ITEM 3.
LEGAL PROCEEDINGS.
We are involved in various legal proceedings arising in the normal course of business. We believe that the ultimate outcome of such proceedings will not have a material adverse effect on our results of operations or financial condition; however, there can be no assurance that this will be the case.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of our security holders during the fourth quarter of 1999.
PART II.
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED 	SHAREHOLDER MATTERS.
Our 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 common stock as reported on the NYSE Composite Tape for each of the quarters during the period July 28, 1998, through December 31, 1998 and the year ended December 31, 1999 are set forth below:
On March 6, 2000, the last reported sale price of the common stock on the NYSE was $9.3125. As of March 6, 2000, we had 94 stockholders of record. We believe the number of beneficial owners of our common stock to be approximately 2,800.
We have not paid any cash dividends on our common stock and do not presently intend to do so in the foreseeable future.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data for Bristol Hotels & Resorts for the year ended December 31, 1999, and 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, and the one month ended January 31, 1995. The selected balance sheet data is presented for Bristol Hotels & Resorts as of December 31, 1999 and 1998, and the Predecessor (and its predecessor, Harvey Hotel Companies) as of December 31, 1995 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.”
SELECTED HISTORICAL FINANCIAL DATA
(in thousands, except per share data)
BRISTOL HOTELS & RESORTS
BRISTOL HOTEL COMPANY (Predecessor)
HARVEY HOTEL COMPANIES (Predecessor)
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL 	CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
Bristol Hotels & Resorts
Bristol Hotels & Resorts’ results of operations for the year ended December 31, 1999, and the period 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. We conducted no operations from March 20, 1998, through May 19, 1998. Therefore, our operating results for the period from Inception through December 31, 1998, are not indicative of our future performance. Comparisons between the year ended December 31, 1999, and the period from Inception through December 31, 1998, are not practicable and therefore are not presented.
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”).
Statistical Summary
The following chart reflects the operations of comparable hotels (“Same Store Hotels”), which are hotels that we operated or were operated by the Predecessor during both periods presented and excludes non-comparable single acquisition assets.
Notes
(1)
Same Store Hotels excludes hotels undergoing 	renovation during 1999 or 1998.
(2)
Canadian assets have been adjusted to remove the 	effect of period-to-period exchange rate fluctuations.
(3)
Excludes recently terminated contracts.
Our leased hotels experienced a gain in RevPAR of 5.2% over 1998 and an increase in ADR of 5.1%. The
largest gains in RevPAR growth were for the 23 properties for which redevelopment was completed in 1998. These hotels had an increase of 20.3% in RevPAR, resulting from increases in occupancy of 6.7% and of 8.6% in ADR.
Since the Redevelopment and Rebranding Program was substantially complete by the end of 1999, our hotels will be able to focus on improving our operating margins and market share performance in 2000. We are concentrating on regaining that business displaced from our hotels by the disruptions of the Redevelopment and Rebranding Program, and increasing our market penetration. We have increased our sales and marketing efforts, and therefore costs, to respond to the stronger competition and increased supply in many of our markets.
Redevelopment and Rebranding Program
The Redevelopment and Rebranding Program started by BHC in November 1997 and substantially completed in 1999 impacted both our 1999 and 1998 operating results and that of the Predecessor. The Redevelopment and Rebranding Program entailed 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 our own brand names. In addition to the renovations, we rebranded 18 hotels to the Crowne Plaza or Crowne Plaza Suites brand. We believe the conversions to the Crowne Plaza brand will enable the hotels to more effectively compete in the markets in which they operate. In total, 50 hotels with 15,333 rooms were undergoing redevelopment during 1999 and 1998. The Redevelopment and Rebranding Program was substantially complete by December 31, 1999.
RESULTS OF OPERATIONS
Bristol Hotels & Resorts
Year ended December 31, 1999
Rooms revenue was $565.3 million for the year ended December 31, 1999. Rooms profit margin (rooms revenue less rooms expenses divided by rooms revenue) was 71.2%, an increase of 0.9% over the period from Inception through December 31, 1998. The end of the Redevelopment and Rebranding Program and the disruptions to the hotels caused by it had a positive impact on our 1999 results. The Redevelopment and Rebranding Program caused 2.4% of our room nights to be out of service during the year, a decrease from 3.7% in 1998, our busiest redevelopment period. During 1999, 26 hotels were under redevelopment, primarily in the first six months of the year. Approximately 81.4% of the total room nights out of service during the year occurred in the first six vonths of 1999.
In the last quarter of 1999, we reorganized our operating structure to align hotels by product type rather than geographic region, and hotel general managers now report directly to their division vice president, allowing us to eliminate a middle layer of managers between the hotels and management. We believe this realignment allows us to respond quicker to opportunities and challenges at the hotels, and by creating divisions of like-branded hotels, allows for best-practice sharing between similar properties.
During 1999, we completed a review of fixed staffing levels at comparable hotels, and determined that approximately 150 hotel-level salaried employees could be eliminated without adversely affecting revenues or service levels. We recognized one-time charges of $187,000 for severance payments to these terminated employees, and $396,000 of relocation expenses related to the management realignment during 1999.
Food and beverage revenue was $144.3 million for the year ended December 31, 1999. Food and beverage profit margin was 24.0% for the period, a slight increase over the period from Inception through December 31, 1998. The availability of newly renovated banquet and restaurant space and a focus on food and beverage marketing efforts led to an increase in revenues during the year.
Management fee income was $5.3 million during the year. This amount includes base and incentive fees for the properties we managed during the year, termination fees of $1 million for the five contracts
terminated due to sale of the related properties in October 1999, and $360,000 ($1.2 million cash less $840,000 unamortized acquisition costs) related to the termination of the Holiday Inn - Hollywood contract.
Construction management fees were $3.2 million for the year ended December 31, 1999. These fees are charged to hotel owners in connection with redevelopment, capital improvement and purchasing services. With the completion of the Redevelopment and Rebranding Program, we do not anticipate that construction management fees will continue to be a significant source of revenue in the future.
Administrative and general and marketing expenses were $71.8 million and $59.5 million for the year ended December 31, 1999, respectively. These costs relate to the hotel-level management and sales and marketing departments.
Property occupancy costs were $65.7 million for the period. The largest component of occupancy costs is utility costs, which were $31.0 million for the year. During 1999, we began installing energy-saving devices in some of our hotels, such as sensors which determine whether a room is occupied and regulate the air-conditioning needs for that room, as well as energy-efficient lighting.
Tenant lease expense was $235.0 million for the year ended December 31, 1999. This amount was primarily paid to FelCor, and consisted of $156.8 million of base rent and $78.2 million of percent rent in excess of the base amount.
Corporate expenses were $22.6 million for the year ended December 31, 1999. This amount includes the costs of the support functions in our corporate office, public company costs, and costs associated with acquiring new operating contracts. As a result of the completion of the Redevelopment and Rebranding Program, we have substantially reduced our construction/design and purchasing departments. We incurred one-time charges for severance and bonuses of $284,000 during 1999 for the termination of these employees.
Interest income was $1.4 million for the year ended December 31, 1999. This amount consists of income earned on cash balances and the $10.4 million outstanding of notes from FelCor (the “FelCor Notes”), net of expenses related to the $9.1 million letter of credit outstanding under our credit facility with Bankers Trust Company.
Depreciation and amortization was $3.1 million for the year ended December 31, 1999. This amount relates primarily to the property and equipment in our corporate office, including our investment in centralized information technology.
EBITDA (earnings before interest, taxes, depreciation and amortization) was $15.2 million for the year ended December 31, 1999. EBITDA margin (EBITDA divided by gross revenues) was 2.0% for the year. Net income was $8.2 million for the year ended December 31, 1999.
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 our 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. We generated approximately 61.5% of our food and beverage revenue from banquet and catering operations.
Management fee income was $2.4 million for the period ended December 31, 1998. At period end, we had 14 management contracts, one of which converted to a lease effective January 1, 1999. We have been advised by certain owners of their intention to sell properties currently under our management. 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 to the hotel owners for purchasing and project management services provided by us 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 was 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 our 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 our corporate office.
EBITDA was $4.8 million for the period. EBITDA margin 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.
Bristol Hotels & Resorts(continued)
Period from July 28, 1998, through December 31,
Until the Spin-off, we had no material operations. Therefore, we believe that the following presentation of our results of operations from July 28, 1998, through December 31, 1998, is more indicative of our performance (in thousands, except per share amounts):
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.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand, cash flow from operations, the $10.4 million outstanding of notes from FelCor (the “FelCor Notes”) and borrowings under the $40 million revolving credit facility with Bankers Trust Company (the “Credit Facility”). We had approximately $16.2 million and $24.9 million of cash as of December 31, 1999 and 1998, respectively, and the ability to call the $10.4 million of FelCor Notes on 5 days’ demand. We believe that we currently require approximately $10 million of cash to fund our day-to-day working capital needs.
Cash flow from operations was $1.7 million for the year ended December 31, 1999, and $8.3 million for
the period from Inception through December 31, 1998. EBITDA was $15.2 million and $4.8 million for the year ended December 31, 1999, and the period from Inception through December 31, 1998, respectively. Interest earned from cash on hand and the FelCor Notes (net of fees related to the line of credit) was $1.4 million and $680,000 for the year ended December 31, 1999, and the period from Inception through December 31, 1998, respectively. These sources of cash were offset in 1999 by working capital items, including an increase in prepaid rent on the leases of $3.0 million, increases in prepaid insurance and other deposits of $2.1 million, and the reduction of trade payable and other current liabilities of $4.8 million. During the period from Inception through December 31, 1998, working capital was positively affected by a reduction of accounts receivable of $14.7 million, offset by prepaid rent on the leases of $11.0 million.
The $40 million of commitments under the Credit Facility may be used for working capital and other general corporate purposes. Under this agreement, the lenders have issued a standby letter of credit of $9.1 million (as of December 31, 1999) to secure our obligations under the leases with FelCor. This amount may be reduced from time to time pursuant to the liquid net worth requirements related to the leases.
Our board of directors has authorized management to repurchase up to 500,000 shares of our outstanding common stock. The authorized stock repurchases may, at the discretion of management, be made from time to time at prevailing prices in the open market or through privately negotiated transactions. Management will base its purchase decisions on market conditions, the price of the shares and other factors. As of December 31, 1999, we had repurchased 125,000 shares through this program.
We are actively pursuing opportunities for growth and anticipate adding to our management portfolio. We began managing the newly constructed 122-room Hilton Garden Inn in Round Rock (Austin), TX in January 2000, and have previously announced agreements to operate a 262-room upscale Hilton Hotel in Austin, TX, two additional Hilton Garden Inns in Windsor, CT, and Lewisville (Dallas), TX, a Staybridge Suites in Oakbrook, IL (near Chicago O’Hare airport), and a Holiday Inn Express and Suites at San Francisco Fisherman’s Wharf. These properties are all under development and we anticipate openings beginning late 2000. We do not anticipate entering into any significant new lease agreements in the future.
It is possible that some new management contracts could require us to make a small capital investment. We may also purchase hotel management contracts from third parties. If such an investment is necessary, we believe we have adequate capital resources including cash on hand, availability under the Credit Facility and the FelCor Notes to fund these opportunities for the immediate future.
We are continuously exploring opportunities for increasing efficiency at the hotels and the corporate office. Some of these opportunities could require small capital investments to achieve the targeted savings. We installed approximately $1.8 million of energy-saving devices in the leased hotels during 1999 and anticipate spending an additional $800,000 in 2000. We believe we have adequate capital resources to fund our growth opportunities for the immediate future.
Seasonality
The lodging industry is affected by seasonal patterns. At most of our hotels, demand is higher in the second and third quarters than during the remainder of the year. Assuming other factors remain constant, we normally have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters. Our results are also impacted during periods of renovation when rooms are placed out of service.
Inflation
We are impacted by inflation in both the movement of certain costs of the operations of our hotels and in the ability to increase the rates charged to guests for rooms, food and beverage and other services. A continuing strong labor market has resulted in increased costs. We are attempting to mitigate the effects to our profit margins by increasing employee productivity without affecting customer service levels.
Many 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. We do not believe that increases in inflation rate from today’s relatively low levels would have an adverse impact on our results of operations. A major economic shift, such as a recession, would have a substantial adverse impact on our operating results. A major economic downturn that results in decreased business and leisure travel could result in lower revenues and, because of the fixed costs associated with operating the hotels, lower profit margins.
Changes in the rate of inflation could impact the level of short-term interest rates. Since we have no floating rate debt currently outstanding, we do not believe that we have any significant exposure should a rise in market interest rates occur.
Year 2000 Readiness
Our Year 2000 Readiness Program (the “Program”) was successful and we experienced no ill effects related to the Year 2000 problem. The Program was fully complete as of December 20, 1999. On December 31, 1999, we implemented a final series of checks on property-level software and systems, all of which produced successful results.
Costs
The hotel owners were principally responsible for the cost of all property-level remediation, and we incurred costs only in connection with Program implementation at our corporate headquarters. Our total cost for such implementation was $355,000. We expect to incur no further costs related to the Program or any other activity related to Year 2000 readiness.
Results
The Program was fully effective in correcting any potential Year 2000-related software, hardware or systems problems, and we experienced no failures of any kind at our corporate headquarters or any of our properties. We experienced no ill effects related to the reservations and other critical systems operated by our various franchisors and third-party vendors (although we were not responsible for the Year 2000 readiness of any such system). It is possible that the full effect of the date change has not been recognized; however, any problems that may occur at a later date as a result of the Year 2000 problem are likely to be minor and correctable.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates on our Credit Facility. Since we have no floating rate debt currently outstanding, we do not believe that we have any significant exposure should a rise in market interest rates occur. We have not entered into any derivative or interest rate transactions. Although we conduct business in Canada, the Canadian operations were not material to our financial position, results of operations or cash flows as of December 31, 1999 and 1998. Additionally, foreign currency transaction gains and losses were not material to our results of operations for the year ended December 31, 1999, or for the period from Inception through December 31, 1998. Accordingly, we were not subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign subsidiaries. To date, we have not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial information is included on the pages indicated and is incorporated into this item by reference:
Page
	Report of Independent Public Accountants
	Bristol Hotels & Resorts
	Consolidated Statements of Income
	Consolidated Balance Sheets
	Consolidated Statements of Cash Flows
	Consolidated Statements of Changes in Stockholders’ Equity
	Notes to Consolidated Financial Statements
	Bristol Hotel Company (Predecessor)
	Consolidated Statements of Operations
	Consolidated Statements of Cash Flows
	Consolidated Statement of Changes in Stockholders’ Equity
	Consolidated Statements of Comprehensive Income (Loss)
	Notes to Consolidated Financial Statements
ITEM 9.
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 2000 Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A not later than 120 days after the close of the fiscal year).
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
	 AND MANAGEMENT.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV.
ITEM 14.
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.
INDEX TO EXHIBITS
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 27th day of March, 2000.
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.
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) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year ended December 31, 1999, and for the period from inception (March 20, 1998), through December 31, 1998. We have also audited the accompanying consolidated statements of operations, changes in stockholders’ equity, cash flows and comprehensive income (loss) for the period from January 1, 1998, through July 27, 1998, and for the year ended December 31, 1997, of Bristol Hotel Company (the Company’s predecessor, a former Delaware corporation) and subsidiaries. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bristol Hotels & Resorts and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the year ended December 31, 1999, and for the period from inception (March 20, 1998), through December 31, 1998; and the results of operations and cash flows of Bristol Hotel Company and subsidiaries for the period from January 1, 1998, through July 27, 1998, and for the year ended December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 25, 2000
(except with respect to
Note 18, as to which the
date is February 28, 2000)
BRISTOL HOTELS & RESORTS
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM INCEPTION
(MARCH 20, 1998) THROUGH DECEMBER 31, 1998
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOL HOTELS & RESORTS
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(Dollars in thousands)
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOL HOTELS & RESORTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM INCEPTION
(MARCH 20, 1998) THROUGH DECEMBER 31, 1998
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOL HOTELS & RESORTS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM INCEPTION
(MARCH 20, 1998) THROUGH DECEMBER 31, 1998
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
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 110 primarily 	full-service hotels (as of December 31, 1999) in the upscale 	 and midscale segments of the hotel industry containing 	approximately 29,200 rooms, of which 100 hotels are operated 	under the long-term leases with FelCor. The Company operates 	hotels in 24 states and Canada, with 29 hotels in 	Texas, 11 hotels in California and 9 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 21 hotels under other 	hotel brands, including Sheraton Four Points, 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 	inter-company 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 $488,000 and $643,000 at December 31, 1999 and 	1998, respectively.
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, 1999 and 1998, 	prepaid rent was $14.1 million and $11.0 million, 	respectively.
	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.
	Depreciation is computed on a straight-line method over the 	estimated useful lives of the assets, as follows:
	Furniture, fixtures and equipment
	3-15 years
	Automobiles and trucks
	5 years
	Leasehold improvements
	Lease term or useful life,
	whichever is less
	The cost of normal repairs and maintenance that does not 	significantly extend the life of the property and equipment is 	expensed as incurred.
	DEFERRED CHARGES AND OTHER NONCURRENT ASSETS
	Deferred charges and other noncurrent assets consists of 	franchise costs, a $1 million note receivable and deferred 	financing costs which are amortized over the life of the related 	line of credit.
	COMPREHENSIVE INCOME
	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 no translation adjustment 	 for the year ended December 31, 1999 and 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.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
	SEGMENT INFORMATION
	The Company does not prepare any information about any components 	 of the business for purposes of allocating resources or 	assessing performance for internal use since it analyzes each 	hotel individually for such purposes. The Company’s 	management has determined that it operates one line of business 	and it would be impracticable to report segment information.
	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 gains and losses are included in net income 	and were a gain of $54,000 for the year ended December 31, 	1999, and a loss of $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, 	1999 and 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, 1999 	 and 1998. The common equivalent shares include employee and 	director stock options which have been deemed exercised at the 	issue date using the treasury stock 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 Accounting Standards No. 128 	“Earnings per Share” (“SFAS 128”), which 	 calls for both basic and diluted weighted average share 	presentation.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
	USE OF ESTIMATES
	The Company has made a number of estimates and assumptions 	relating to the reporting of assets and liabilities, the 	disclosure of contingent assets and liabilities and the reported 	amounts of revenues and expenses to prepare these financial 	statements in conformity with generally accepted accounting 	principles. Actual results could differ from those estimates.
	RECLASSIFICATIONS
	Certain financial statement items from the prior years for the 	Predecessor have been reclassified to conform to the current 	presentation.
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. Therefore, 	at the Spin-off, former BHC stockholders owned 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):
4.
LEASES
	Of the 110 hotels operated by the Company, 100 are subject 	to long-term leases with FelCor. The principal terms of the 	leases are summarized below, although certain terms vary from 	hotel to hotel.
TERM
	The leases are for initial terms of five 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.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
LEASES (continued)
RENT
The Company pays 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 for the leases:
The base rent and the thresholds for computing percentage rent under the leases are adjusted annually to reflect changes in the Consumer Price Index.
The Company recognized lease expense of $235.0 million for the year ended December 31, 1999, and $87.9 million from July 28, 1998 through December 31, 1998. Of this amount, $156.8 million and $55.3 million, respectively, was base rent, and the remainder was percentage rent above the base amount.
Future minimum (base) rental payments under leases are as follows (in thousands):
TERMINATION FEES
Upon the sale of a property to a third party, the owner may terminate the lease. Under the FelCor leases, 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 by the Company 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. Five leases were terminated during the year ended December 31, 1999. In accordance with the calculations set forth under the lease agreements, no termination fees were received. The lease for the Hampton Inn - Las Vegas contains provisions for a termination fee calculated as the net present value of the projected cash flow to the Company from the property for the remainder of the lease term.
The leases may contain specific criteria under which, if the Company fails to meet these criteria, the owner may terminate the lease without payment of the termination fee. Either party may terminate upon a breach by the other party of the agreements under the lease.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
LEASES (continued)
INSURANCE, PROPERTY TAXES AND GROUND LEASES
	The owner pays 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 pays 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 NOTES 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 Company received repayments on this note of 	$6 million during the year ended December 31, 1999. The 	 Company then advanced an additional $6 million to FelCor 	and executed a new note for the $9.1 million outstanding. 	This note bears interest at LIBOR plus 125 basis points (7.7% as 	of December 31, 1999) and is callable upon five days’ 	notice from the Company.
	During 1999, FelCor executed a note for amounts due to a Canadian 	 subsidiary of the Company for approximately $1.3 million. 	This note bears interest at LIBOR plus 130 basis points (7.8% as 	of December 31, 1999) and is callable upon five days demand 	from the Company. The notes (collectively, the “FelCor 	Notes”) outstanding totaled $10.4 million at 	December 31, 1999.
6.
PROPERTY AND EQUIPMENT
	Property and equipment consists of the following (in thousands):
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%. The Credit Facility matured in July 1999, and the Company 	 exercised one of its one-year extensions. The current maturity 	date is July 2000, and can be extended for an additional one-year 	 period. 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 pays a fee of 1.875% annually on the maximum 	amount which may be drawn under each letter of credit issued. As 	of December 31, 1999, a letter of credit for 	$9.1 million was outstanding to FelCor to secure the 	Company’s obligations under the leases.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.
INCOME TAXES
	Components of income tax expense from continuing operations for 	the year ended December 31, 1999 and the period from 	July 28, 1998, through December 31, 1998, consists of 	the following (in thousands):
	The Company estimates that its effective tax rates for 1999 and 	1998 approximated 39.5% and 40.3%, respectively. The actual 	income tax expense for the year ended December 31, 1999, and 	 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:
	The tax effects of temporary differences that give rise to 	significant portions of the deferred tax assets and liabilities 	at December 31, 1999 and 1998, are as follows 	(in thousands):
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):
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. The options expire five years from the date of grant. 	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, 1999, 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, 50,513 of which 	are currently exercisable.
	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 999,557 employee 	options outstanding at December 31, 1999, including those 	issued under the Predecessor’s plan, of which 159,400 were 	exercisable.
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.
	From July 28, 1998 through July 27, 1999, the Company 	had the option to repurchase, at $6.38 per share, any shares 	 issued to employees under this plan upon an employee’s 	termination. As of July 28, 1999, the Company had 	repurchased approximately 2,400 shares from terminated 	employees.
	REPURCHASE OF COMMON STOCK
	The Board of Directors voted in February 1999 to authorize the 	Company to repurchase, from time to time, up to 	500,000 shares of its common stock. Shares cannot be 	repurchased from the Company’s officers, directors or 	employees.
	During the third quarter of 1999, the Company repurchased 	25,000 shares at $7.50 per share (plus broker 	commission). During the fourth quarter of 1999, the Company made 	two purchases totaling 100,000 shares, at an average price 	of $4.90 per share (plus broker commissions). The shares 	were retired upon purchase.
	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.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10.
STOCKHOLDERS’ EQUITY (continued)
SFAS 123 DISCLOSURE (continued)
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):
A summary of the status of the Company’s stock option plan at December 31, 1999 and 1998, and changes during the periods, are presented in the table and narrative below:
The 1,100,807 options outstanding at December 31, 1999, have exercise prices between $2.51 and $8.32 with a weighted average exercise price of $5.61 and a weighted average remaining contractual life of 7.3 years. At December 31, 1999, 209,913 of these options (with a weighted average exercise price of $5.92) 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 1999 and 1998, respectively: risk-free interest rates of 4.7% and 5.49%; no expected dividend yields; expected lives of 7.3 and 7.2 years; expected volatility of 73.26% and 33.75%.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
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):
13.
MANAGEMENT CONTRACTS
	 During 1999, the Company began management of the Holiday Inn 	Express Hotel & Suites in Cambridge, MA, the Hampton Inn 	 in Sault Ste. Marie, MI, and the Hawthorn Hotel & 	Suites near Chicago’s O’Hare Airport. In addition, the 	Company extended the term of its existing management contract for 	 the Holiday Inn - Nashville Vanderbilt from 2003 to 	2008. The Company contributed $400,000 towards a renovation of 	the hotel in connection with the extension. The Company entered 	into a management contract for a Holiday Inn Express 	Hotel & Suites at San Francisco’s 	Fisherman’s Wharf, a project which is currently under 	construction. The Company invested $1.5 million in this 	management contract. The property, which is adjacent to the 	Company’s Holiday Inn - Fisherman’s Wharf, is 	 scheduled to open in the fall of 2000.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.
MANAGEMENT CONTRACTS (continued)
	On December 15, 1999, the owners of the Hawthorn Suites 	borrowed $1 million from the Company. The note is for a term 	 of three years, bears interest at 8.65% annually and is included 	 in other non-current assets on the Company’s balance sheet.
	In April 1999, the Company received a termination fee of 	$1.2 million for the cancellation of the management 	contract for the Holiday Inn - Hollywood. This amount, 	net of $840,000 unamortized investment in the management 	contract, was recognized as management fee income. In the third 	quarter of 1999, a management contract covering five hotels was 	terminated in connection with the sale of the hotels. The sale 	and termination resulted in the Company receiving a 	$1 million termination fee.
	The Company’s investment in management contracts at 	December 31, 1999 and 1998, was $2.9 million and 	$2.0 million, respectively. The investments are amortized on 	 a straight-line basis over the lives of the contracts. The 	amortization of the investments was $201,000 and $99,000 for the 	year ended December 31, 1999, and the period from 	July 28, 1998 through December 31, 1998, respectively. 	Management fee income was $5.3 million and 	$2.4 million for the year ended December 31, 1999, and 	the period from July 28, 1998 through December 31, 	1998, respectively.
	Management contracts may contain provisions which allow the 	third-party owner to terminate the contract. Therefore, the 	Company cannot guarantee that it will manage these properties to 	the contract expiration dates, although early terminations 	generally require payment of termination fees by the owner.
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 $11.9 	million and $4.9 million related to these benefits for the 	year ended December 31, 1999, and 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 year ended 	December 31, 1999 and the period from Inception through 	December 31, 1998, of $2.0 million and 	$1.0 million, respectively. The Company determined that it 	did not meet the performance criteria necessary to make the 	discretionary 50% match contribution for either period. The 	Predecessor had accrued $963,000 for this discretionary match for 	 the period from January 1, 1998, through July 27, 	1998, which the Company reversed in December 1998.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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., Hilton Hotels Corporation (formerly 	Promus Hotels, Inc.), Hawthorn Suites Franchising, 	Incorporated, and ITT Sheraton Corporation. 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 	$33.5 million and $12.5 million, respectively, were 	paid during the year ended December 31, 1999, and 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 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. The Company has added 1,332 rooms to the Holiday Inn 	system toward these requirements as of December 31, 1999.
	The Company has entered into Franchise Agreements with Bass which 	 generally require the payment of franchise fees of 5% of room 	revenues. Amounts paid to Bass pursuant to Franchise Agreements 	and related marketing, advertising and reservation services were 	$51.3 million and $18.0 million, including 	$29.8 million and $11.2 million for franchise royalty 	and marketing fees and $5.9 million and $2.3 million of 	 frequent guest program fees for the year ended December 31, 	 1999, and the period from Inception through December 31, 	1998, respectively.
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.
FAIR VALUE
The Company has estimated the fair value of its financial instruments at December 31, 1999 and 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.
SUBSEQUENT EVENTS
On February 28, 2000, the Company announced a definitive merger agreement with Bass PLC whereby Bass PLC, the parent company of Bass Hotels & Resorts, will acquire the outstanding stock of the Company for $9.50 per share pursuant to a tender offer. The board of directors of Bristol has approved the transaction and resolved to recommend that Bristol shareholders accept the offer. United/ Harvey Holdings, L.P., a 39% stockholder of the Company, has entered into an agreement with Bass PLC to accept the offer and tender its shares.
Pursuant to the merger agreement, Bass PLC will promptly commence a cash tender offer for all outstanding shares of common stock of Bristol. The offer is conditioned upon, among other things, Bass PLC acquiring in the offer a majority of the outstanding Bristol shares (counting the 9.9% of the outstanding Bristol shares currently held by Bass). In the merger following the tender offer, each share of Bristol common stock not acquired pursuant to the offer will be converted into the right to receive $9.50 in cash. The total purchase consideration for the Bristol shares not already owned by Bass is $157 million. The merger is expected to occur in the second quarter of 2000.
19.
QUARTERLY FINANCIAL DATA (unaudited)
The unaudited consolidated quarterly results of operations for the Company are as follows (in thousands, except per share amounts):
BRISTOL HOTELS & RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19.
QUARTERLY FINANCIAL DATA (unaudited - continued)
	Earnings per share and weighted average shares for the period 	from Inception through June 30, 1998 are not presented. 	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 for the second and 	 third quarters of 1998 are not comparable to future periods.
	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.
BRISTOL HOTEL COMPANY (Predecessor)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOL HOTEL COMPANY (Predecessor)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOL HOTEL COMPANY (Predecessor)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOL HOTEL COMPANY (Predecessor)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOL HOTEL COMPANY (Predecessor)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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.
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.
The cost of normal repairs and maintenance that does not significantly extend the life of the property and equipment is expensed as incurred. Depreciation is computed on a straight-line method over the estimated useful lives of the assets, as follows:
Buildings
35-40 years
Furniture, fixtures and equipment
3-15 years
Automobiles and trucks
5 years
Leasehold improvements
Lease term or useful life,
whichever is less
Depreciation and amortization expense recorded for the period ended July 27, 1998, and the year ended December 31, 1997 was $34.3 million and $39.7 million, respectively.
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
	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 results 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 end of each reporting period.
	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. 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.
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
	The following table reconciles the computation of basic EPS to 	diluted EPS:
	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 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.
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 were leased to and operated by BH&R.
	The assets spun off to BH&R by the Predecessor subsequent to 	July 27, 1998 consisted of (in thousands):
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 was being amortized over 40 years.
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
ACQUISITIONS (continued)
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).
Single-Asset Acquisitions
Owned Hotels
	The Predecessor completed the following single-asset 	acquisitions:
(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:
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 Bass. 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.
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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.
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 year ended December 31, 1997, consist of the 	following (in thousands):
	Components of income tax benefits 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):
	The Predecessor estimates that its effective tax rate for 1998 	and 1997 approximated 41.24% and 39.9, respectively. The actual 	income tax expense for the period from January 1, 1998, 	through July 27, 1998, and the year ended December 31, 	1997, is computed by applying the U.S. federal statutory 	income tax rate, adjusted as follows:
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.
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 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.
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.
STOCKHOLDERS’ EQUITY (continued)
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):
A summary of the status of the Predecessor’s stock option plan at July 27, 1998, and December 31, 1997, and changes during the period from January 1, 1998, through July 27, 1998, and the year ended December 31, 1997, are presented in the table and narrative below:
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: 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%.
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
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 year ended December 31, 	1997, was $3.5 million and $4.9 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.
10.
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.
11.
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 April 1, 1995, all employees have been eligible for 	participation in the benefits provided through the Trust. The 	Predecessor provided $5.4 million and $6.1 million 	related to these benefits for period January 1, 1998, 	through July 27, 1998, and the year ended December 31, 	1997, 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,
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11.
BENEFITS (continued)
	1998, and the year ended December 31, 1997, totaling 	$2.5 million and $1.5 million, respectively.
12.
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 and $19.5 million were paid 	during the period January 1, 1998, through July 27, 	1998, and the year ending December 31, 1997, respectively.
	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 and 	$11.0 million for the period January 1 through July 27, 	 1998, and the year ended December 31, 1997, respectively.
13.
RELATED PARTY TRANSACTIONS
	The Predecessor agreed to enter into Franchise Agreements with 	Holiday Corporation (“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.
BRISTOL HOTEL COMPANY (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.
QUARTERLY FINANCIAL DATA (unaudited)
The unaudited consolidated quarterly results of operations for the Predecessor are as follows (in thousands, except per share amounts):
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.
INDEX TO EXHIBITS