter as to which a
responsibility, liability or obligation is asserted or which is the subject of
any Proceeding; provided that such access may be conditioned or restricted as
may be reasonably necessary to ensure compliance with law and the safety of
personnel and facilities or to protect confidential or privileged information.
All Indemnified Parties requesting such immediate access and cooperation shall
endeavor to coordinate such efforts to result in as minimal interruption of the
operation of the Leased Property as practicable. Lessor agrees to indemnify and
hold harmless Lessee from and against any and all liabilities, costs, damages,
charges, fees or expenses arising in connection with, and to the extent caused
by a Lessor Indemnified Party, the access to or use of the Leased Property by a
Lessor Indemnified Party pursuant to this subsection (d).
(e) The indemnification rights and obligations provided for in
this Article 8 (1) shall be in addition to any indemnification rights and
obligations provided for elsewhere in this Lease, and (2) shall survive the
termination of this Lease.
(f) For purposes of this Section 8.3, all amounts for which
any Indemnified Party seeks indemnification shall be computed net of any actual
income tax benefit resulting therefrom to such Indemnified Party, any insurance
proceeds received (net of tax effects) with respect thereto, and any amounts
recovered (net of tax effects) from any third parties based on claims the
Indemnified Party has against such third parties which reduce the damages that
would otherwise be sustained; provided, that in all cases, the timing of the
receipt or realization of insurance proceeds or income tax benefits or
recoveries from third parties shall be taken into account in determining the
amount of reduction of damages. Each Indemnified Party agrees to use its
reasonable efforts to pursue, or assign to Lessee or Lessor, as the case may be,
any claims or rights it may have against any third party which would materially
reduce the amount of damages otherwise incurred by such Indemnified Party.
(g) Notwithstanding anything to the contrary contained in this
Lease, if Lessor shall become entitled to the possession of the Leased Property
by virtue of the termination of this Lease or repossession of the Leased
Property, then Lessor may assign its indemnification rights under Section 8.3 of
this Lease to any Person to whom Lessor subsequently transfers the Leased
Property, subject to the following conditions and limitations, each of which
shall be deemed to be incorporated into the terms of such assignment, whether or
not specifically referred to therein:
(1) The indemnification rights referred to in this
section may be assigned only if a known Environmental
Liability then exists or if a Proceeding is then pending or,
to the knowledge of Lessee or Lessor, then threatened with
respect to the Leased Property;
(2) Such indemnification rights shall be limited to
Environmental Liabilities relating to or specifically
affecting the Leased Property; and
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(3) Any assignment of such indemnification rights
shall be limited to the immediate transferee of Lessor, and
shall not extend to any such transferee's successors or
assigns.
ARTICLE 9
MAINTENANCE, REPAIRS AND CAPITAL EXPENDITURES
9.1 Maintenance, Repairs and Capital Expenditures.
(a) Except as otherwise expressly provided in this Lease, and
except for conditions caused by Lessor's gross negligence or willful misconduct
(or that of its employees, agents or independent contractors), Lessee, at its
sole expense, will keep the Leased Property, and all private roadways, sidewalks
and curbs appurtenant thereto that are under Lessee's control, including windows
and plate glass, mechanical, electrical and plumbing systems and equipment
(including conduit and ductware), and non-load bearing interior walls, and
parking lot surfaces, in good order and repair (whether or not the need for such
repairs occurred as a result of Lessee's use, any prior use, the elements or the
age of the Leased Property, or any portion thereof), and, with reasonable
promptness, make all necessary and appropriate repairs, replacements, and
improvements thereto of every kind and nature, whether interior or exterior,
ordinary or extraordinary, foreseen or unforeseen or arising by reason of a
condition existing prior to the commencement of the Term of this Lease
(concealed or otherwise), or required by any governmental agency having
jurisdiction over the Leased Property. Lessee, however, shall be permitted to
prosecute claims against Lessor's predecessors in title (other than Lessor or an
Affiliate of Lessor which conveyed the Property to, or was the
predecessor-by-merger to, Lessor or an Affiliate thereof) for breach of any
representation or warranty or for any latent defects in the Leased Property to
be maintained by Lessee unless Lessor is already diligently pursuing such a
claim. All repairs shall, to the extent reasonably achievable, be at least
equivalent in quality to the original work. Lessee will not take or omit to take
any action, the taking or omission of which might materially impair the value or
the usefulness of the Leased Property or any part thereof for its Primary
Intended Use.
(b) Notwithstanding Lessee's obligations under Subsection
9.1(a) above or elsewhere in this Lease, unless caused by the gross negligence
or willful misconduct of Lessee, Manager or subtenants of Lessee or Manager, and
their respective employees, agents or independent contractors, Lessee shall not
be responsible for any Capital Improvements, including (without limitation)
Capital Improvements required by the Franchisor under the Franchise Agreement.
Lessor shall be responsible for all such Capital Improvements, including,
without limitation, Capital Improvements required to comply with all Legal
Requirements (including, without limitation, all Environmental Laws, the
Americans with Disabilities Act and any state or local handicap access laws and
regulations and all zoning and land use laws and regulations) and Capital
Improvements required to comply with any Franchise Agreement; subject to
Lessor's right to approve the Capital Budget pursuant to Article 4; provided,
however, that
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notwithstanding the foregoing or any other obligation of Lessor hereunder for
the cost of Capital Improvements required by a Franchise Agreement, Lessor shall
have the right, its sole (unreviewable) discretion, to refuse to make any
Capital Expenditure required by any Franchisor; provided, further, that if such
refusal directly results in a default under or termination of such Franchise
Agreement, Lessor shall be responsible for all of Lessee's damages caused
thereby, termination payments payable by Lessee under the terms of such
Franchise Agreement, application fees for a new franchise license reasonably
approved by Lessor, increased royalty fees and other costs arising out of such
refusal or out of the resulting need to apply for and enter into a substitute
franchise license agreement. Except as set forth in the preceding sentence or
elsewhere in this Lease, Lessor shall not under any circumstances be required to
build or rebuild any improvement on the Leased Property, or to make any repairs,
replacements, alterations, restorations or renewals of any nature or description
to the Leased Property, whether ordinary or extraordinary, foreseen or
unforeseen, or to make any expenditure whatsoever with respect thereto, in
connection with this Lease, or to maintain the Leased Property in any way.
Lessee hereby waives, to the extent permitted by law, the right to make repairs
at the expense of Lessor pursuant to any law in effect at the time of the
execution of this Lease or hereafter enacted. Lessor shall have the right to
give, record and post, as appropriate, notices of non-responsibility under any
mechanic's lien laws now or hereafter existing.
(c) If Lessor fails to make any Capital Expenditure required
to comply with Legal Requirements, after the expiration of all the applicable
notice and cure periods set forth in Section 24.3, or if Lessor fails to make
any Emergency Capital Expenditures promptly following notice from Lessee of an
Emergency Situation, or if an Emergency Capital Expenditure must be made
immediately (without allowing the time necessary to notify Lessor thereof) then
Lessee will have the right, but not the obligation, to make such Capital
Expenditures on behalf of and for the account of Lessor, whereupon Lessor shall
reimburse Lessee for the reasonable cost thereof, with interest thereon at the
Base Rate, within ten (10) days after receipt of documentation (with reasonable
detail as to the breakdown of costs incurred) evidencing such Capital
Expenditure.
(d) Nothing contained in this Lease and no action or inaction
by Lessor shall be construed as (1) constituting the request of Lessor,
expressed or implied, to any contractor, subcontractor, laborer, materialman or
vendor to or for the performance of any labor or services or the furnishing of
any materials or other property for the construction, alteration, addition,
repair or demolition of or to the Leased Property or any part thereof, or (2)
except as otherwise expressly provided herein, giving Lessee any right, power or
permission to contract for or permit the performance of any labor or services or
the furnishing of any materials or other property in such fashion as would
permit the making of any claim against Lessor in respect thereof or to make any
agreement that may create, or in any way be the basis for any right, title,
interest, lien, claim or other encumbrance upon the estate of Lessor in the
Leased Property, or any portion thereof.
(e) Lessee will, upon the expiration or prior termination of
the Term, vacate and surrender the Leased Property to Lessor in the condition in
which the Leased Property was originally received from Lessor, except as
repaired, rebuilt, restored, altered or added to as
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permitted or required by the provisions of this Lease and except for ordinary
wear and tear (subject to the obligation of Lessee to maintain the Leased
Property in good order and repair, as would a prudent owner, during the entire
Term of the Lease, to the extent required in Section 9.1(a)), or damage by
casualty or Condemnation (subject to any obligations of Lessee to restore or
repair as set forth in this Lease).
9.2 Encroachments, Restrictions, Etc. If any of the Improvements, at
any time, materially encroach upon any property, street or right-of-way adjacent
to the Leased Property, or violate the agreements or conditions contained in any
lawful restrictive covenant or other agreement affecting the Leased Property, or
any part thereof, or impair the rights of others under any easement or
right-of-way to which the Leased Property is subject, then promptly upon the
request of Lessor or at the behest of any Person affected by any such
encroachment, violation or impairment (in which case Lessee will immediately
notify Lessor thereof), Lessee shall, at Lessor's expense (except to the extent
that the encroachment or violation was the result of the gross negligence or
willful misconduct of Lessee, Manager or subtenants of Lessee or Manager, and
their respective employees, agents or independent contractors, in which case
Lessee shall bear such expense), subject to its right to contest the existence
of any encroachment, violation or impairment and in such case, in the event of
an adverse final determination, either (a) obtain valid and effective waivers or
settlements of all claims, liabilities and damages resulting from each such
encroachment, violation or impairment, whether the same shall affect Lessor or
Lessee or (b) make such changes in the Improvements, and take such other
actions, as Lessor in the good faith exercise of its judgment deems reasonably
practicable to remove such encroachment, and to end such violation or
impairment, including, if necessary, the alteration of any of the Improvements,
and in any event take all such actions as may be necessary in order to be able
to continue the operation of the Improvements for the Primary Intended Use
substantially in the manner and to the extent the Improvements were operated
prior to the assertion of such violation, impairment or encroachment. Any such
alteration shall be made in conformity with the applicable requirements of
Article 10. Lessee's obligations under this Section 9.2 shall be in addition to
and shall in no way discharge or diminish any obligation of any insurer under
any policy of title or other insurance held by Lessor or Lessee.
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ARTICLE 10
ALTERATIONS AND IMPROVEMENTS; LESSOR'S CAPITAL RESERVE
10.1 Alterations and Improvements. Without Lessor's prior written
consent, which consent shall not be unreasonably withheld, Lessee shall not have
the right to make any additions, modifications or improvements to the Leased
Property; provided, however, that Lessor may not withhold its consent if such
additions, modifications or improvements will not significantly alter the
character or purposes or detract from the value or operating efficiency of, and
will not impair the revenue-producing capability of, the Hotel and the Leased
Property, or adversely affect the ability of Lessee to comply with the
provisions of this Lease. The cost of any such permitted additions,
modifications or improvements to the Leased Property shall be paid by Lessee
unless otherwise provided herein or agreed by Lessor in writing, and all such
additions, modifications and improvements shall, without payment by Lessor at
any time, be included under the terms of this Lease and upon expiration or
earlier termination of this Lease shall pass to and become the property of
Lessor.
10.2 Salvage. All materials which are scrapped or removed in connection
with the making of repairs required by Articles 9 or 10 shall be or become the
property of Lessor or Lessee depending on which party is paying for or providing
the financing for such work.
10.3 Initial Upgrades.
(a) Upgrades Required by Franchisor. Lessor agrees to pay the
cost to install, construct and complete the improvements, alterations, upgrades
and refurbishments in and to the Improvements and acquisitions of Furniture,
Fixtures and Equipment required under any product improvement plan or other
upgrade program or requirement (collectively, a "PIP") necessary to qualify the
Hotel to initially operate or continue to operate under any Franchise Agreement,
but only to the extent so agreed under the Master Hotel Agreement or hereafter
approved by Lessor.
(b) Contemplated Renovations. Schedule 1 to the Master Hotel
Agreement sets forth a preliminary budget for certain improvements, alterations,
upgrades and/or refurbishments of and to various hotels (including acquisitions
of Furniture, Fixtures and Equipment) that are contemplated by BHR and FelCor
(the "CONTEMPLATED RENOVATIONS"). In the event any Contemplated Renovations
apply to the Hotel, Lessor and Lessee agree to work diligently and in good faith
to refine and finalize the plans and specifications, budgets and time schedules
for the Contemplated Renovations and Lessor agrees to pay the budgeted cost of
the Contemplated Renovations or such higher amount as may be approved by Lessor,
such approval not to be unreasonably withheld. The Contemplated Renovations may
include some or all of the items required by the PIP.
(c) Construction Services Agreement. In the event of a PIP, a
Contemplated Renovation or other previously unbudgeted Capital Improvement
(including a reconstruction of
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the Improvements following a casualty or Condemnation), Lessor and Lessee may,
in their sole discretion, enter into an agreement (a "CONSTRUCTION SERVICES
AGREEMENT") whereby Lessee, Manager or another Subsidiary of BHR will perform
construction advisory and supervisory services described therein for the fees
and other compensation described therein. Lessee has no obligation to provide
such services under this Lease other than pursuant to a Construction Services
Agreement.
10.4 Lessor Approval of Capital Expenditures. All Capital
Expenditures (individually or in the aggregate) whether pursuant to the Capital
Budget or otherwise, shall be subject to the approval of Lessor. Such approval
may be conditioned upon review and approval by Lessor of the plans and
specifications (including matters of design and decor) and the contracting and
purchasing of all labor, services and materials. Lessor or its representatives
shall have the right to require competitive bidding of contracts for Capital
Improvements, review all bids and monitor costs, time, quality and performance.
The foregoing restrictions shall not apply to Emergency Capital Expenditures
made by Lessee in amounts not to exceed $25,000 and with prior notice to Lessor
(if possible under the circumstances).
10.5 Lessor's Capital Reserve.
(a) Lessor shall be obligated to make available to Lessee
(which may be through an escrow required by a Holder) an amount equal to three
percent (3%) of Gross Revenues from the Hotel during each Lease Year ("CAPITAL
RESERVE") for Capital Improvements, the allocation for expenditure of which
shall be governed by the Capital Budget for such Lease Year. Upon written
request by Lessee to Lessor (stating the specific use to be made and subject to
the approval thereof by Lessor, which approval shall not be unreasonably
withheld and may be evidenced by Lessor's approval of the Capital Budget (if
such Capital Budget specifically describes such Capital Improvement), such funds
shall be made available by Lessor for Capital Expenditures set forth in the
Capital Budget; provided, however, that no Capital Expenditures shall be made to
purchase property (other than "real property" within the meaning of Treasury
Regulations Section 1.856-3(d)), to the extent that doing so would cause Lessor
to recognize income other than "rents from real property" as defined in Section
856(d) of the Code. Lessor's obligation shall be cumulative, but not compounded,
and any amounts that have accrued hereunder shall be payable in future periods
for such uses and in accordance with the procedure set forth herein. Lessee
shall have no interest in any accrued obligation of Lessor hereunder after the
termination of this Lease. All Capital Improvements shall be owned by Lessor
subject to the provisions of this Lease.
(b) Lessor's obligation with respect to Capital
Expenditures shall not be limited to amounts from time to time available in the
Capital Reserve, but Lessor may require that such Capital Reserve amounts be
expended prior to Lessor incurring any obligation to pay for Capital
Improvements with other funds.
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ARTICLE 11
FRANCHISE SYSTEM COMPLIANCE
11.1 Assignment or Execution of Franchise Agreement or
Guaranty of Franchise Agreement by Lessor. At Lessor's sole expense (limited, in
the case of all Holiday Inn Franchising, Inc. licenses, to the administrative
cost of processing such franchise assignments or agreements), on or about the
Commencement Date, the Franchise Agreement will be assigned to Lessee or, if
required by the Franchisor, Lessee will execute a new Franchise Agreement for
the Hotel. If the Franchisor requires as a condition to granting or allowing the
transfer, assignment or renewal of any Franchise Agreement approved by Lessor
that Lessor, as the owner of the Leased Property, become contingently liable (as
guarantor or indemnitor) with respect to the Franchise Agreement, Lessor will
take such actions and execute such documents as Lessee shall reasonably request
in order to become such a guarantor or indemnitor in order to secure such
transfer, assignment or renewal.
11.2 Compliance with Franchise Agreement by Lessee. To the
extent any of the provisions of the Franchise Agreement impose a greater
obligation on Lessee than the corresponding provisions of this Lease, then
Lessee shall be obligated to comply with the provisions of the Franchise
Agreement (other than requirements with respect to Capital Improvements for
which Lessor is responsible under this Lease and other obligations of Lessor
hereunder). It is the intent of the parties hereto that Lessee shall comply in
every respect with such provisions of the Franchise Agreement so as to avoid any
default thereunder during the term of this Lease. Lessee shall not terminate,
extend or enter into any material modification of the Franchise Agreement
without in each instance first obtaining Lessor's prior written consent, which
shall not be unreasonably withheld. Lessor and Lessee agree to cooperate with
each other in the event it becomes necessary to obtain a franchise extension or
modification or a new franchise for the Leased Property, and in any transfer of
the Franchise Agreement to Lessor or, any designee of Lessor or any successor to
Lessee upon the termination of this Lease. In the event of expiration or
termination of a Franchise Agreement, for whatever reason, Lessor will have the
right, in the exercise of its reasonable discretion, to approve any new
Franchise Agreement for the Hotel. If, upon any expiration or earlier
termination of this Lease (other than upon an Event of Default by Lessee), a
Franchise Agreement remains in effect, or would but for such expiration or
termination remain in effect, Lessor shall indemnify, defend and hold Lessee and
its Affiliates harmless with respect to the obligations and liabilities arising
thereunder after the date of expiration or termination of this Lease.
11.3 Compliance with Franchise Agreement by Lessor. To the
extent any of the provisions of the Franchise Agreement impose a greater
obligation on Lessor than the corresponding provisions of this Lease, then
Lessor shall be obligated to comply with the provisions of the Franchise
Agreement (other than requirements with respect to operational matters and other
obligations of Lessee hereunder). It is the intent of the parties hereto that
Lessor, to the extent of its obligations hereunder, shall comply in every
respect with the provisions of the Franchise Agreement so as to avoid any
default thereunder during the term of this Lease. To the extent Lessor is a
party thereto, Lessor shall not terminate, extend or enter
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into any material modification of the Franchise Agreement without in each
instance first obtaining Lessee's prior written consent, not to be unreasonably
withheld.
11.4 Changes in Franchise. Lessor and Lessee agree to
cooperate with each other in the event it becomes necessary to obtain a
franchise extension or modification or a new franchise for the Leased Property,
and in any transfer of any Franchise Agreement to any designee of Lessor or,
with Lessor's prior written consent, any successor to Lessee upon the
termination of this Lease. In the event of expiration or termination of a
Franchise Agreement, for whatever reason, Lessor will have the right, in its
reasonable discretion, to approve any new Franchise Agreement for the Hotel. If,
upon any expiration or earlier termination of this Lease (other than upon an
Event of Default by Lessee), a Franchise Agreement remains in effect in favor of
Lessor's designee or Affiliate, Lessor shall indemnify, defend and hold Lessee
harmless with respect to the obligations and liabilities arising thereunder
after the date of expiration or termination of this Lease.
ARTICLE 12
PERMITTED LIENS AND CONTESTS
12.1 Liens. Subject to the provision of Section 12.2, relating
to permitted contests, Lessee will not directly or indirectly create or allow to
remain and will promptly discharge at its expense any lien, encumbrance,
attachment, title retention agreement or claim upon the Leased Property or any
attachment, levy, claim or encumbrance in respect of the Rent first arising or
accrued from and after the Commencement Date, not including, however, (a) this
Lease, (b) the matters, if any, included as exceptions in the title policy
insuring Lessor's interest in the Leased Property, (c) restrictions, liens and
other encumbrances which are either created or incurred by Lessor or its
employees, agents or independent contractors or consented to in writing by
Lessor or any easements granted pursuant to the provisions of Section 7.3 of
this Lease, (d) liens for those taxes upon Lessor which Lessee is not required
to pay hereunder, (e) subleases permitted by Article 20 hereof, (f) liens for
Impositions or for sums resulting from noncompliance with Legal Requirements so
long as (1) the same are not yet payable or are payable without the addition of
any fine or penalty or (2) such liens are in the process of being contested as
permitted by Article 12; or (3) the same are Lessor's responsibility hereunder,
(g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums
either disputed or not yet due provided that (1) the payment of such sums shall
not be postponed under any related contract for more than sixty (60) days after
the completion of the action giving rise to such lien and such reserve or other
appropriate provisions as shall be required by law or GAAP shall have been made
therefor or (2) any such liens are in the process of being contested as
permitted by Article 12 hereof, and (h) any liens which are the responsibility
of Lessor pursuant to the provisions of Article 24 of this Lease.
12.2 Permitted Contests. Lessee shall have the right to contest the
amount or validity of any Imposition to be paid by Lessee or any Legal
Requirement or Insurance Requirement or
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any lien, attachment, levy, encumbrance, charge or claim ("CLAIMS") not
otherwise permitted by Article 11, by appropriate legal proceedings in good
faith and with due diligence (but this shall not be deemed or construed in any
way to relieve, modify or extend Lessee's covenants to pay or its covenants to
cause to be paid any such charges at the time and in the manner as in this
Article provided), on condition, however, that such legal proceedings shall not
operate to relieve Lessee from its obligations hereunder and shall not cause the
sale or risk the imminent loss of the Leased Property, or any part thereof, or
cause Lessor or Lessee to be in default under any mortgage, deed of trust,
security deed or other agreement encumbering the Leased Property or any interest
therein. Upon the request of Lessor, Lessee shall either (a) provide a bond or
other assurance reasonably satisfactory to Lessor that all Claims which may be
assessed against the Leased Property together with interest and penalties, if
any, thereon will be paid, or (b) deposit within the time otherwise required for
payment with a bank or trust company as trustee upon terms reasonably
satisfactory to Lessor, as security for the payment of such Claims, money in an
amount sufficient to pay the same, together with interest and penalties in
connection therewith, as to all Claims which may be assessed against or become a
Claim on the Leased Property, or any part thereof, in said legal proceedings.
Lessee shall furnish Lessor and any lender of Lessor with reasonable evidence of
such deposit within five (5) days of the same. Lessor agrees to join in any such
proceedings if the same be required legally to prosecute such contest of the
validity of such Claims; provided, however, that Lessor shall not thereby be
subjected to any liability for the payment of any costs or expenses in
connection with any proceedings brought by Lessee; and Lessee covenants to
indemnify and save harmless Lessor from any such costs or expenses. Lessee shall
be entitled to any refund of any Claims and such charges and penalties or
interest thereon which have been paid by Lessee or paid by Lessor and for which
Lessor has been fully reimbursed. In the event that Lessee fails to pay any
Claims when due or to provide the security therefor as provided in this Article
and to diligently prosecute any contest of the same, Lessor may, upon ten (10)
days advance Notice to Lessee, and Lessee's failure to correct the same within
such 10-day period, pay such charges together with any interest and penalties
and the same shall be repayable by Lessee to Lessor as Additional Charges at the
next Rent payment date provided for in this Lease. Provided, however, that
should Lessor reasonably determine that the giving of such Notice would risk
loss to the Leased Property or cause damage to Lessor, then Lessor shall give
such Notice as is practical under the circumstances. Lessor reserves the right
to contest any of the Claims at its expense not pursued by Lessee. Lessor and
Lessee agree to cooperate in coordinating the contest of any Claims.
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ARTICLE 13
INSURANCE REQUIREMENTS
13.1 General Insurance Requirements. During the Term of this Lease, the
Leased Property shall at all times be insured with the kinds and amounts of
insurance described below. This insurance shall be written by companies
authorized to issue insurance in the State. The policies (except crime, workers
compensation, and safe deposit box legal liability) must name Lessor as an
additional insured, and the Manager, if any, shall also be named as an
additional insured, under the coverages described in Subsection 13.1(b). Losses
shall be payable to Lessor or Lessee as provided in this Lease. Any loss
adjustment for coverages insuring both parties shall require the written consent
of Lessor and Lessee, each acting reasonably and in good faith. Evidence of
insurance shall be deposited with Lessor. The policies on the Leased Property,
including the Improvements, Furniture, Fixtures and Equipment and Lessee's
Personal Property, shall satisfy the requirements of the Franchise Agreement and
of any ground lease, mortgage, security agreement or other financing lien
affecting the Leased Property and at a minimum shall include the following:
(a) Lessor shall obtain and maintain, at its own expense:
(i) Building insurance on the "SPECIAL FORM" (formerly
"ALL RISK" form) (including earthquake and flood in reasonable amounts (not to
exceed $100,000,000 per occurrence and in the aggregate for the Existing Hotels)
if and as determined by Lessor, in the exercise of its reasonable discretion, or
Lessor's underwriters or lenders) in an amount not less than 100% of the then
full replacement cost thereof (as defined in Section 13.2) or such other amount
which is acceptable to Lessor, and personal property insurance on the "SPECIAL
FORM" in the full amount of the replacement cost thereof;
(ii) Insurance for loss or damage (direct and indirect)
from steam boilers, pressure vessels or similar apparatus, air conditioning
systems, piping and machinery, and sprinklers, if any, now or hereafter
installed in the Hotel, in the minimum amount of $5,000,000 or in such greater
amounts as are then customary or as may be reasonably requested by Lessor from
time to time; and
(iii) Loss of income insurance on the "SPECIAL FORM", in
the amount of twelve (12) months of the sum of Base Rent plus Percentage Rent
(based on the last Lease Year of operation or, to the extent the Leased Property
has not been operated for an entire 12-month Lease Year, based on prorated
Percentage Rent) for the benefit of Lessor.
(b) Lessee shall obtain and maintain, at its own expense:
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(i) Commercial general liability insurance, with
amounts not less than $10,000,000 combined single limit for each occurrence and
in the aggregate, as well as excess liability (umbrella) insurance with limits
of at least $50,000,000 per occurrence and in the aggregate, covering each of
the following: bodily injury, death, or property damage liability per
occurrence, personal and advertising injury, general aggregate, products and
completed operations, with respect to Lessor, and "all risk legal liability"
(including liquor law or "dram shop" liability, if liquor or alcoholic beverages
are served on the Leased Property) with respect to Lessee;
(ii) Fidelity bonds or blanket crime policies with
limits and deductibles as may be reasonably determined by Lessor, covering
Lessee's and/or Manager's employees in job classifications normally bonded under
prudent hotel management practices in the United States or otherwise required by
law;
(iii) Workers' compensation insurance (or its substantial
equivalent as a non-subscribing employer in the State of Texas) to the extent
necessary to protect Lessee against Lessee's and/or Manager's workers'
compensation claims to the extent required by applicable state laws;
(iv) Comprehensive form vehicle liability insurance for
owned, non-owned, and hired vehicles, in the amount of $5,000,000;
(v) Garage keeper's legal liability insurance covering
both comprehensive and collision-type losses with a limit of liability of
$1,000,000 for any one occurrence;
(vi) Innkeeper's legal liability insurance covering
property of guests while on the Leased Property for which Lessor is legally
responsible with a limit of not less than $2,000 per guest and $50,000 in any
one occurrence or $100,000 annual aggregate;
(vii) Safe deposit box legal liability insurance covering
property of guests while in a safe deposit box on the Leased Property for which
Lessor is legally responsible with a limit of not less than $5,000 in any one
occurrence;
(viii) Insurance covering such other hazards (such as
plate glass or other common risks) and in such amounts as may be customary for
comparable properties in the area of the Leased Property and is available from
insurance companies, insurance pools or other appropriate companies authorized
to do business in the State at rates which are economically practicable in
relation to the risks covered as may be reasonably determined by Lessor; and
(ix) Business interruption insurance on the "SPECIAL
FORM" in the amount of twelve (12) months of gross profit, for the benefit of
Lessee.
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13.2 Replacement Cost. The term "full replacement cost" as used herein
shall mean the actual replacement cost of the Leased Property requiring
replacement from time to time including an increased cost of construction
endorsement, if available, and the cost of debris removal. In the event either
party believes that full replacement cost (the then-replacement cost less such
exclusions) has increased or decreased at any time during the Term, it shall
have the right to have such full replacement cost re-determined.
13.3 Waiver of Claims and Subrogation. Each of Lessor and Lessee do
hereby remise, release and discharge the other party and any officer, agent,
employee, representative or contractor of such party, of and from any liability
whatsoever hereafter arising from loss, damage or injury caused by fire or other
casualty for which insurance (permitting waiver of liability and containing a
waiver of subrogation) shall be carried as required by this Lease by the injured
party at the time of such loss, damage or injury to the extent of any recovery
by the injured party under such insurance. All insurance policies carried by
Lessor or Lessee (except fidelity bonds, blanket crime insurance or workers
compensation where contrary to public policy or law), shall expressly waive any
right of subrogation on the part of the insurer against the other party. The
parties hereto agree that their policies will include such waiver clause or
endorsement so long as the same are obtainable without extra cost, and in the
event of such an extra charge the other party, at its election, may pay the
same, but shall not be obligated to do so.
13.4 Form Satisfactory, etc. All of the policies of insurance referred
to in this Article 13 shall be written in a form, with deductibles and
exclusions from coverage and by insurance companies reasonably satisfactory to
Lessor. Subject to the right to reimbursement or credit for coverages specified
in Subsection 13.1(a) and any other "casualty coverages" required by Lessor,
Lessee shall pay all of the premiums therefor, and deliver such policies or
certificates thereof to Lessor prior to their effective date (and, with respect
to any renewal policy, thirty (30) days prior to the expiration of the existing
policy), and in the event of the failure of Lessee either to effect such
insurance as herein called for or to pay the premiums therefor, or to deliver
such policies or certificates thereof to Lessor at the times required, Lessor
shall be entitled, but shall have no obligation, to effect such insurance and
pay the premiums therefor, and Lessee shall reimburse Lessor for any premium or
premiums paid by Lessor for the coverages required under Subsection 13.1(b) upon
written demand therefor, and Lessee's failure to repay the same within thirty
(30) days after Notice of such failure from Lessor shall constitute an Event of
Default within the meaning of Subsection 16.1(c). Each insurer mentioned in this
Article 13 shall agree, by endorsement to the policy or policies issued by it,
or by independent instrument furnished to Lessor, that it will give to Lessor
thirty (30) days' written notice before the policy or policies in question shall
be materially altered, allowed to expire or canceled.
13.5 Increase in Limits. If either Lessor or Lessee at any time deems
the limits of the personal injury or property damage under the comprehensive
public liability insurance then carried to be either excessive or insufficient,
Lessor or Lessee shall endeavor in good faith to agree on the proper and
reasonable limits for such insurance to be carried and such insurance
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shall thereafter be carried with the limits thus agreed on until further change
pursuant to the provisions of this Section.
13.6 Blanket Policy. Notwithstanding anything to the contrary contained
in this Article 13, Lessor (or Lessee at Lessor's request) may bring the
insurance provided for herein within the coverage of a so-called blanket policy
or policies of insurance carried and maintained by Lessor or Lessee, as the case
may be; provided, however, that the coverage afforded to Lessor and Lessee will
not be reduced or diminished or otherwise be different from that which would
exist under a separate policy meeting all other requirements of this Lease by
reason of the use of such blanket policy of insurance, and provided further that
the requirements of this Article 13 are otherwise satisfied.
13.7 No Separate Insurance. Lessee shall not on Lessee's own initiative
or pursuant to the request or requirement of any third party, take out separate
insurance concurrent in form or contributing in the event of loss with that
required in this Article to be furnished, or increase the amount of any then
existing insurance by securing an additional policy or additional policies,
unless all parties having an insurable interest in the subject matter of the
insurance, including in all cases Lessor, are included therein as additional
insured, and the loss is payable under such additional separate insurance in the
same manner as losses are payable under this Lease. Lessee shall immediately
notify Lessor of any such separate insurance that Lessee has obtained or of the
increase of any of the amounts of the then existing insurance.
13.8 Reports On Insurance Claims. Lessee shall promptly investigate and
make a complete and timely written report to the appropriate insurance company
as to all accidents, claims for damage relating to the ownership, operation, and
maintenance of the Hotel, any damage or destruction to the Hotel and the
estimated cost of repair thereof and shall prepare any and all reports required
by any insurance company in connection therewith. All such reports shall be
timely filed with the insurance company as required under the terms of the
insurance policy involved, and a final copy of such report shall be furnished to
Lessor. Lessee shall be authorized to adjust, settle, or compromise any
insurance loss, or to execute proofs of such loss, in the aggregate amount of
$25,000 or less, with respect to any single casualty or other event.
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ARTICLE 14
CASUALTY INSURANCE PROCEEDS; RECONSTRUCTION
14.1 Insurance Proceeds. Subject to the provisions of Section 14.6 and
the terms of any Mortgage or Ground Lease, all proceeds payable by reason of any
loss or damage to the Leased Property, or any portion thereof, and insured under
any policy of insurance required by Article 13 of this Lease shall be paid to
Lessor and held by Lessor in an interest-bearing account, shall be made
available, if applicable, for reconstruction or repair, as the case may be, of
any damage to or destruction of the Leased Property, or any portion thereof,
and, if applicable, shall be paid out by Lessor from time to time for the
reasonable costs of such reconstruction or repair upon satisfaction of
reasonable terms and conditions specified by Lessor. Any excess proceeds of
insurance remaining after the completion of the restoration or reconstruction of
the Leased Property shall be paid to Lessor. If neither Lessor nor Lessee is
required or elects to repair and restore as set forth herein, all insurance
proceeds shall be retained by Lessor. All salvage of any Leased Property
resulting from any risk covered by insurance shall belong to Lessor and all
salvage of any of Lessee's Personal Property resulting from any risk covered by
insurance shall belong to Lessee.
14.2 Reconstruction in the Event of Damage or Destruction Covered
by Insurance.
(a) Except as provided in Section 14.6, if during the Term the
Leased Property is totally or partially destroyed by a risk covered by the
insurance described in Article 13, whether or not such damage or destruction
renders the Hotel Unsuitable for its Primary Intended Use, Lessee shall be
obligated, but only to the extent of any insurance proceeds made available to
Lessee and any other sums advanced by Lessor pursuant to the next sentence, to
restore the Hotel to substantially the same condition as existed immediately
before the damage or destruction and otherwise in accordance with the terms of
the Lease and a Construction Services Agreement to be entered into in connection
herewith. If the insurance proceeds are not adequate to restore the Hotel to
that condition, each of Lessor (if Lessor has fulfilled its obligations under
Subsection 13.1(a)) and Lessee shall have the right to terminate this Lease,
without in any way affecting any of the Other Leases in effect, by giving Notice
to the other and all insurance proceeds shall be retained by Lessor; provided,
however that, if such termination is by Lessee, Lessor shall have the right, in
its sole discretion, to nullify the termination and keep this Lease in full
force by providing, within thirty (30) days after Lessee's Notice of
termination, a Notice to Lessee of Lessor's unconditional, legally binding
obligation to be responsible for all restoration costs in excess of the
insurance proceeds.
If this Lease is terminated by either party as aforesaid (and such
termination is not nullified by Lessor) and if the inadequacy of insurance
proceeds was the result of Lessor's failure to maintain the proper insurance
coverages as required pursuant to Article 13, Lessor shall, at its option,
within one hundred eighty (180) days after such termination, either (i) commit
in writing to pay (and thereafter pay) to Lessee the Termination Fee in
accordance with the terms of the Master Hotel Agreement or (ii) offer to lease
to Lessee one or more hotel facilities reasonably
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acceptable to Lessee pursuant to one or more Other Leases that would create for
Lessee leasehold estates having an aggregate fair market value no less than the
fair market value of the leasehold estate hereunder, as of the date of
termination. If this Lease is not terminated and Lessee restores the Hotel, the
insurance proceeds, and any other sums made available by Lessor as aforesaid,
shall be paid out by Lessor from time to time for the reasonable costs of such
restoration upon satisfaction of reasonable terms and conditions, and any excess
proceeds remaining after such restoration shall be retained by Lessor.
(b) Notwithstanding the provisions of Subsection 14.2(a)
above, if Lessee reasonably estimates that it cannot within a reasonable time
obtain all necessary government approvals, including building permits, licenses
and conditional use permits, after diligent efforts to do so, to perform all
required repair and restoration work (and complete such work not later than the
earlier of (i) two years prior to the end of the final extension Term or of the
initial Term, if there are no extension Terms, and (ii) one year after the
casualty) and to operate the Hotel for its Primary Intended Use in substantially
the same manner as that existing immediately prior to such damage or destruction
and otherwise in accordance with the terms of the Lease, either Lessor or Lessee
may terminate this Lease by providing Notice to the other party, without in any
way affecting any of the Other Leases then in effect between Lessor and Lessee.
14.3 Reconstruction in the Event of Damage or Destruction Not Covered
by Insurance. Except as provided in Section 14.6, if during the Term the Hotel
is totally or materially destroyed by a risk not covered by the insurance
described in Article 13, whether or not such damage or destruction renders the
Hotel Unsuitable for its Primary Intended Use, the provisions of Section 14.2
applicable to casualties for which insurance proceeds are inadequate shall
govern.
14.4 Lessee's Personal Property and Business Interruption Insurance.
All insurance proceeds payable by reason of any loss of or damage to any of
Lessee's Personal Property and the business interruption insurance maintained
for the benefit of Lessee shall be paid to Lessee; provided, however, no such
payments shall diminish or reduce the insurance payments otherwise payable to or
for the benefit of Lessor hereunder.
14.5 Abatement of Rent Upon Casualty. Any damage or destruction due to
casualty notwithstanding, this Lease shall remain in full force and effect, but
Lessee's obligation to make rental payments and to pay all other charges
required by this Lease shall be equitably abated during any period required for
the applicable repair and restoration to the extent the Hotel or any part
thereof is Unsuitable for its Primary Intended Use. If Lessor and Lessee are
unable to agree upon the amount of such abatement within thirty (30) days after
such damage or destruction, the matter may be submitted by either party to
arbitration under Section 22.2 hereof for resolution.
14.6 Damage Near End of Term. Notwithstanding any provisions of Section
14.2 or 14.3 appearing to the contrary, if damage to or destruction of the Hotel
rendering it Unsuitable for its Primary Intended Use occurs (i) during the last
twenty-four (24) months of the initial Term or any extension Term, then Lessee
shall have the right to terminate this Lease by giving Notice
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to Lessor, within thirty (30) days after the date of damage or destruction, and
(ii) during the last twenty-four (24) months of the final extension Term (or of
the initial Term, if there are no extension Terms), then Lessor shall have the
right to terminate this Lease by giving Notice to Lessee, within thirty (30)
days after the date of damage or destruction. In the event of a termination
under this Section 14.6, all accrued unabated Rent shall be paid immediately,
and this Lease shall automatically terminate five (5) days after the date of
such Notice.
14.7 Waiver. Unless Lessor is in material default hereunder, Lessee
hereby waives any statutory rights of termination that may arise by reason of
any damage or destruction of the Hotel that Lessor is obligated to restore or
may restore under any of the provisions of this Lease.
ARTICLE 15
CONDEMNATION; AWARD ALLOCATION
15.1 Definitions.
(a) "AWARD(S)" means all compensation, sums or anything of
value awarded, paid or received on a total or partial Condemnation.
(b) "CONDEMNOR" means any public or quasi-public authority, or
private corporation or individual, having the power of Condemnation.
(c) "CONDEMNATION" means a Taking resulting from (1) the
exercise of any governmental power, whether by legal proceedings or otherwise,
by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor,
either under threat of condemnation or while legal proceedings for condemnation
are pending.
(d) "DATE OF TAKING" means the date the Condemnor has the
right to possession of the property being condemned.
15.2 Parties' Rights and Obligations. If during the Term there is any
Condemnation of all or any part of the Leased Property or any interest in this
Lease, the rights and obligations of Lessor and Lessee shall be determined by
this Article 15 subject to the terms of any Mortgage or Ground Lease.
15.3 Total Taking. If title to the fee (or leasehold under a Ground
Lease) of the whole of the Leased Property is condemned by any Condemnor, this
Lease shall cease and terminate as of the Date of Taking by the Condemnor,
without in any way affecting any of the Other Leases then in effect between
Lessor and Lessee. If title to the fee (or leasehold under a Ground Lease) of
less than the whole of the Leased Property is so taken or condemned, which
nevertheless renders the Leased Property Unsuitable or Uneconomic for its
Primary Intended Use, Lessee and Lessor shall each have the option, by notice to
the other, at any time prior to the Date of Taking, to terminate this Lease as
of the Date of Taking. Upon such date, if such Notice has been given,
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this Lease shall thereupon cease and terminate. All Base Rent, Percentage Rent
and Additional Charges paid or payable by Lessee hereunder shall be apportioned
as of the Date of Taking, and Lessee shall promptly pay Lessor such amounts.
15.4 Partial Taking. If title to less than the whole of the Leased
Property is condemned, and the Leased Property is not Unsuitable for its Primary
Intended Use, and not Uneconomic for its Primary Intended Use, or if Lessee or
Lessor is entitled but neither elects to terminate this Lease as provided in
Section 15.3, Lessee at its cost and in accordance with the terms of this Lease
and any Construction Services Agreement entered into in connection herewith,
shall with all reasonable dispatch, but only to the extent of any Award funds
made available to Lessee and any other sums advanced by Lessor pursuant to this
Section, restore the untaken portion of any Improvements so that such
Improvements constitute a complete architectural unit of the same general
character and condition (as nearly as may be possible under the circumstances)
as the Improvements existing immediately prior to the Condemnation. Lessor shall
in good faith seek a fair and equitable allocation of any Award among
restoration, taken Improvements and other elements. Lessor will contribute to
the cost of restoration that part of its Award specifically allocated to such
restoration, together with severance and other damages awarded for the
Improvements; provided, however, the amount of such contribution will not exceed
such cost. If the Awards are not adequate to restore the Hotel to that
condition, each of Lessor and Lessee shall have the right to terminate this
Lease, without in any way affecting any of the Other Leases in effect, by giving
Notice to the other; provided, however that, if such termination is by Lessee,
Lessor shall have the right, in its sole discretion, to nullify the termination
and keep this Lease in full force by providing, within thirty (30) days after
Lessee's Notice of termination, a Notice to Lessee of Lessor's unconditional,
legally binding obligation to be responsible for all restoration costs in excess
of the Awards. If this Lease is not terminated and Lessee restores the Hotel,
the Award funds, and any other sums made available by Lessor as aforesaid, shall
(subject to the requirements of any ground or building lease or Mortgage) be
held by Lessor and paid out by Lessor from time to time for the reasonable costs
of such restoration upon satisfaction of reasonable terms and conditions, and
any excess Award funds remaining after such restoration, and reimbursement of
Lessor for any sums advanced by Lessor hereunder, shall be retained by Lessor.
In the event of a partial Taking that does not result in a termination of this
Lease, the Base Rent shall be abated in the manner and to the extent that is
fair, just and equitable to both Lessee and Lessor, taking into consideration,
among other relevant factors, the number of usable rooms, the amount of square
footage, the revenues affected by such partial Taking and changes in the Hotel's
projected net operating income following such partial Taking. If Lessor and
Lessee are unable to agree upon the amount of such abatement within thirty (30)
days after such partial Taking, the matter may be submitted by either party to
arbitration under Section 22.2 hereof for resolution.
15.5 Allocation of Award. The total Award made in connection with a
Total Taking, or a partial Taking that results in a termination of this Lease
with respect to the Leased Property, or for loss of Rent, or for Lessor's loss
of business beyond the Term, shall be solely the property of and payable to
Lessor. Any Award made for loss of Lessee's business during the remaining
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Term, if any, or for the taking of Lessee's Personal Property or for removal and
relocation expenses of Lessee in any such proceedings shall be the sole property
of and payable to Lessee. Any other Award not separately allocated to Lessor or
Lessee shall be equitably apportioned between Lessor and Lessee in proportion to
the then fair market value of the leasehold estate of Lessee hereunder and the
then fair market value of the Leased Property.
15.6 Temporary Taking. If the whole or any part of the Leased Property
(other than the fee or leasehold under a Ground Lease) or of Lessee's interest
under this Lease is condemned by any Condemnor for its temporary use or
occupancy (which shall mean a period not to exceed the lesser of twelve (12)
months or the remainder of the Term), this Lease shall not terminate by reason
thereof, and Lessee shall continue to pay, in the manner and at the terms herein
specified, the full amounts of Base Rent and Additional Charges. In addition,
the entire amount of any Award made for such Condemnation allocable to the Term
of this Lease, whether paid by way of damages, rent or otherwise, shall be paid
to Lessee and, except for any portion thereof utilized for restoration, shall be
deemed to be Room Revenues for the purpose of calculating the Percentage Rent
payable hereunder during such temporary taking. Except only to the extent that
Lessee may be prevented from so doing pursuant to the terms of the order of the
Condemnor, Lessee shall continue to perform and observe all of the other terms,
covenants, conditions and obligations hereof on the part of Lessee to be
performed and observed, as though such Condemnation had not occurred. Lessee
covenants that upon the termination of any such period of temporary use or
occupancy it will, at its sole cost and expense (subject to Lessor's
contribution as set forth below), restore the Leased Property as nearly as may
be reasonably possible to the condition in which the same was immediately prior
to such Condemnation, unless (a) such period of temporary use or occupancy
extends beyond the expiration of the Term, in which case Lessee shall not be
required to make such restoration, or (b) the condemnation award is inadequate
to cover the costs of such restoration, in which case the provisions of Section
15.4 applicable to inadequate awards shall govern. If restoration is required in
connection with such temporary taking and the condemnation award (together with
any other sums Lessor elects, in its sole discretion, to advance) is adequate to
pay the costs thereof, the provisions of Section 15.4 shall govern the
disbursement of the awards (and other sums, if applicable) and the disposition
of any awards in excess of restoration costs. If restoration is required
hereunder, Lessor shall contribute to the cost of such restoration that portion
of its entire Award that is specifically allocated to such restoration in the
judgment or order of the court, if any, and Lessee shall fund the balance of
such costs in advance of restoration in a manner reasonably satisfactory to
Lessor.
ARTICLE 16
DEFAULT BY LESSEE; LESSOR'S REMEDIES
16.1 Events of Default. If any one or more of the following events
(individually, an "EVENT OF DEFAULT") occurs:
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(a) if Lessee fails to make any payment of Base Rent,
estimated monthly Percentage Rent or quarterly Percentage Rent, or any
Additional Charges, when the same becomes due and payable and, if not more than
two failures to make such payment have occurred under all the Percentage Leases
within the prior twelve (12) month period, such condition continues for a period
of two (2) Business Days after receipt by Lessee of Notice from Lessor thereof;
or
(b) if Lessee fails to observe or perform any term, covenant
or condition of this Lease, other than the payment of Rent, and such failure is
not cured by Lessee within a period of 30 days after receipt by Lessee of Notice
thereof from Lessor, unless such failure cannot with due diligence be cured
within a period of thirty (30) days, in which case it shall not be deemed an
Event of Default if Lessee proceeds promptly and with due diligence to cure the
failure and diligently completes the curing thereof provided, however, in no
event shall such cure period extend beyond one hundred fifty (150) days after
such Notice; or
(c) if Lessee shall file a petition in bankruptcy or
reorganization for an arrangement pursuant to any federal or state bankruptcy
law or any similar federal or state law, or shall be adjudicated a bankrupt or
shall make an assignment for the benefit of creditors or shall admit in writing
its inability to pay its debts generally as they become due, or if a petition or
answer proposing the adjudication of Lessee as a bankrupt or its reorganization
pursuant to any federal or state bankruptcy law or any similar federal or state
law shall be filed in any court and Lessee shall be adjudicated a bankrupt and
such adjudication shall not be vacated or set aside or stayed within sixty (60)
days after the entry of an order in respect thereof, or if a receiver of Lessee
or of the whole or substantially all of the assets of Lessee shall be appointed
in any proceeding brought by Lessee or if any such receiver, trustee or
liquidator shall be appointed in any proceeding brought against Lessee and shall
not be vacated or set aside or stayed within sixty (60) days after such
appointment; or
(d) if Lessee is liquidated or dissolved, or begins
proceedings toward such liquidation or dissolution, or, in any manner, permits
the sale or divestiture of substantially all of its assets, except as permitted
under the Master Hotel Agreement; or
(e) except as permitted under the Master Hotel Agreement, if
the estate or interest of Lessee in the Leased Property or any part thereof is
(contrary to the terms of this Lease) voluntarily or involuntarily transferred,
assigned, conveyed, levied upon or attached in any proceeding (unless Lessee is
contesting such lien or attachment in good faith in accordance with Article 12
hereof); or
(f) if, except (A) as a result of Unavoidable Occurrence,
damage, destruction or a partial or complete Condemnation or otherwise as
contemplated by this Lease, or (B) as authorized by Lessor in connection with a
PIP, Contemplated Renovations or other Repositioning approved in writing by
Lessor, Lessee voluntarily ceases operations on the Leased Property for a period
in excess of thirty (30) days; or
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(g) the Hotel is operated under a Franchise Agreement and if:
(A) an event of default has been declared by the Franchisor under the Franchise
Agreement with respect to the Hotel on the Leased Premises as a result of any
action or failure to act by Lessee or any Person with whom Lessee contracts for
management services at the Hotel, other than as a result of Lessor's default
hereunder or hereunder (including, without limitation, a failure to complete a
Capital Improvement required by the Franchisor resulting from Lessor's failure
to fund the Capital Expenditure therefor pursuant to Subsection 9.1(b), or a
failure to pay Real Estate Taxes, Personal Property Taxes or Capital
Impositions) or Lessor's gross negligence or wilful misconduct, and (B) Lessee
has failed, within thirty (30) days thereafter (or any earlier deadline for
termination set forth in the Franchise Agreement), to cure such default by
either (1) curing the underlying default under the Franchise Agreement and
paying all costs and expenses associated therewith, or (2) obtaining at Lessee's
sole cost and expense a substitute franchise or license agreement reasonably
acceptable to Lessor with a substitute Franchisor reasonably acceptable to
Lessor, on terms and conditions reasonably acceptable to Lessor; provided,
however, that if Lessee is in good faith disputing an assertion of default by
the Franchisor or is proceeding diligently to cure such default, the 30-day
period shall be extended for such period of time as Lessee continues to dispute
such default in good faith or diligently proceeds to cure such default, so long
as there is no period during which the Hotel is not operated pursuant to a
Franchise Agreement approved by Lessor (a "FRANCHISE EVENT OF DEFAULT"); or
(h) if there occurs a Default by Lessee, as that term is
defined in the Master Agreement;
then, and in any such event, Lessor may exercise one or more
remedies available to it herein or at law or in equity, including but not
limited to its right to terminate this Lease by giving Lessee not less than ten
(10) days' Notice of such termination.
If a Proceeding is commenced with respect to any alleged
default under this Lease, the prevailing party in such Proceeding shall receive,
in addition to its damages incurred, such sum as the court or arbitrator shall
determine as its reasonable attorneys' fees, and all costs and expenses incurred
in connection therewith.
No Event of Default (other than a failure to make a payment of
Rent) shall be deemed to exist under clause (d) during any time the curing
thereof is prevented by an Unavoidable Delay, provided that upon the cessation
of such Unavoidable Delay, Lessee remedies such default or Event of Default
without further delay. No Event of Default shall be deemed to exist under clause
(a) during any period of time that the payment of Rent is delayed or rendered
impossible solely by the Year 2000 Problem, provided that Lessee diligently
seeks alternative methods of payment and pays such Rent as soon as reasonably
possible.
16.2 Surrender. If an Event of Default occurs (and the event giving
rise to such Event of Default has not been cured within the curative period
relating thereto as set forth in
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Section 16.1) and is continuing, whether or not this Lease has been terminated
pursuant to Section 16.1, Lessee shall, if requested by Lessor so to do,
immediately surrender to Lessor the Leased Property including, without
limitation, any and all books, records, files, licenses, permits and keys
relating thereto, and quit the same and Lessor may enter upon and repossess the
Leased Property by self-help repossession, summary proceedings, ejectment or
otherwise, and may remove Lessee and all other persons and any and all personal
property from the Leased Property, subject to rights of any hotel guests and to
any requirement of law. Lessee hereby waives any and all requirements of
applicable laws for service of notice to re-enter the Leased Property. Except as
otherwise required by applicable law, Lessor shall be under no obligation to,
but may if it so chooses, relet the Leased Property or otherwise mitigate
Lessor's damages.
16.3 Damages. Except as otherwise required by applicable law, neither
(a) the termination of this Lease, (b) the repossession of the Leased Property,
(c) the failure of Lessor to relet the Leased Property, nor (d) the reletting of
all or any portion thereof, shall relieve Lessee of its liability and
obligations hereunder, all of which shall survive any such termination,
repossession or reletting. In the event of any such termination, Lessee shall
forthwith pay to Lessor all Rent due and payable with respect to the Leased
Property to and including the date of such termination. In addition, upon the
occurrence of an Event of Default, Lessee shall forthwith pay to Lessor, at
Lessor's option, as and for agreed current damages for Lessee's default, either:
(1) Without termination of Lessee's right to possession of the
Leased Property, each installment of Rent and other sums payable by Lessee to
Lessor under this Lease as the same becomes due and payable, which Rent and
other sums shall bear interest at the Overdue Rate, and Lessor may enforce, by
action or otherwise, any other term or covenant of this Lease; or
(2) the sum of:
(A) the unpaid Rent which had been earned at the
time of termination, repossession or reletting, and
(B) the worth at the time of termination,
repossession or reletting of the amount by which the
unpaid Rent for the balance of the Term after the time of
termination, repossession or reletting, exceeds the amount
of rentals that Lessee proves Lessor reasonably can be
expected to receive after the time of termination,
repossession and reletting, and
(C) any other amount necessary to compensate Lessor
for all the detriment proximately caused by Lessee's
failure to perform its obligations under this Lease or
which in the ordinary course of things, would be likely to
result therefrom, including without limitation, if such
termination results in a default under or termination of
the Franchise Agreement, Lessee shall be solely
responsible for all damages and
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termination payments under the terms of the Franchise
Agreement, application fees for a new franchise license,
increased royalty fees and other costs arising out of such
termination or out of the resulting need to apply for and
enter into a substitute franchise license agreement for
the Leased Property.
The worth at the time of termination, repossession or reletting of the amount
referred to in subparagraph (B) is computed by discounting such amount to then
present value at a rate equal to the Base Rate. Rent for the purposes of this
Section 16.3 shall be a sum equal to (i) the average of the annual amounts of
the Percentage Rent for the three (3) Fiscal Years immediately preceding the
Fiscal Year in which the termination, re-entry or repossession takes place, or
(ii) if three (3) Fiscal Years shall not have elapsed, the average of the
Percentage Rent during the preceding Fiscal Year(s) during which this Lease was
in effect, or (iii) if one Fiscal Year has not elapsed, the amount derived by
annualizing the Percentage Rent from the Commencement Date.
16.4 Waiver. If this Lease is terminated pursuant to Section 16.1,
Lessee waives, to the extent permitted by applicable law, (a) any right to a
trial by jury in the event of summary proceedings to enforce the remedies set
forth in this Article 16, and (b) the benefit of any laws now or hereafter in
force exempting property from liability for rent or for debt and Lessor waives
any right to "pierce the corporate veil" of Lessee or otherwise bring any claim
against any Affiliate of Lessee not obligated hereunder or on a guaranty hereof,
other than to the extent funds shall have been inappropriately paid to any
Affiliate of Lessee following a default resulting in an Event of Default.
16.5 Application of Funds. Any payments received by Lessor under any of
the provisions of this Lease during the existence or continuance of any Event of
Default shall be applied to Lessee's obligations in the order that Lessor may
determine or as may be prescribed by the laws of the State.
16.6 Lessor's Right to Cure Lessee's Default. If Lessee fails to make
any payment or to perform any act required to be made or performed under this
Lease including, without limitation, Lessee's failure to comply with the terms
of any Franchise Agreement, and fails to cure the same within the relevant time
periods provided in Section 16.1, Lessor, without waiving or releasing any
obligation of Lessee, and without waiving or releasing any obligation or
default, may (but shall be under no obligation to) at any time thereafter make
such payment or perform such act for the account and at the expense of Lessee,
and may, to the extent permitted by law, enter upon the Leased Property for such
purpose and, subject to Section 16.4, take all such action thereon as, in
Lessor's opinion, may be necessary or appropriate therefor. No such entry shall
be deemed an eviction of Lessee. All sums so paid by Lessor and all costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses, in each case to the extent permitted by law) so incurred, together
with a late charge thereon (to the extent permitted by law) at the Overdue Rate
from the date on which such sums or expenses are paid or incurred by Lessor,
shall be paid
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by Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor
contained in this Article shall survive the expiration or earlier termination of
this Lease.
ARTICLE 17
DEFAULT BY LESSOR; LESSEE'S REMEDIES
17.1 Breach by Lessor.
(a) It shall be a breach of this Lease if Lessor fails to
observe or perform any term, covenant or condition of this Lease on its part to
be performed and such failure continues for a period of thirty (30) days after
Notice thereof from Lessee, unless such failure cannot with due diligence be
cured within a period of thirty (30) days, in which case such failure shall not
be deemed a breach if Lessor proceeds within such 30-day period, with due
diligence, to cure the failure and thereafter diligently completes the curing
thereof within one hundred eighty (180) days after such Notice, or such longer
period as is required to complete any Capital Improvements necessary to effect
such cure. The time within which Lessor shall be obligated to cure any such
failure also shall be subject to extension of time due to the occurrence of any
Unavoidable Delay. If Lessor does not cure any such failure within the
applicable time period as aforesaid, Lessee may declare the existence of a
"LESSOR DEFAULT" by a second Notice to Lessor. Thereafter, Lessee may forthwith
cure the same in accordance with the provisions of Section 24.2, subject to the
provisions of the following paragraph and exercise any other rights and remedies
that Lessee may have as a result of such breach; provided, however, Lessee shall
have no right to terminate this Lease for any Lessor Default and no right, for
any such Lessor Default, to offset or counterclaim against any Rent or other
charges due hereunder except as expressly provided herein.
(b) If Lessor shall in good faith dispute the occurrence of
any Lessor Default and Lessor, before the expiration of the applicable cure
period, shall give Notice thereof to Lessee, setting forth, in reasonable
detail, the basis therefor, no Lessor Default shall be deemed to have occurred
and Lessor shall have no obligation with respect thereto until final adverse
determination thereof, whether through arbitration or otherwise; provided,
however, that in the event of any such adverse determination, Lessor shall pay
to Lessee interest on any disputed funds at the Base Rate, from the date demand
for such funds was made by Lessee until the date of final adverse determination
and, thereafter, at the Overdue Rate until paid. If Lessee and Lessor shall
fail, in good faith, to resolve any such dispute within ten (10) days after
Lessor's Notice of dispute, either may submit the matter for determination by
arbitration, but only if such matter is required to be submitted to arbitration
pursuant to Article 22, or otherwise by a court of competent jurisdiction.
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ARTICLE 18
INDEMNIFICATION
18.1 Indemnification.
(a) Notwithstanding the existence of any insurance, and
without regard to the policy limits of any such insurance or self-insurance, but
subject to Article 8 and Section 13.3, Lessee will protect, indemnify, hold
harmless and defend Lessor Indemnified Parties from and against all liabilities,
losses, obligations, claims, damages, penalties, causes of action, costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses), to the extent (but excluding those for which Lessor agrees to
indemnify Lessee under Subsection 22.1(b) below) resulting from, imposed upon or
incurred by or asserted against Lessor Indemnified Parties by reason of: (a) any
accident, injury to or death of persons or loss of or damage to property
occurring on or about the Hotel, the Leased Property or adjoining roadways,
curbs or sidewalks during the Term, including without limitation any claims
under liquor liability, "dram shop" or similar laws, (b) any use, misuse,
non-use, condition, management, maintenance or repair during the Term by Lessee
or any of its agents, employees or invitees of the Hotel, the Leased Property or
Lessee's Personal Property or any Proceeding or claim by governmental entities
or other third parties to which a Lessor Indemnified Party is made a party or
participant related to such use, misuse, non-use, condition, management,
maintenance, or repair thereof by Lessee or any of its agents, employees,
independent contractors or invitees (including without limitation matters
arising out of any negligent acts or failures to act or wilful misconduct of
Lessee, Manager or subtenants of Lessee or Manager, and their respective
employees, agents or independent contractors), including any failure of Lessee
or any of its agents, employees, independent contractors or invitees to perform
any obligations under this Lease or imposed by applicable law (other than
requirements with respect to Capital Improvements for which Lessor is
responsible under this Lease and other obligations of Lessor hereunder), (c) any
Impositions that are the obligations of Lessee pursuant to the applicable
provisions of this Lease, (d) any failure on the part of Lessee to perform or
comply with any of the terms of this Lease, and (e) the non-performance during
the Term of any of the terms and provisions of any and all existing and future
subleases of the Leased Property to be performed by the landlord thereunder.
(b) Notwithstanding the existence of any insurance, and
without regard to the policy limits of any such insurance or self-insurance, but
subject to Article 8 and Section 13.3, Lessor shall indemnify, save harmless and
defend Lessee Indemnified Parties from and against all liabilities, obligations,
claims, damages, penalties, causes of action, costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses), to the extent (but
excluding those for which Lessee agrees to indemnify Lessor under Subsection
22.1(a) above) resulting from, imposed upon or incurred by or asserted against
Lessee Indemnified Parties as a result of (a) the gross negligence or willful
misconduct of Lessor arising in connection with this Lease, (b) any failure on
the part of Lessor to perform or comply with any of the terms of this Lease, (c)
any condition existing at the Leased Property on the Commencement Date (unless
such condition was not remedied or was aggravated by the gross negligence or
wilful misconduct
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of Lessee, Manager or subtenants of Lessee or Manager, and their respective
employees, agents or independent contractors, or (d) the operation of the Hotel
(other than by Lessee or its Manager) subsequent to the expiration or earlier
termination of this Lease (unless otherwise provided in Article 16).
(c) Any amounts that become payable by an Indemnifying Party
under this Section shall be paid within ten (10) days after liability therefor
on the part of the Indemnifying Party is determined by litigation or otherwise,
and if not timely paid, shall bear a late charge (to the extent permitted by
law) at the Overdue Rate from the date of such determination to the date of
payment. Nothing herein shall be construed as indemnifying a Lessor Indemnified
Party or Lessee Indemnified Party against its own grossly negligent acts or
omissions or willful misconduct.
Lessee's or Lessor's liability for a breach of the provisions of this
Article shall survive any termination of this Lease.
18.2 Indemnification Procedure. If any Proceeding is brought against
any Indemnified Party in respect of any claim or liability with respect to which
such Indemnified Party may claim indemnification under this Lease, the
Indemnifying Party, upon request, shall at its sole expense resist and defend
such Proceeding, or cause the same to be resisted and defended by counsel
designated by the Indemnified Party and approved by the Indemnifying Party,
which approval shall not be unreasonably withheld; provided, however, that such
approval shall not be required in the case of defense by counsel designated by
any insurance company undertaking such defense pursuant to any applicable policy
of insurance. Each Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel will be at the sole expense of such
Indemnified Party unless such counsel has been approved by the Indemnifying
Party, which approval shall not be unreasonably withheld. The Indemnifying Party
shall not be liable for any settlement of any such Proceeding made without its
consent, which shall not be unreasonably withheld, but if settled with the
consent of the Indemnifying Party, or if settled without its consent (if its
consent shall be unreasonably withheld), or if there be a final, nonappealable
judgment for an adversary party in any such Proceeding, the Indemnifying Party
shall indemnify and hold harmless the Indemnified Parties from and against any
liabilities incurred by such Indemnified Parties by reason of such settlement or
judgement.
ARTICLE 19
REIT REQUIREMENTS AND RESTRICTIONS
19.1 REIT Requirements.
(a) Lessor has informed Lessee, and Lessee understands, that,
in order for FelCor to qualify as a REIT, the following requirements (the "REIT
REQUIREMENTS") must be satisfied:
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(i) The average of the adjusted tax bases of Lessor's
personal property that is leased to Lessee under this Lease at the beginning and
end of a calendar year cannot exceed fifteen percent (15%) of the average of the
aggregate adjusted tax bases of all of Lessor's property that is leased to
Lessee under this Lease at the beginning and end of such calendar year (the
"PERSONAL PROPERTY LIMITATION").
(ii) Lessee cannot sublet the property that is leased to
it by Lessor, or enter into any similar arrangement, on any basis such that the
rental or other amounts paid by the sublessee thereunder would be based, in
whole or in part, on either (i) the net income or profits derived by the
business activities of the sublessee or (ii) any other formula such that any
portion of the rent paid by Lessee to Lessor would fail to qualify as "rents
from real property" within the meaning of Section 856(d) of the Code.
(iii) Lessee cannot sublease the property leased to it by
Lessor to, or enter into any similar arrangement with, any Person in which
FelCor owns, directly or indirectly, a ten percent (10%) or greater interest,
within the meaning of Section 856(d)(2)(B) of the Code.
(iv) FelCor (or any Person that owns a ten percent (10%)
or greater interest in FelCor) cannot own, directly or indirectly, a ten percent
(10%) or greater interest in Lessee, within the meaning of Section 856(d)(2)(B)
of the Code.
(v) No Person can own, directly or directly, capital stock
of FelCor that exceeds the limitations set forth in FelCor's Charter, as amended
and restated.
(b) Lessee agrees, and agrees to use reasonable efforts to
cause its Affiliates, to use their reasonable best efforts to permit the REIT
Requirements to be satisfied. Lessee agrees, and agrees to use reasonable
efforts to cause its Affiliates, to cooperate in good faith with FelCor and
Lessor to ensure that the REIT Requirements are satisfied, including but not
limited to, providing FelCor with information about the ownership of Lessee, and
its Affiliates to the extent that such information is reasonably available.
Lessee agrees, and agrees to use reasonable efforts to cause its Affiliates,
upon request by FelCor and, where appropriate, at FelCor's expense, to take
reasonable action necessary to ensure compliance with the REIT Requirements.
Immediately after becoming aware that the REIT Requirements are not, or will not
be, satisfied, Lessee shall notify, or use reasonable efforts to cause its
Affiliates to notify, FelCor of such noncompliance.
(c) If Lessor reasonably anticipates that the Personal
Property Limitation will be exceeded with respect to the Leased Property for any
Lease Year, Lessor shall notify Lessee, and Lessee shall purchase, either from
Lessor or a third party, items of personal property anticipated by Lessor to be
in excess of the Personal Property Limitation ("EXCESS PERSONAL PROPERTY ITEMS")
on such terms as may be negotiated in good faith between Lessor and Lessee. If
the Excess Personal Property Items are purchased from Lessor, the purchase
prices of such
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Excess Personal Property Items shall be equal to the adjusted tax bases of such
Excess Personal Property Items in the hands of Lessor as of the closing of the
purchase.
19.2 Lessee Officer and Employee Limitation. Anything contained in this
Lease to the contrary notwithstanding, none of the officers or employees of
Lessee (or any Person who furnishes or renders services to the tenants of the
Leased Property, or manages or operates the Leased Property) shall be officers
or employees of FelCor or Lessor (or any Person who serves as an advisor of
FelCor). In addition, if a Person serves as both (a) a director of Lessee (or
any Person who furnishes or renders services to the tenants of the Leased
Property, or manages or operates the Leased Property) and (b) a director and
officer (or employee) of FelCor (or any Person who serves as an advisor of
FelCor) that Person shall not receive any compensation for serving as a director
of Lessee (or any Person who furnishes or renders services to the tenants of the
Leased Property, or manages or operates the Leased Property). Finally, if a
Person serves as both (a) a director and officer of Lessee (or any Person who
furnishes or renders services to the tenants of the Leased Property, or manages
or operates the Leased Property), and (b) a director of FelCor (or any Person
who serves as an advisor to FelCor), that Person shall not receive any
compensation for serving as a director of FelCor (or any Person who serves as an
advisor to FelCor).
19.3 Management Agreement.
(a) Lessee agrees to obtain Lessor's prior consent (which
shall not be unreasonably withheld) to the terms of any management or agency
agreement relating to the management or operation of the Hotel (a "MANAGEMENT
AGREEMENT"), or any material amendment or modification thereto, under which the
payment of management fees is not expressly subordinate to the payment of Rent
hereunder on terms reasonably acceptable to Lessor (provided, however,
management fees and other amounts may be paid to the Manager so long as no Event
of Default has occurred hereunder). Lessee shall, upon request, provide Lessor
with a copy of any proposed Management Agreement. Lessee also shall provide
Lessor with copies of any and all amendments or modifications of a Management
Agreement which are entered into from time to time. Without limiting the
generality of the foregoing, any Management Agreement shall provide that (i)
upon termination of this Lease or termination of Lessee's right to possession of
the Leased Property for any reason other than a termination by Lessor pursuant
to Section 2.5, the Management Agreement may be terminated by Lessor without
liability for any payment due or to become due to the Hotel Manager, and (ii)
except as provided in the Master Hotel Agreement, any management fees payable to
any Affiliate of Lessee shall be expressly subordinated to the payments of Rent
to Lessor hereunder (provided, however, management fees and other amounts may be
paid to the Manager so long as no Event of Default has occurred hereunder), and
no fees or other amounts payable by Lessee to the Manager shall excuse Lessee
from its obligations to pay Rent and other amounts payable by Lessee to Lessor
hereunder. Lessor shall have the right to approve in advance any Manager who is
not an Affiliate of Lessee.
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(b) In the event that Lessor in good faith has concerns
regarding the character, conduct or performance of the General Manager of the
Hotel, Lessee and Manager will consult with Lessor to discuss Lessor's concerns
and attempt to address any deficiencies in character, conduct or performance.
19.4 Payments to Affiliates of Lessee. Notwithstanding anything to the
contrary contained in this Lease, Lessee shall make no payments to Affiliates as
Gross Operating Expenses unless expressly set forth in the Operating Budget or
an approved Capital Budget, allowed by the Master Hotel Agreement or otherwise
expressly agreed to in writing by Lessor, in either case, after full written
disclosure (including information regarding competitive pricing) by Lessee to
Lessor of the affiliation and any other related information reasonably requested
by Lessor.
ARTICLE 20
SUBLETTING AND ASSIGNMENT BY LESSEE
20.1 Subletting and Assignment. Except as otherwise expressly provided
herein, or in the Master Hotel Agreement, Lessee shall not sell, assign, sublet,
transfer, convey or hypothecate, whether by operation of law or otherwise, its
leasehold interest in the Leased Property, or any interest therein, to any other
Person without the prior written consent of Lessor not to be unreasonably
withheld. Subject to the provisions of Article 19 and Section 20.2 and any other
express conditions or limitations set forth herein, Lessee may (a) on the terms
and conditions set forth below, assign this Lease or sublet all or any part of
the Leased Property to a Subsidiary of BHR, or (b) unless a Major Sublease is
involved, sublet any retail or Restaurant portion of the Improvements in the
normal course of the Primary Intended Use; provided that any subletting shall
not individually as to any one such subletting, or in the aggregate be executed
by Lessee for the sole or primary purpose of diminishing in any material respect
the actual or potential Percentage Rent payable under this Lease. Lessor shall
have the right to approve in advance any Major Sublease. In the case of a
subletting, the sublessee shall comply with the provisions of Section 20.2, and
in the case of an assignment, the assignee shall assume in writing and agree to
keep and perform all of the terms of this Lease on the part of Lessee to be kept
and performed and shall be, and become, jointly and severally liable with Lessee
for the performance thereof.
Notwithstanding the above, Lessee may assign this Lease to an Affiliate
without the consent of Lessor; provided that any such assignee assumes in
writing and agrees to keep and perform all of the terms of this Lease on the
part of Lessee to be kept and performed and shall be and become jointly and
severally liable with Lessee for the performance thereof. In case of either an
assignment or subletting made during the Term, Lessee shall remain primarily
liable, as principal rather than as surety, for the prompt payment of the Rent
and for the performance and observance of all of the covenants and conditions to
be performed by Lessee hereunder unless, in the case of an assignment, Lessor
otherwise consents in writing (which consent will not be
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unreasonably withheld but may be conditioned upon the assignee's or transferee's
satisfaction of criteria similar to those for a Qualified Assignee as described
in Section 21.1 hereof). An original counterpart of each such sublease or
assignment and assumption, duly executed by Lessee and such sublessee or
assignee, as the case may be, in form and substance satisfactory to Lessor,
shall be delivered promptly to Lessor.
20.2 Subordination and Attornment. Lessee shall insert in each sublease
executed during the Term that is permitted under Section 20.1 provisions to the
effect that (a) such sublease is subject and subordinate to all of the terms and
provisions of this Lease and to the rights of Lessor hereunder if Lessor
executes a non-disturbance agreement with respect to such sublease (otherwise,
Lessee only need use reasonable efforts to obtain such subordination agreement),
(b) if this Lease terminates before the expiration of such sublease, the
sublessee thereunder will, at Lessor's option, attorn to Lessor and waive any
right the sublessee may have to terminate the sublease or to surrender
possession thereunder as a result of the termination of this Lease, and (c) if
the sublessee receives a Notice from Lessor or Lessor's assignees, if any,
stating that an uncured Event of Default exists under this Lease, the sublessee
shall thereafter be obligated to pay all rentals accruing under said sublease
directly to the party giving such Notice, or as such party may direct. All
rentals received from the sublessee by Lessor or Lessor's assignees, if any, as
the case may be, shall be credited against the amounts owing by Lessee under
this Lease.
ARTICLE 21
LEASEHOLD MORTGAGES
21.1 Lessee May Grant Leasehold Mortgages. Notwithstanding anything to
the contrary set forth in this Lease, Lessee shall have the right at any time
and from time to time during the term of this Lease, without Lessor's prior
consent but with the prior written consent of (i) any Holder under any existing
Mortgage or any ground lessor under any existing Ground Lease (if such consent
is required thereunder), or (ii) if Lessor has given Lessee written Notice of a
future Mortgage or Ground Lease, and consent is required thereunder (in which
case Lessor agrees to use reasonable efforts to obtain such consent), of any
Holder under any such future Mortgage or ground lessor under such future Ground
Lease, to encumber Lessee's leasehold interest hereunder and Lessee's Personal
Property with a mortgage, deed of trust, assignment or similar security
instrument (a "LEASEHOLD MORTGAGE") (that may include an assignment of revenues
from the Leased Property, including an assignment of rents from subleases of
Lessee) to an institutional lender or other reputable national mortgage lender
as leasehold mortgagee ("LEASEHOLD MORTGAGEE"). No Leasehold Mortgage shall
create a lien upon the Lessor's fee title to, or other interest in, the Leased
Property.
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ARTICLE 22
ARBITRATION AND DISPUTE RESOLUTION PROCEDURES
22.1 Arbitration. Except as set forth in Section 22.2, in each case
specified in this Lease in which it shall become necessary to resort to
arbitration, such arbitration shall be determined as provided in this Section
22.1. The party desiring such arbitration shall give Notice to that effect to
the other party, and an arbitrator shall be selected by mutual agreement of the
parties, or if they cannot agree within thirty (30) days of such notice, by
appointment made by the American Arbitration Association ("AAA") from among the
members of its panels who are qualified and who have experience in resolving
matters of a nature similar to the matter to be resolved by arbitration.
22.2 Alternative Arbitration. In each case specified in this Lease for
a matter to be submitted to arbitration pursuant to the provisions of this
Section 22.2, Lessor and Lessee will agree upon a nationally recognized
accounting firm with a hospitality division of which neither party nor their
Affiliates of Lessor is a significant client to serve as arbitrator of such
dispute within fifteen (15) days after written demand for arbitration is
received or sent by either party. In the event the parties fail to make such
designation within such fifteen (15) day period, Lessor shall be entitled to
designate any nationally recognized accounting firm with a hospitality division
of which Lessor or an Affiliate of Lessor is not a significant client to serve
as arbitrator of such dispute within fifteen (15) days after the parties fail to
timely make such designation. In the event Lessor fails to make such designation
within such fifteen (15) day period, Lessee shall be entitled to designate any
nationally recognized accounting firm with a hospitality division of which
Lessee or an Affiliate of Lessee is not a significant client to serve as
arbitrator of such dispute within fifteen (15) days after the parties fail to
timely make such designation. In the event no nationally recognized accounting
firm satisfying such qualifications is available and willing to serve as
arbitrator, the arbitration shall instead be administered as set forth in
Section 22.1.
22.3 Arbitration Procedures. In any arbitration commenced pursuant to
Sections 22.1 or 22.2, a single arbitrator shall be designated and shall resolve
the dispute. The arbitrator's decision shall be binding on all parties, shall
not be subject to further review or appeal except as otherwise allowed by
applicable law and may be filed in and enforced by a court of competent
jurisdiction.. Upon the failure of either party (the "non-complying party") to
comply with his decision, the arbitrator shall be empowered, at the request of
the other party, to order such compliance by the non-complying party and to
supervise or arrange for the supervision of the non-complying party's obligation
to comply with the arbitrator's decision, all at the expense of the
non-complying party. To the maximum extent practicable, the arbitrator and the
parties, and the AAA if applicable, shall take any action necessary to insure
that the arbitration shall be concluded within ninety (90) days of the filing of
such dispute. The fees and expenses of the arbitrator shall be shared equally by
Lessor and Lessee except as otherwise specified above in this Section 22.3.
Unless otherwise agreed in writing by the parties or required by the arbitrator
or AAA, if applicable, arbitration proceedings hereunder shall be conducted in
the State. Notwithstanding formal rules of evidence, each party may submit such
evidence as each party deems appropriate to support its position and the
arbitrator shall have access to and right to examine all books and records of
Lessee and Lessor regarding the Hotel during the arbitration.
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ARTICLE 23
APPRAISAL
23.1 Appraisers; Appraisal Procedure. If it becomes necessary to
determine the fair market value of the leasehold estate hereunder (or the fair
market value of any other property) for any purpose of this Lease, the party
required or permitted to give Notice of such required determination shall
include in the Notice the name of a person selected to act as appraiser on its
behalf. Within ten (10) days after Notice, Lessor (or Lessee, as the case may
be) shall by Notice to Lessee (or Lessor, as the case may be) appoint a second
person as appraiser on its behalf. The appraisers thus appointed, each of whom
must be a member of the American Institute of Real Estate Appraisers (or any
successor organization thereto) with at least five (5) years experience in the
State appraising property similar to the Leased Property, shall, within
forty-five (45) days after the date of the Notice appointing the first
appraiser, proceed to determine the fair market value of the leasehold estate
hereunder (or the fair market value of any other property, as the case may be)
as of the relevant date (giving effect to the impact, if any, of inflation from
the date of their decision to the relevant date); provided, however, that if
only one appraiser shall have been so appointed, then the determination of such
appraiser shall be final and binding upon the parties. If two (2) appraisers are
appointed and if the difference between the amounts so determined does not
exceed five percent (5%) of the lesser of such amounts, then the fair market
value of the leasehold estate hereunder (or fair market value of any other
property, as the case may be) shall be an amount equal to fifty percent (50%) of
the sum of the amounts so determined. If the difference between the amounts so
determined exceeds five percent (5%) of the lesser of such amounts, then such
two (2) appraisers shall have twenty (20) days to appoint a third appraiser. If
no such third appraiser shall have been appointed within such twenty (20) days
or within ninety (90) days of the original request for a determination of fair
market value, whichever is earlier, either Lessor or Lessee may apply to any
court having jurisdiction to have such appointment made by such court. Any
appraiser appointed by the original appraisers or by such court shall be
instructed to determine the fair market value of the leasehold estate hereunder
(or the fair market value of any other property) within forty-five (45) days
after appointment of such appraiser. The determination of the appraiser which
differs most in the terms of dollar amount from the determinations of the other
two (2) appraisers shall be excluded, and fifty percent (50%) of the sum of the
remaining two (2) determinations shall be final and binding upon Lessor and
Lessee as the fair market value of the leasehold estate hereunder (or fair
market value of any other property, as the case may be). This provision for
determining by appraisal shall be specifically enforceable to the extent such
remedy is available under applicable law, and any determination hereunder shall
be final and binding upon the parties except as otherwise provided by applicable
law. Lessor and Lessee shall each pay the fees and expenses of the appraiser
appointed by it and each shall pay one-half (?) of the fees and expenses of the
third appraiser and one-half (?) of all other costs and expenses incurred in
connection with each appraisal.
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ARTICLE 24
LESSOR MORTGAGES
24.1 Lessor May Grant Liens.
(a) Without the consent of Lessee, Lessor may, subject to the
terms and conditions set forth below in this Section 24.1, from time to time,
directly or indirectly, create or otherwise cause to exist any Mortgage or any
lien, encumbrance or title retention agreement ("ENCUMBRANCE") upon the Leased
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. Upon the request of Lessor
or the holder of the Encumbrance (the "HOLDER") , Lessee shall subordinate this
Lease to the lien of a new Mortgage on the Leased Property, on the condition
that Lessor has obtained from the proposed mortgagee a subordination,
non-disturbance and attornment agreement in form and substance reasonably
satisfactory to Lessee and Holder (provided, however, if the loan to value ratio
of the fairly allocated indebtedness secured by the Mortgage is 60% or less,
then Lessor need only use reasonable good faith efforts to obtain such
agreement). Any such subordination, non-disturbance and attornment agreement
shall provide, among other things, that, provided no default has occurred and is
then continuing under this Lease, Lessee (i) shall be entitled to receive all
the Gross Revenues of the Hotel subject to the terms of this Lease, and (ii)
shall not be disturbed in its possession of the Leased Property following a
transfer by foreclosure or deed in lieu of foreclosure under such Mortgage if
Lessee attorns to the transferee by foreclosure or deed in lieu of foreclosure.
(b) Lessee shall, upon the request of Lessor or any existing
or future Holder, (i) provide Holder with copies of all licenses, permits,
occupancy agreements, operating agreements, leases, contracts and similar
agreements reasonably requested in connection with any existing or proposed
financing of the Leased Property, and (ii) execute, or cause the Manager or any
relevant Affiliate to execute, such estoppel agreements with respect to the
Hotel's liquor license and any of the other aforementioned agreements as Holder
may reasonably request in connection with any such financing, provided that no
such estoppel agreement shall in any way affect the Term or affect adversely in
any material respect any rights of Lessee under this Lease.
(c) No act or failure to act on the part of Lessor which would
entitle Lessee under the terms of this Lease, or by law, to be relieved of any
of Lessee's obligations hereunder (including, without limitation, its obligation
to pay Rent) or to terminate this Lease, shall result in a release or
termination of such obligations of Lessee or a termination of this Lease unless:
(i) Lessee shall have first given written notice of Lessor's act or failure to
act to the Holder, specifying the act or failure to act on the part of Lessor
which would give basis to Lessee's rights; and (ii) the Holder, after receipt of
such notice, shall have failed or refused to correct or cure the condition
complained of within a reasonable time thereafter (in no event less than thirty
(30) days nor more than sixty (60) days), which shall include a reasonable time
for such Holder to obtain possession of the Leased Property, if possession is
reasonably necessary for the Holder to correct or cure the condition, or to
foreclose such Mortgage, and if the Holder notifies the Lessee
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of its intention to take possession of the Leased Property or to foreclose such
Mortgage, commences foreclosure actions within said sixty (60) days,
unconditionally commits to correct or cure such condition and diligently pursues
such cure to completion. If such Holder is prohibited by any process or
injunction issued by any court or by reason of any action by any court having
jurisdiction or any bankruptcy, debtor rehabilitation or insolvency proceedings
involving Lessor from commencing or prosecuting foreclosure or other appropriate
proceedings in the nature thereof, the times for commencing or prosecuting such
foreclosure or other proceedings shall be extended for the period of such
prohibition, provided, however, that the Lease shall continue to be in full
force and effect if Lessee is not constructively evicted from the Leased
Property and is not otherwise prevented from operating the Hotel as a result
thereof.
(d) Lessee shall deliver to any Holder who gives Lessee
written notice of its status as a Holder, at such Holder's address stated in the
Holder's written notice or at such other address as the Holder may designate by
later written notice to Lessee, a duplicate copy of any and all Notices
regarding any default which Lessee may from time to time give or serve upon
Lessor pursuant to the provisions of this Lease. Copies of such Notices given by
Lessee to Lessor shall be delivered to such Holder simultaneously with delivery
to Lessor. No such Notice by Lessee to Lessor hereunder shall be deemed to have
been given unless and until a copy thereof has been mailed to such Holder.
(e) Lessee shall cooperate in all reasonable respects, and as
generally described in Section 2.6 of this Lease, with any transfer of the
Leased Property to a Holder that succeeds to the interest of Lessor in the
Leased Property (including, without limitation, in connection with the transfer
of any franchise, license, lease, permit, contract, agreement, or similar item
to such Holder or such Holder's designee necessary or appropriate to operate the
Leased Property). Lessor and Lessee shall cooperate in (i) including in this
Lease by suitable amendment from time to time any provision which may be
requested by any proposed Holder, or may otherwise be reasonably necessary, to
implement the provisions of this Article and (ii) entering into any further
agreement with or at the request of any Holder which may be reasonably requested
or required by such Holder in furtherance or confirmation of the provisions of
this Article; provided, however, that any such amendment or agreement shall not
in any way affect the Term nor affect adversely in any material respect any
rights of Lessor or Lessee under this Lease.
24.2 Lessee's Right to Cure. Subject to the provisions of Section 17.1,
if Lessor breaches any covenant to be performed by it under this Lease or any
Mortgage, Lessee, after Notice to and demand upon Lessor, without waiving or
releasing any obligation hereunder, and in addition to all other remedies
available to Lessee, may (but shall be under no obligation at any time
thereafter to) make such payment or perform such act for the account and at the
expense of Lessor. All sums so paid by Lessee and all costs and expenses
(including, without limitation, reasonable attorneys' fees) so incurred,
together with interest thereon at the Overdue Rate from the date on which such
sums or expenses are paid or incurred by Lessee, shall be paid by Lessor to
Lessee on demand or, following entry of a final, nonappealable judgment against
Lessor for
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such sums, may be offset by Lessee against the Base Rent payments next accruing
or coming due. The rights of Lessee hereunder to cure and to secure payment from
Lessor in accordance with this Section 24.2 shall survive the termination of
this Lease with respect to the Leased Property.
ARTICLE 25
QUIET ENJOYMENT
25.1 Quiet Enjoyment. So long as Lessee pays all Rent as the same
becomes due and complies with all of the terms of this Lease and performs its
obligations hereunder, in each case within the applicable grace periods, if any,
Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for
the Term hereof, free of any claim or other action by Lessor or anyone claiming
by, through or under Lessor, but subject to all liens and encumbrances subject
to which the Leased Property was conveyed to Lessor or hereafter consented to by
Lessee or provided for herein prior to the foreclosure thereof. Notwithstanding
the foregoing, Lessee shall have the right by separate and independent action to
pursue any claim it may have against Lessor as a result of a breach by Lessor of
the covenant of quiet enjoyment contained in this Article.
ARTICLE 26
CERTIFICATES; INSPECTION RIGHTS
26.1 Lessee Estoppel Certificates. At any time and from time to time
upon not less than ten (10) days Notice by Lessor, Lessee will furnish to Lessor
or any Person designated by Lessor an Officer's Certificate certifying that this
Lease is unmodified and in full force and effect (or that this Lease is in full
force and effect as modified and setting forth the modifications), the date to
which the Rent has been paid, whether to the knowledge of Lessee there is any
existing default or Event of Default hereunder by Lessor or Lessee, and such
other information as may be reasonably requested by Lessor. Any such certificate
furnished pursuant to this Section may be relied upon by Lessor, any
underwriter, lender, investor and prospective purchaser of the Leased Property.
26.2 Lessor Estoppel Certificates. At any time and from time to time
upon not less than ten (10) days notice by Lessee, Lessor will furnish to Lessee
or to any Person designated by Lessee an estoppel certificate certifying that
this Lease is unmodified and in full force and effect (or that this Lease is in
full force and effect as modified and setting forth the modifications), the date
to which Rent has been paid, whether to the knowledge of Lessor there is any
existing default or Event of Default on Lessee's part hereunder, and such other
information as may be reasonably requested by Lessee. Any such certificate
furnished pursuant to this Section may be relied upon by Lessee, any
underwriter, lender, investor and prospective purchaser of the assets of Lessee.
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26.3 Inspection Rights. Lessee shall permit Lessor and its authorized
agents and representatives as frequently as reasonably requested by Lessor to
inspect the Leased Property and Lessee's accounts and records pertaining thereto
and make copies thereof, during usual business hours upon reasonable advance
notice, subject only to the terms of this Agreement.
ARTICLE 27
NOTICES
27.1 Notices. All notices, demands, requests, consents, approvals and
other communications ("Notice" or "NOTICES") hereunder shall be in writing and
personally served, mailed (by registered or certified mail, return receipt
requested and postage prepaid), sent by FedEx or other nationally recognized
overnight courier, or sent by facsimile, addressed to Lessor at its address set
forth in the Schedule of Basic Terms attached hereto, Attention: President (with
a copy to Attention: General Counsel), and addressed to Lessee at its address
set forth in the Schedule of Basic Terms attached hereto, Attention: President
(with a copy to Attention: General Counsel), or to such other address or
addresses as either party may hereafter designate. Personally delivered Notice
(including any confirmed facsimile transmission or delivery by nationally
recognized overnight courier) shall be effective upon receipt at the specified
address. Notice given by mail shall be complete at the time of deposit in the
U.S. Mail system, but any prescribed period of Notice and any right or duty to
do any act or make any response within any prescribed period or on a date
certain after the service of such Notice given by mail shall be extended five
(5) days.
ARTICLE 28
GROUND LEASE
28.1 The Ground Lease. The provisions of this Article 28 shall apply
and be controlling notwithstanding anything to the contrary contained herein if
Lessor owns its interest in the Land or Improvements through a ground or
building lease. All of the terms of the lease or leases (if any) described in
Exhibit "A" attached hereto (collectively referred to herein as the "GROUND
LEASE") are hereby incorporated into and made a part of this Lease as if stated
at length herein. The parties hereto agree that wherever the word "LAND" appears
in this Lease, the same shall be deemed to mean the premises demised by the
Ground Lease.
Lessee shall have the benefit of each and every covenant and agreement
made by the lessor under the Ground Lease ("GROUND LESSOR"), to Lessor under the
Ground Lease and Lessee accepts this Lease subject to, all of the terms,
covenants, conditions and agreements contained in the Ground Lease. In the event
that the consent of the Ground Lessor is required in connection with the
transactions contemplated by the Master Hotel Agreement and/or this Lease, and
such consent has not been obtained effective as of the Commencement Date, then
Lessor shall have the option to terminate this Lease, without payment of a
Termination Fee or other
- 83 -
<PAGE> 90
premium or penalty, immediately (and effective as of the earliest date required
to avoid any default under the Ground Lease by Lessor) upon (i) notice to Lessee
that the Ground Lessor has declared Lessor to be in default under the Ground
Lease and (ii) execution of a management agreement with Lessee (or its Manager,
at Lessee's request) upon such terms as are required to provide Lessee (or
Manager, as the case may be) with the same Net Economic Benefit (as defined in
the Master Hotel Agreement) as would have this Lease in accordance with its
terms, other than this sentence.
Lessor shall pay directly to Ground Lessor all rent due from Lessor to
Ground Lessor under the terms of the Ground Lease when due.
In the event of conflicts between the terms of this Lease and the terms
of the Ground Lease, the terms of the Ground Lease shall control. To the extent
any of the provisions of the Ground Lease impose a greater obligation on Lessor
than the corresponding provisions of this Lease, then Lessor shall be obligated
to comply with the provisions of the Ground Lease (other than obligations for
which Lessee is specifically responsible hereunder). To the extent any of the
provisions of the Ground Lease impose a greater obligation on Lessee than the
corresponding provisions of this Lease, then Lessee shall be obligated to comply
with the provisions of the Ground Lease (other than obligations for which Lessor
is specifically responsible hereunder). Any obligations set forth in the Ground
Lease not specifically allocated by this Lease shall be apportioned according to
the relative responsibilities of Lessor and Lessee hereunder. Notwithstanding
the generality of the foregoing, Lessor and Lessee agree that nothing in this
Lease shall be deemed to affect or modify any requirements of the Ground Lease
with regard to (i) necessary consents and approvals of the Ground Lessor or (ii)
requirements of records retention as set forth in the Ground Lease.
Lessee and Lessor covenant and agree with each other that neither shall
do anything which shall have the effect of creating a breach on the part of
Lessor, its successors and assigns, of any of the terms, covenants and
conditions of the Ground Lease. Notwithstanding the foregoing, in the event that
Ground Lessor shall fail or refuse to comply with any of the respective
provisions of the Ground Lease despite Lessor's good faith reasonable efforts to
obtain such compliance and Lessor is not in default under the Ground Lease,
Lessor shall have no liability on account of any such failure or refusal,
provided that Lessee shall have the option to request that Lessor assign to
Lessee, and Lessee shall have, the right to exercise in its own name (and not
that of Lessor) all of the rights to enforce compliance on the part of Ground
Lessor as are available to Lessor. Lessor hereby agrees to cooperate with and
execute and deliver, all at Lessee's expense, all instruments and information
reasonably required by Lessee in order to enforce such compliance.
- 84 -
<PAGE> 91
ARTICLE 29
MISCELLANEOUS
29.1 Enforceability. Anything contained in this Lease to the contrary
notwithstanding, all claims against, and liabilities of, Lessee or Lessor
arising prior to any date of termination of this Lease shall survive such
termination. If any term or provision of this Lease or any application thereof
is invalid or unenforceable, the remainder of this Lease and any other
application of such term or provisions shall not be affected thereby. If any
late charges or any interest rate provided for in any provision of this Lease
are based upon a rate in excess of the maximum rate permitted by applicable law,
the parties agree that such charges shall be fixed at the maximum permissible
rate. Neither this Lease nor any provision hereof may be changed, waived,
discharged or terminated except by a written instrument in recordable form
signed by Lessor and Lessee. All the terms and provisions of this Lease shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns. The headings in this Lease are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof. This
Lease shall be governed by and construed in accordance with the laws of the
State, but not including its conflicts of laws rules.
29.2 Waiver of Trial by Jury. LESSOR AND LESSEE EACH WAIVE, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN THE
EVENT OF A PROCEEDING WITH RESPECT TO THIS LEASE, INCLUDING, WITHOUT LIMITATION,
SUMMARY PROCEEDINGS TO ENFORCE THE REMEDIES SET FORTH IN ARTICLE 16.
29.3 No Waiver. No failure by Lessor or Lessee to insist upon the
strict performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial payment
of Rent during the continuance of any such breach, shall constitute a waiver of
any such breach or of any such term. To the extent permitted by law, no waiver
of any breach shall affect or alter this Lease, which shall continue in full
force and effect with respect to any other then existing or subsequent breach.
29.4 Remedies Cumulative. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of Lessor or Lessee now or
hereafter provided either in this Lease or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right, power
and remedy and the exercise or beginning of the exercise by Lessor or Lessee of
any one or more of such rights, powers and remedies shall not preclude the
simultaneous or subsequent exercise by Lessor or Lessee of any or all of such
other rights, powers and remedies.
29.5 Acceptance of Surrender No surrender to Lessor of this Lease or of
the Leased Property or any part thereof, or of any interest therein, shall be
valid or effective unless agreed to and accepted in writing by Lessor and no act
by Lessor or any representative or agent of Lessor, other than such a written
acceptance by Lessor, shall constitute an acceptance of any such surrender.
- 85 -
<PAGE> 92
29.6 No Merger of Title. There shall be no merger of this Lease or of
the leasehold estate created hereby by reason of the fact that the same Person
may acquire, own or hold, directly or indirectly: (a) this Lease or the
leasehold estate created hereby or any interest in this Lease or such leasehold
estate and (b) the fee estate in the Leased Property.
29.7 Conveyance by Lessor. If Lessor or any successor owner of the
Leased Property conveys the Leased Property to a Person other than an Affiliate
of Lessor in accordance with the terms hereof other than as security for a debt,
and the grantee or transferee of the Leased Property expressly assumes all
obligations of Lessor hereunder arising or accruing from and after the date of
such conveyance or transfer, Lessor or such successor owner, as the case may be,
shall thereupon be released from all future liabilities and obligations of
Lessor under this Lease arising or accruing from and after the date of such
conveyance or other transfer as to the Leased Property and all such future
liabilities and obligations shall thereupon be binding upon the new owner.
29.8 Waiver of Presentment, etc. Lessee waives all presentments,
demands for payment and for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance and waives
all notices of the existence, creation, or incurring of new or additional
obligations, except as expressly granted herein.
29.9 Standard of Discretion. In any provision of this Lease requiring
or permitting the exercise by Lessor or Lessee of such party's approval,
election, decision, consent, judgment, determination or words of similar import
(collectively, an "APPROVAL"), such Approval may, unless otherwise expressly
specified in such provision, be given or withheld in such party's sole, absolute
and unreviewable discretion. Any Approval which by the terms of this Lease may
not be unreasonably withheld shall also not be unreasonably conditioned or
delayed.
29.10 Action for Damages. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN, IN ANY SUIT OR OTHER CLAIM BROUGHT BY EITHER PARTY SEEKING DAMAGES
AGAINST THE OTHER PARTY FOR BREACH OF ITS OBLIGATIONS UNDER THIS LEASE, THE
PARTY AGAINST WHOM SUCH CLAIM IS MADE SHALL BE LIABLE TO THE OTHER PARTY ONLY
FOR ACTUAL DAMAGES AND NOT FOR CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES.
29.11 Lease Assumption in Bankruptcy Proceeding. If an Event of Default
occurs and Lessee has filed or has had filed against it a petition in bankruptcy
or for reorganization or other relief pursuant to the federal bankruptcy code,
Lessee shall promptly move the court presiding over the proceeding to assume
this Lease pursuant to 11 U.S.C. ?365, without seeking an extension of the time
to file said motion.
29.12 FelCor Intra-Family Transfers. Lessee acknowledges that Lessor
may transfer legal title to the Leased Property one or more times to
Subsidiaries of FelCor (each, an "AFFILIATED LESSOR"). Lessee hereby consents to
such transfers provided that, in each case, this Lease is assumed by the
Affiliated Lessor in its entirety and without modification, except to the
- 86 -
<PAGE> 93
extent that Lessor, or the Affiliated Lessor that then owns the Leased Property,
specifically retains any obligations accrued through the date of transfer
hereunder. Lessee covenants that in connection with such transfers, Lessee will
execute and deliver to Lessor, the Affiliated Lessor and/or their
representatives appropriate estoppels and other documentation reasonably
requested by them, including an amendment to this Lease, for the purposes of
reflecting and acknowledging the Affiliated Lessor's interests as lessor
hereunder.
29.13 Memorandum of Lease. Lessor and Lessee shall promptly upon the
request of either enter into a short form memorandum of this Lease, in form
suitable for recording under the laws of the State, in which reference to this
Lease, and all options contained herein, shall be made. Lessee shall pay all
costs and expenses of recording such memorandum of this Lease.
ARTICLE 30
NOTIFICATION OF PROPERTY HAZARDS
30.1 NOTIFICATION REGARDING ASBESTOS. LESSEE ACKNOWLEDGES THAT LESSOR
HAS ADVISED LESSEE OF THE LIKELIHOOD OF THE EXISTENCE OF ASBESTOS CONTAINING
MATERIALS USED DURING THE INITIAL CONSTRUCTION OF THE HOTEL AND OTHER LEASED
PROPERTY. IF AND TO THE EXTENT REQUIRED BY LAW, AN OPERATION AND MAINTENANCE
PLAN HAS BEEN ESTABLISHED TO MONITOR SUCH MATERIALS AND HAS BEEN MADE AVAILABLE
TO LESSEE.
30.2 NOTIFICATION REGARDING RADON GAS. RADON IS A NATURALLY OCCURRING
RADIOACTIVE GAS THAT, WHEN IT HAS ACCUMULATED IN A BUILDING IN SUFFICIENT
QUANTITIES, MAY PRESENT A HEALTH RISK TO PERSONS WHO ARE EXPOSED TO IT OVER
TIME. LEVELS OF RADON THAT EXCEED FEDERAL AND STATE GUIDELINES HAVE BEEN FOUND
IN BUILDINGS IN FLORIDA. ADDITIONAL INFORMATION REGARDING RADON AND RADON
TESTING MAY BE OBTAINED FROM THE APPROPRIATE COUNTY PUBLIC HEALTH UNIT.
[SIGNATURES ON FOLLOWING PAGE]
- 87 -
<PAGE> 94
IN WITNESS WHEREOF, the parties have executed this Lease by their duly
authorized officers as of the date first above written.
"LESSOR"
--------------------------------------------
By:
-----------------------------------------
Title:
--------------------------------------
LESSEE"
------------------------------------------
By:
-----------------------------------------
Title:
--------------------------------------
- 88 -
<PAGE> 95
EXHIBIT A
LEASED PROPERTY DESCRIPTION
<PAGE> 96
EXHIBIT B
EXCLUDED PROPERTY
<PAGE> 97
EXHIBIT C
CAPITAL EXPENDITURES POLICY
CAPITAL EXPENDITURES
A capital expenditure is defined as an investment in a readily identifiable
facility which (l) is held for use or income rather than for sale or conversion
into goods or cash and (2) has a useful service life in excess of one year.
Nonrecurring expenses directly associated with the investment should be included
as part of the total expenditure for evaluation purposes. Capital expenditures
may include, without limitation, expenditures for computer hardware and software
to solve the "Year 2000 Problem."
Capitalization Policy
If the cost of the capital expenditure is $1,500 or greater and the items
acquired have an expected service life of more than one year, the expenditure is
capitalized. See "MAINTENANCE AND REPAIRS" for those expenditures which are
expensed without regard to the $1,500 guideline. If the item(s) acquired meet
the more than one-year life criterion, but the total invoice cost is less than
$1,500, the expenditure is considered an expense item.
Replacement - Component Parts
If the estimated job or total invoice cost (including parts and labor) of any
particular item or series of items acquired with respect to one particular job
for replacement of the following major building components is under $1,500, the
expenditure is to be expensed to maintenance and repairs:
Heating Equipment - Pumps, boilers, heat exchangers, thermostats,
pressure gauges, alarm devices, piping.
Plumbing Equipment - Pumps, meters, sprinkler and fire alarm system,
piping.
Air Conditioning Equipment - Compressors, condensers, motors, cooling
towers, evaporative coolers, piping.
Fire Prevention Equipment - Major fire system sprinklers, smoke
detectors.
Power - Transformer, conduits and boxes, panel boards, switches and
outlets.
Elevators - Motors, hydraulics, cables.
<PAGE> 98
Betterments and Redevelopments
If the estimated job or total invoice cost is $1,500 or above, and the
expenditure(s) will extend the useful life of an asset previously capitalized,
then the expenditure should be capitalized. All invoices, regardless of amount,
that are included in a hotel redevelopment budget will be capitalized.
Maintenance and Repairs
The following replacement expenditures are considered maintenance and repairs
and are not subject to the total invoice cost guideline of $1,500 unless they
are included in a hotel redevelopment budget:
Repainting of Buildings, Pools, Park Areas(1)(6)
Refinishing of Furniture(2)
Glass Replacement
Maintenance Service Contracts, such- Yard, Television, Elevator, Swimming Pool
Wall Paper Vinyl(2)
Reupholstery of Furniture(2)
Replastering(2)
Replacement of Chain Locks, Key Blanks, Keys, Locks, Locksets. Locks
and locksets installed in new doors or offering substantial security
improvements should be capitalized if the invoice is over $1,500.
Patching Parking Lot(3)
Roof Repairs(4)
Waterproofing of Lamp Globes & Lightbulbs
Section Replacement for Neon Signs
Caulking and Sealing(1)
Chrome Fittings such as Faucets, Towel Bars, etc.(2)
Toilet and Toilet Seats(7)
Stolen or Damaged Television(7)
Small Parts for Equipment
Landscaping/Plants(5)
Clocks, Clock-Radios or Similar Small Items(7)
1. If the complete exterior of the building is repainted, including
caulking and sealing of the building, those costs will be capitalized.
2. Expenditures for interior painting, wall paper, refinishing of
furniture, replastering, or reupholstering may be capitalized if:
A) these expenditures are part of a hotel addition or
major refurbishment project (including newly
instituted franchise requirements), or
2
<PAGE> 99
B) the cost of these expenditures exceed $5,000 with
respect to any particular item or series of items
related to one particular job and extend the useful
life of the asset.
3. Repairing of parking lots, including resealing and resurfacing, will be
capitalized if the expenditure exceeds $5,000.
Replacements/Major overhauls
4. Replacement of the complete roof or complete section of the roof
(including laying a roof over an existing roof) will be capitalized if
the total expenditure exceeds $5,000.
5. If the landscaping is new or replacement of existing interior or
exterior landscaping and exceeds $5,000, the cost of the landscaping
can be capitalized.
6. Major overhauls to the pool which exceed $5,000 in cost and extend the
useful life of the asset will be capitalized.
7. When an entire floor or a significant portion of a hotel replaces a
series of mattresses, bed spreads, window treatments, televisions,
irons and boards, in-room coffee makers or similar type items, these
items will be capitalized.
3
<PAGE> 1
EXHIBIT 11.1
BRISTOL HOTELS & RESORTS
COMPUTATION OF EARNINGS PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PER SHARE
NET EARNINGS SHARES AMOUNT
--------------- ------ ---------
($ in thousands)
<S> <C> <C> <C>
For the period July 28, 1998 through December 31, 1998:
Net income per share..................................... $ 2,645 9,787,535 $ 0.27
Effect of options........................................ -- 164,020 --
---------- -------------- ---------
Net income per share, assuming dilution.................. $ 2,645 9,951,555 $ 0.27
========== ============== =========
</TABLE>
<PAGE> 1
EXHIBIT 11.2
BRISTOL HOTEL COMPANY (PREDECESSOR)
COMPUTATION OF EARNINGS PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PER SHARE
NET EARNINGS SHARES AMOUNT
--------------- ------ ---------
($ in thousands)
<S> <C> <C> <C>
For the period January 1, 1998, through July 27, 1998:
Income before extraordinary item per share $ 15,261 44,379,739 $ 0.34
Effect of options -- 814,744
-------- ----------
Income before extraordinary item per
share, assuming dilution $ 15,261 45,194,483 $ 0.34
======== ==========
Net loss per share $(10,428) 44,379,739 $ (0.23)
Effect of options -- 814,744
-------- ----------
Net loss per share, assuming dilution $(10,428) 45,194,483 $ (0.23)
======== ==========
For the year ended December 31, 1997:
Income before extraordinary item per share $ 33,214 37,359,364 $ 0.89
Effect of options -- 972,938
-------- ----------
Income before extraordinary item per
share, assuming dilution $ 33,214 38,332,302 $ 0.87
======== ==========
Net income per share $ 20,473 37,359,364 $ 0.55
Effect of options -- 972,938
-------- ----------
Net income per share, assuming dilution $ 20,473 38,332,302 $ 0.53
======== ==========
For the year ended December 31, 1996:
Income before extraordinary item
per share $ 17,749 24,848,760 $ 0.71
Effect of options -- 677,653
-------- ----------
Income before extraordinary item per
share, assuming dilution $ 17,749 25,526,413 $ 0.70
======== ==========
Net income per share $ 17,749 24,848,760 $ 0.71
Effect of options -- 677,653
-------- ----------
Net income per share, assuming dilution $ 17,749 25,526,413 $ 0.70
======== ==========
</TABLE>
Earnings per share have been retroactively adjusted for the effect of
stock splits.
<PAGE> 1
EXHIBIT 21.1
BRISTOL HOTELS & RESORTS
SUBSIDIARIES
1) AUSTIN INNKEEPERS, INC. 17) BRISTOL SALT LAKE TENANT
2) HMC CANADA, INC. COMPANY
3) BHMC GENPAR, L.L.C. 18) BRISTOL SLC MANAGEMENT
4) BHMC LIMPAR, L.L.C COMPANY
5) BHTC CANADA, INC. 19) BRISTOL TEXAS BEVERAGE
6) BRISTOL ACQUISTION COMPANY
BEVERAGE COMPANY 20) FORT HAYS RESTAURANT, INC.
7) BRISTOL HOSPITALITY 21) GLENJON, INC.
BEVERAGE COMPANY 22) H&H CATTLE, INC.
8) BRISTOL HOSPITALITY TENANT 23) HARPER FARMS, INC.
COMPANY 24) HARVEY HOTEL PURCHASING
9) BRISTOL HOTEL BEVERAGE COMPANY
COMPANY 25) HARVEY'S BAR/REMINGTON'S
10) BRISTOL HOTEL MANAGEMENT 26) HAYS BANCORP, INC.
CORPORATION 27) MIDLAND HOTEL, INC.
11) BRISTOL HOTEL TENANT 28) MOLINE MANAGEMENT, INC.
COMPANY 29) MOLINE RESTAURANT, INC.
12) BRISTOL IP COMPANY 30) NATIONAL INNS, INC.
13) BRISTOL KANSAS BEVERAGE 31) OMAHA RESTAURANT, INC.
COMPANY 32) ROSE ROOM, INC.
14) BRISTOL LODGING BEVERAGE 33) UNITED INNS, INC. OF
COMPANY TENNESSEE
15) BRISTOL LODGING TENANT
COMPANY
16) BRISTOL MANAGEMENT, L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 5, 1999 on the consolidated financial statements of Bristol
Hotels & Resorts and its Predecessor, the Bristol Hotel Company, (and to all
references to our Firm), incorporated by reference into the Registration
Statement on Form S-8 (File #333-59965) of Bristol Hotels & Resorts, Inc.
Dallas, Texas,
February 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-20-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,916
<SECURITIES> 0
<RECEIVABLES> 35,972
<ALLOWANCES> (643)
<INVENTORY> 9,612
<CURRENT-ASSETS> 96,143
<PP&E> 7,648
<DEPRECIATION> (1,759)
<TOTAL-ASSETS> 105,522
<CURRENT-LIABILITIES> 63,162
<BONDS> 0
0
0
<COMMON> 228
<OTHER-SE> 57,160
<TOTAL-LIABILITY-AND-EQUITY> 105,522
<SALES> 0
<TOTAL-REVENUES> 294,918
<CGS> 0
<TOTAL-COSTS> 280,743
<OTHER-EXPENSES> 10,434
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (689)
<INCOME-PRETAX> 4,430
<INCOME-TAX> 1,785
<INCOME-CONTINUING> 2,645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,645
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
