<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) November 28, 2000
-------------------------------
HOST MARRIOTT, L.P.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-25087 52-2095412
(Commission File Number) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, Maryland 20817
(Address of Principal Executive Offices) (Zip Code)
-------------------------------
Registrant's Telephone Number, Including Area Code (310) 380-9000
(Former Name or Former Address, if changed since last report.)
================================================================================
1
<PAGE>
Form 8-K
ITEM 2. ACQUISITIONS OR DISPOSITIONS OF ASSETS
Host Marriott, L.P. ("Host LP"), whose general partner and majority limited
partner is Host Marriott Corporation ("Host REIT"), has agreed to purchase
certain subsidiaries of Crestline Capital Corporation ("Crestline") that hold
the leasehold interests with respect to 117 hotel properties owned by Host LP.
Host LP will purchase these entities, whose primary assets are the leasehold
interests, for approximately $205 million. Host LP also agreed to execute a
standard management agreement with Crestline allowing them to operate the Plaza
San Antonio hotel.
Under the REIT Modernization Act, which was passed in December 1999 and will
be effective beginning January 1, 2001, Host LP will be able to lease its
hotels to a wholly-owned subsidiary through a taxable corporation which will
elect to be treated as a taxable REIT subsidiary ("TRS"). Under the terms of
the transaction, Host LP, through a subsidiary, will purchase the leases from
Crestline on January 1, 2001.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired (see pg. 3)
(b) Pro forma financial information. (see pg. 54)
(c) Exhibits
99-Host Marriott Corporation press release
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto authorized.
Host Marriott, LP
By: its general partner
HOST MARRIOTT CORPORATION
By: /s/ Donald D. Olinger
--------------------------
Donald D. Olinger
Senior Vice President and
Corporate Controller
Date: November 28, 2000
2
<PAGE>
The businesses to be acquired by Host LP are the subsidiaries of Crestline
whose primary assets are the leasehold interests with respect to 117 hotel
properties owned by Host LP. In conjunction with these leases, Crestline
and certain of its subsidiaries entered into limited guarantees of the
lease obligations of each lessee. The 117 full-service hotel leases are
grouped into four lease pools, with Crestline's guarantee limited to the
greater of 10% of the aggregate rent payable for the preceding year or 10%
of the aggregate rent payable under all leases in the respective pool.
Additionally, the lessee's obligation under each lease agreement is
guaranteed by all other lessees in the respective lease pool. As a result,
Host LP believes that the operating results of each full-service lease pool
may be material to its financial statements. Further information regarding
these leases and Crestline's limited guarantees may be found in Host LP's
annual report on Form 10-K for the fiscal year ended December 31, 1999.
The following audited financial statements present separately the balance
sheets of the four lease pools in which the 117 hotels are organized, and
the related statements of operations, statements of shareholder's equity,
and statements of cash flows for the fiscal year ended December 31, 1999.
3
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
With Independent Public Accountants' Report Thereon
4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCHP I Corporation:
We have audited the accompanying consolidated balance sheet of CCHP I
Corporation and its subsidiaries (a Maryland corporation) as of December 31,
1999, and the related consolidated statements of operations, shareholder's
equity and cash flows for the fiscal year ended December 31, 1999. These
consolidated financial statements are the responsibility of CCHP I
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP I
Corporation and its subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the fiscal year then ended in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
February 24, 2000
5
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(in thousands, except share data)
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents............................................ $ 9,467
Due from hotel managers.............................................. 3,890
-------
13,357
Hotel working capital.................................................. 26,011
-------
$39,368
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Lease payable to Host Marriott....................................... $ 5,792
Other................................................................ 3,334
-------
9,126
Hotel working capital notes payable to Host Marriott................... 26,011
Deferred income taxes.................................................. 1,027
-------
Total liabilities.................................................. 36,164
-------
Shareholder's equity
Common stock (100 shares issued at $1.00 par value).................. --
Retained earnings.................................................... 3,204
-------
Total shareholder's equity......................................... 3,204
=======
$39,368
=======
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<S> <C>
REVENUES
Rooms............................................................... $585,381
Food and beverage................................................... 277,684
Other............................................................... 65,069
--------
Total revenues.................................................... 928,134
--------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
Rooms............................................................... 141,898
Food and beverage................................................... 211,964
Other............................................................... 241,996
Other operating costs and expenses
Lease expense to Host Marriott...................................... 276,058
Management fees..................................................... 40,659
--------
Total operating costs and expenses................................ 912,575
--------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............... 15,559
Corporate expenses.................................................... (1,367)
Interest expense...................................................... (1,585)
--------
INCOME BEFORE INCOME TAXES............................................ 12,607
Provision for income taxes............................................ (5,169)
--------
NET INCOME............................................................ $ 7,438
========
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------ -------- ------
<S> <C> <C> <C>
Balance, January 1, 1999................................ $-- $ -- $ --
Dividend to Crestline Capital......................... -- (4,234) (4,234)
Net income............................................ -- 7,438 7,438
---- ------ ------
Balance, December 31, 1999.............................. $-- $3,204 $3,204
==== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 7,438
Change in amounts due from hotel managers.............................. (678)
Change in lease payable to Host Marriott............................... 5,792
Changes in other operating accounts.................................... 1,149
-------
Cash from operations................................................. 13,701
INVESTING ACTIVITIES................................................... --
-------
FINANCING ACTIVITIES
Dividend to Crestline Capital.......................................... (4,234)
-------
Increase in cash and cash equivalents.................................. 9,467
Cash and cash equivalents, beginning of year........................... --
-------
Cash and cash equivalents, end of year................................. $ 9,467
=======
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
CCHP I Corporation (the "Company") was incorporated in the state of Delaware
on November 23, 1998 as a wholly owned subsidiary of Crestline Capital
Corporation ("Crestline"). On December 29, 1998, Crestline became a publicly
traded company when Host Marriott Corporation ("Host Marriott") completed its
plan of reorganizing its business operations by spinning-off Crestline to the
shareholders of Host Marriott as part of a series of transactions pursuant to
which Host Marriott converted into a real estate investment trust ("REIT").
On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 35 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. During 1999, Host
Marriott sold three of the hotels and terminated the leases on those hotels.
As of December 31, 1999, the Company leased 32 full-service hotels from Host
Marriott.
The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase as cash equivalents.
Revenues
The Company records the gross property-level revenues generated by the
hotels as revenues.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
10
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Leases
Hotel Leases
The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 35 full-service hotels. Each hotel lease has an initial
term generally ranging from three to seven years. The hotel leases generally
have four seven-year renewal options at the option of the Company, however,
Host Marriott may terminate any unexercised renewal options. The Tenant
Subsidiaries are required to pay the greater of (i) a minimum rent specified
in each hotel lease or (ii) a percentage rent based upon a specified
percentage of aggregate revenues from the hotel, including room revenues, food
and beverage revenues, and other income, in excess of specified thresholds.
The amount of minimum rent is increased each year based upon 50% of the
increase in CPI during the previous twelve months. Percentage rent thresholds
are increased each year based on a blend of the increases in CPI and the
Employment Cost Index during the previous twelve months. The hotel leases
generally provide for a rent adjustment in the event of damage, destruction,
partial taking or certain capital expenditures. The rent during any renewal
periods will be negotiated at fair market value at the time the renewal option
is exercised.
The Tenant Subsidiaries are responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries are responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott is responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.
In the event that Host Marriott disposes of a hotel free and clear of the
hotel lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the hotel lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the hotel lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve of Crestline's leases
without having to pay a termination fee. During 1999, Host Marriott exercised
its right to terminate three hotel leases of the Company and Crestline without
having to pay a termination fee. Conversely, Crestline may terminate up to
twelve full-service hotel leases without penalty upon 180 days notice to Host
Marriott. During 1999, Crestline exercised its right to terminate two of the
Company's hotel leases as well as three additional Crestline hotel leases.
These hotel leases will terminate in 2000, 180 days after each respective
notification date.
As a result of the recent tax legislation discussed below, Host Marriott may
purchase all, but not less than all, of its hotel leases with Crestline,
beginning January 2, 2001, with the purchase price calculated as discussed
above. The payment of the termination fee will be payable in cash or, subject
to certain conditions, shares of Host Marriott common stock at the election of
Host Marriott.
For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.
FF&E Leases
Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the
11
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FF&E Leases is a fixed amount. The Company will have the option at the
expiration of the FF&E Lease term to either (i) renew the FF&E Leases for
consecutive one-year renewal terms at fair market rental rate, or (ii)
purchase the Excess FF&E for a price equal to its fair market value. If the
Company does not exercise its purchase or renewal option, the Company is
required to pay a termination fee equal to approximately one month's rent.
Guaranty and Pooling Agreement
In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provides a full guarantee and Crestline
provides a limited guarantee of all of the hotel lease obligations.
The cumulative limit of Crestline's guarantee obligation is the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement is
reduced to zero, the Company can terminate the agreement and Host Marriott can
terminate the Company's hotel leases without penalty.
All of the Company's leases are cross-defaulted and the Company's
obligations under the guaranty are secured by all the funds received from its
Tenant Subsidiaries.
Recent Tax Legislation
On December 17, 1999 President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effective January 1, 2001, will allow a REIT to lease hotels to a "taxable
REIT subsidiary" if the hotel is operated and managed on behalf of such
subsidiary by an independent third party. A taxable REIT subsidiary is a
corporation that is owned more than 35 percent by a REIT. This law will enable
Host Marriott, beginning in 2001 to lease its hotels to a taxable REIT
subsidiary. Host Marriott may, at its discretion, elect to terminate the
Company's leases, beginning in 2001, and pay termination fees determined
according to formulas specified in the leases. If Host Marriott elects to
terminate the full-service hotel leases, it would have to terminate all of
Crestline's full-service hotel leases.
Future minimum annual rental commitments for all non-cancelable leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................... $161,094
2001............................................................... 158,406
2002............................................................... 156,630
2003............................................................... 156,630
2004............................................................... 141,614
Thereafter......................................................... 141,614
--------
Total minimum lease payments..................................... $915,988
========
Lease expense for 1999 consisted of the following (in thousands):
Base rent.......................................................... $167,996
Percentage rent.................................................... 108,062
--------
$276,058
========
</TABLE>
12
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Working Capital Notes
Upon the commencement of the hotel leases, the Company purchased the working
capital of the leased hotels from Host Marriott for $26,832,000 with the
purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
Upon termination of the hotel lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note, the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note,
Host Marriott will pay the Company the difference in cash. As of December 31,
1999, the outstanding balance of the working capital notes was $26,011,000.
Debt maturities at December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................. $ 135
2001................................................................. 1,205
2002................................................................. --
2003................................................................. 3,005
2004................................................................. --
Thereafter........................................................... 21,666
-------
$26,011
=======
</TABLE>
Cash paid for interest expense in 1999 totaled $1,463,000.
Note 4. Management Agreements
All of the Company's hotels are operated by hotel management companies under
long-term hotel management agreements between Host Marriott and hotel
management companies.
Assignment of Management Agreements
The existing management agreements were assigned to the Tenant Subsidiaries
upon the execution of the hotel leases for the term of each corresponding
hotel lease. The Tenant Subsidiaries are obligated to perform all of the
obligations of Host Marriott under the hotel management agreements including
payment of fees due under the management agreements other than certain
obligations including payment of property taxes, property casualty insurance
and ground rent, maintaining a reserve fund for FF&E replacements and capital
expenditures for which Host Marriott retains responsibility.
Marriott International Management Agreements
Marriott International manages 28 of the 32 hotels under long-term
management agreements assigned to the Tenant Subsidiaries, generally for an
initial term of 15 to 20 years with renewal terms at the option of Marriott
International of up to an additional 16 to 30 years. The management agreements
generally provide for payment of base management fees equal to one to four
percent of revenues and incentive management fees generally equal to 20% to
50% of Operating Profit (as defined in the management agreements) over a
priority return (as defined) to the Tenant Subsidiaries, with total incentive
management fees not to exceed 20% of cumulative Operating Profit, or 20% of
current year Operating Profit.
13
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to the terms of the management agreements, Marriott International
is required to furnish the hotels with certain services ("Chain Services")
which are generally provided on a central or regional basis to all hotels in
the Marriott International hotel system. Chain Services include central
training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.
Other Hotel Management Agreements
The Company's remaining four hotels are managed by other hotel management
companies. One of the hotels is managed by Swissotel Management (USA) LLC, one
is managed by Four Seasons Hotel Limited, and the remaining two hotels are
managed by other independent hotel management companies under the "Marriott"
brand pursuant to franchise agreements. The managers of the hotels provide
similar services as Marriott International under its management agreements and
receive base management fees, generally calculated as a percentage of
revenues, and in most cases, incentive management fees, which are generally
calculated as a percentage of operating profits.
The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with respect to a single
lodging facility is cross-collateralized or cross-defaulted to any other
agreement and a single agreement may be canceled under certain conditions,
although such cancellation will not trigger the cancellation of any other
agreement.
Franchise Agreements
Two of the Company's hotels are managed under franchise agreements between
Host Marriott and Marriott International for terms ranging from 15 to 30
years. In connection with the assignment of the corresponding management
agreement, the Tenant Subsidiaries assumed the franchise agreements for these
hotels and will be the franchisee for the term of the corresponding hotel
lease. Pursuant to the franchise agreements, the Tenant Subsidiaries generally
pay a franchise fee based on a percentage of room revenues and food and
beverage revenues as well as certain other fees for advertising and
reservations. Franchise fees for room revenues vary from four to six percent,
while fees for food and beverage revenues vary from two to three percent of
revenues.
Note 5. Income Taxes
The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and state tax expense allocated for
the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.
14
<PAGE>
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes for 1999 consists of the following (in
thousands):
<TABLE>
<S> <C>
Current--Federal...................................................... $3,536
--State........................................................... 606
------
4,142
------
Deferred--Federal..................................................... 877
--State........................................................... 150
------
1,027
------
$5,169
======
</TABLE>
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for 1999 follows:
<TABLE>
<S> <C>
Statutory federal tax rate............................................. 35.0%
State income taxes, net of federal tax benefit......................... 6.0
----
41.0%
====
</TABLE>
As of December 31, 1999, the Company had no deferred tax assets. The tax
effect of the temporary difference that gives rise to the Company's deferred
tax liability is attributable to the hotel working capital.
15
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
With Independent Public Accountants' Report Thereon
16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCHP II Corporation:
We have audited the accompanying consolidated balance sheet of CCHP II
Corporation and its subsidiaries (a Maryland corporation) as of December 31,
1999, and the related consolidated statements of operations, shareholder's
equity and cash flows for the fiscal year ended December 31, 1999. These
consolidated financial statements are the responsibility of CCHP II
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP II
Corporation and its subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the fiscal year then ended in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
February 24, 2000
19
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of December 31, 1999
(in thousands, except share data)
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents............................................ $ 8,856
Due from hotel managers.............................................. 10,280
-------
19,136
Hotel working capital.................................................. 18,090
-------
$37,226
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Lease payable to Host Marriott....................................... $16,197
Other................................................................ 1,246
-------
17,443
Hotel working capital notes payable to Host Marriott................... 18,090
Deferred income taxes.................................................. 996
-------
Total liabilities.................................................. 36,529
Shareholder's equity
Common stock (100 shares issued at $1.00 par value).................... --
Retained earnings...................................................... 697
-------
Total shareholder's equity......................................... 697
-------
$37,226
=======
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<S> <C>
REVENUES
Rooms.............................................................. $ 646,624
Food and beverage.................................................. 306,320
Other.............................................................. 64,876
---------
Total revenues................................................... 1,017,820
---------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
Rooms.............................................................. 158,279
Food and beverage.................................................. 230,001
Other.............................................................. 231,668
Other operating costs and expenses
Lease expense to Host Marriott..................................... 312,112
Management fees.................................................... 66,672
---------
Total operating costs and expenses............................... 998,732
---------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST.............. 19,088
Corporate expenses................................................... (1,499)
Interest expense..................................................... (928)
---------
INCOME BEFORE INCOME TAXES........................................... 16,661
Provision for income taxes........................................... (6,831)
---------
NET INCOME........................................................... $ 9,830
=========
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------ -------- -------
<S> <C> <C> <C>
Balance, January 1, 1999.............................. $-- $ -- $ --
Dividend to Crestline Capital....................... -- (9,133) (9,133)
Net income.......................................... -- 9,830 9,830
---- ------- -------
Balance, December 31, 1999............................ $-- $ 697 $ 697
==== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 9,830
Change in amounts due from hotel managers.............................. (9,322)
Change in lease payable to Host Marriott............................... 16,197
Changes in other operating accounts.................................... 1,284
-------
Cash from operations................................................. 17,989
-------
INVESTING ACTIVITIES................................................... --
-------
FINANCING ACTIVITIES
Dividend to Crestline Capital.......................................... (9,133)
-------
Increase in cash and cash equivalents.................................. 8,856
Cash and cash equivalents, beginning of year........................... --
-------
Cash and cash equivalents, end of year................................. $ 8,856
=======
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
CCHP II Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").
On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 28 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. As of December 31,
1999, the Company leased 28 full-service hotels from Host Marriott.
The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase as cash equivalents.
Revenues
The Company records the gross property-level revenues generated by the
hotels as revenues.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
22
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Leases
Hotel Leases
The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 28 full-service hotels. Each hotel lease has an initial
term of eight years. The hotel leases generally have four seven-year renewal
options at the option of the Company, however, Host Marriott may terminate any
unexercised renewal options. The Tenant Subsidiaries are required to pay the
greater of (i) a minimum rent specified in each hotel lease or (ii) a
percentage rent based upon a specified percentage of aggregate revenues from
the hotel, including room revenues, food and beverage revenues, and other
income, in excess of specified thresholds. The amount of minimum rent is
increased each year based upon 50% of the increase in CPI during the previous
twelve months. Percentage rent thresholds are increased each year based on a
blend of the increases in CPI and the Employment Cost Index during the
previous twelve months. The hotel leases generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures. The rent during any renewal periods will be negotiated
at fair market value at the time the renewal option is exercised.
The Tenant Subsidiaries are responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries are responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott is responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.
In the event that Host Marriott disposes of a hotel free and clear of the
hotel lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the hotel lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the hotel lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve of Crestline's leases
without having to pay a termination fee. During 1999, Host Marriott exercised
its right to terminate three of Crestline's hotel leases, however, none of
these were the Company's hotel leases. Conversely, Crestline may terminate up
to twelve full-service hotel leases without penalty upon 180 days notice to
Host Marriott. During 1999, Crestline exercised its right to terminate five of
its hotel leases, however, none of these were the Company's hotel leases.
As a result of the recent tax legislation discussed below, Host Marriott may
purchase all, but not less than all, of its hotel leases with Crestline
beginning January 1, 2001, with the purchase price calculated as discussed
above. The payment of the termination fee will be payable in cash or, subject
to certain conditions, shares of Host Marriott common stock at the election of
Host Marriott.
For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.
FF&E Leases
Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the FF&E Leases
is a fixed amount. The Company will have the option at the expiration of the
FF&E Lease term to
23
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
either (i) renew the FF&E Leases for consecutive one-year renewal terms at
fair market rental rate, or (ii) purchase the Excess FF&E for a price equal to
its fair market value. If the Company does not exercise its purchase or
renewal option, the Company is required to pay a termination fee equal to
approximately one month's rent.
Guaranty and Pooling Agreement
In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provides a full guarantee and Crestline
provides a limited guarantee of all of the hotel lease obligations.
The cumulative limit of Crestline's guarantee obligation is the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement is
reduced to zero, the Company can terminate the agreement and Host Marriott can
terminate the Company's hotel leases without penalty.
All of the Company's leases are cross-defaulted and the Company's
obligations under the guaranty are secured by all the funds received from its
Tenant Subsidiaries.
Recent Tax Legislation
On December 17, 1999 President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effective January 1, 2001, will allow a REIT to lease hotels to a "taxable
REIT subsidiary" if the hotel is operated and managed on behalf of such
subsidiary by an independent third party. A taxable REIT subsidiary is a
corporation that is owned more than 35 percent by a REIT. This law will enable
Host Marriott, beginning in 2001 to lease its hotels to a taxable REIT
subsidiary. Host Marriott may, at its discretion, elect to terminate the
Company's leases, beginning in 2001, and pay termination fees determined
according to formulas specified in the leases. If Host Marriott elects to
terminate the full-service hotel leases, it would have to terminate all of
Crestline's full-service hotel leases.
Future minimum annual rental commitments for all non-cancelable leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................ $ 174,747
2001............................................................ 174,747
2002............................................................ 174,747
2003............................................................ 174,747
2004............................................................ 174,747
Thereafter...................................................... 349,493
----------
Total minimum lease payments.................................. $1,223,228
==========
Lease expense for 1999 consisted of the following (in
thousands):
Base rent....................................................... $ 167,755
Percentage rent................................................. 144,357
----------
$ 312,112
==========
</TABLE>
24
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Working Capital Notes
Upon the commencement of the hotel leases, the Company purchased the working
capital of the leased hotels from Host Marriott for $18,090,000 with the
purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
Upon termination of the hotel lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note, the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note,
Host Marriott will pay the Company the difference in cash. As of December 31,
1999, the outstanding balance of the working capital notes was $18,090,000.
Debt maturities at December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................... $ --
2001............................................................... --
2002............................................................... --
2003............................................................... --
2004............................................................... --
Thereafter......................................................... 18,090
-------
$18,090
=======
</TABLE>
Cash paid for interest expense in 1999 totaled $856,000.
Note 4. Management Agreements
All of the Company's hotels are operated by hotel management companies under
long-term hotel management agreements between Host Marriott and hotel
management companies.
Assignment of Management Agreements
The existing management agreements were assigned to the Tenant Subsidiaries
upon the execution of the hotel leases for the term of each corresponding
hotel lease. The Tenant Subsidiaries are obligated to perform all of the
obligations of Host Marriott under the hotel management agreements including
payment of fees due under the management agreements other than certain
obligations including payment of property taxes, property casualty insurance
and ground rent, maintaining a reserve fund for FF&E replacements and capital
expenditures for which Host Marriott retains responsibility.
Marriott International Management Agreements
Marriott International manages 20 of the 28 hotels under long-term
management agreements assigned to the Tenant Subsidiaries, generally for an
initial term of 15 to 20 years with renewal terms at the option of Marriott
International of up to an additional 16 to 30 years. The management agreements
generally provide for payment of base management fees equal to one to four
percent of revenues and incentive management fees generally equal to 20% to
50% of Operating Profit (as defined in the management agreements) over a
priority return (as defined) to the Tenant Subsidiaries, with total incentive
management fees not to exceed 20% of cumulative Operating Profit, or 20% of
current year Operating Profit.
25
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to the terms of the management agreements, Marriott International
is required to furnish the hotels with certain services ("Chain Services")
which are generally provided on a central or regional basis to all hotels in
the Marriott International hotel system. Chain Services include central
training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.
Ritz-Carlton Hotel Management Agreements
The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of
Marriott International, manages three of the leased hotels under long-term
Hotel Management Agreements assigned to the Tenant Subsidiaries. These
agreements have an initial term of 15 to 25 years with renewal terms at the
option of Ritz-Carlton of up to an additional 10 to 40 years. Base management
fees vary from two to four percent of revenues and incentive management fees
are generally equal to 20% of available cash flow or operating profit, up to a
maximum of 2.1% of revenues, as defined in the agreements.
Other Hotel Management Agreements
The Company's remaining five hotels are managed by other hotel management
companies. One of the hotels is managed by the Hyatt Corporation and the
remaining four hotels are managed by other independent hotel management
companies under other brands pursuant to franchise agreements. The managers of
the hotels provide similar services as Marriott International under its
management agreements and receive base management fees, generally calculated
as a percentage of revenues, and in most cases, incentive management fees,
which are generally calculated as a percentage of operating profits.
The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with respect to a single
lodging facility is cross-collateralized or cross-defaulted to any other
agreement and a single agreement may be canceled under certain conditions,
although such cancellation will not trigger the cancellation of any other
agreement.
Franchise Agreements
Four of the Company's hotels are managed under franchise agreements between
Host Marriott and other hotel companies for terms ranging from 15 to 30 years.
In connection with the assignment of the corresponding management agreement,
the Tenant Subsidiaries assumed the franchise agreements for these hotels and
will be the franchisee for the term of the corresponding hotel lease. Pursuant
to the franchise agreements, the Tenant Subsidiaries generally pay a franchise
fee based on a percentage of room revenues and food and beverage revenues as
well as certain other fees for advertising and reservations. Franchise fees
for room revenues vary from four to six percent, while fees for food and
beverage revenues vary from two to three percent of revenues.
Note 5. Income Taxes
The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and net state tax expense allocated
for the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.
26
<PAGE>
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes for 1999 consists of the following (in
thousands):
<TABLE>
<S> <C>
Current--Federal..................................................... $4,981
--State.......................................................... 854
------
5,835
------
Deferred--Federal.................................................... 850
--State.......................................................... 146
------
996
------
$6,831
======
</TABLE>
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for 1999 follows:
<TABLE>
<S> <C>
Statutory federal tax rate............................................. 35.0%
State income taxes, net of federal tax benefit......................... 6.0
----
41.0%
====
</TABLE>
As of December 31, 1999, the Company had no deferred tax assets. The tax
effect of the temporary differences that gives rise to the Company's federal
deferred tax liability is attributable to the hotel working capital.
27
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
With Independent Public Accountants' Report Thereon
28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCHP III Corporation:
We have audited the accompanying consolidated balance sheet of CCHP III
Corporation and its subsidiaries (a Maryland corporation) as of December 31,
1999, and the related consolidated statements of operations, shareholder's
equity and cash flows for the fiscal year ended December 31, 1999. These
consolidated financial statements are the responsibility of CCHP III
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP III
Corporation and its subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the fiscal year then ended in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
February 24, 2000
29
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of December 31, 1999
(in thousands, except share data)
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents............................................ $ 6,638
Due from hotel managers.............................................. 8,214
Restricted cash...................................................... 4,519
-------
19,371
Hotel working capital.................................................. 21,697
-------
$41,068
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Lease payable to Host Marriott....................................... $13,706
Other................................................................ 4,139
-------
17,845
Hotel working capital notes payable to Host Marriott................... 21,697
Deferred income taxes.................................................. 342
-------
Total liabilities.................................................. 39,884
-------
Shareholder's equity
Common stock (100 shares issued at $1.00 par value).................. --
Retained earnings.................................................... 1,184
-------
Total shareholder's equity......................................... 1,184
-------
$41,068
=======
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<S> <C>
REVENUES
Rooms............................................................... $570,611
Food and beverage................................................... 274,233
Other............................................................... 80,149
--------
Total revenues.................................................... 924,993
--------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
Rooms............................................................... 137,338
Food and beverage................................................... 202,181
Other............................................................... 236,721
Other operating costs and expenses
Lease expense to Host Marriott...................................... 295,563
Management fees..................................................... 41,893
--------
Total operating costs and expenses................................ 913,696
--------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............... 11,297
Corporate expenses.................................................... (1,357)
Interest expense...................................................... (1,129)
--------
INCOME BEFORE INCOME TAXES............................................ 8,811
Provision for income taxes............................................ (3,612)
--------
NET INCOME............................................................ $ 5,199
========
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------ -------- -------
<S> <C> <C> <C>
Balance, January 1, 1999.............................. $-- $ -- $ --
Dividend to Crestline Capital....................... -- (4,015) (4,015)
Net income.......................................... -- 5,199 5,199
---- ------- -------
Balance, December 31, 1999............................ $-- $ 1,184 $ 1,184
==== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.............................................................. $5,199
Change in amounts due from hotel managers............................... (4,084)
Change in lease payable to Host Marriott................................ 13,706
Changes in other operating accounts..................................... (4,168)
------
Cash from operations.................................................. 10,653
INVESTING ACTIVITIES.................................................... --
------
FINANCING ACTIVITIES
Dividend to Crestline Capital........................................... (4,015)
------
Increase in cash and cash equivalents................................... 6,638
Cash and cash equivalents, beginning of year............................ --
------
Cash and cash equivalents, end of year.................................. $6,638
======
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
CCHP III Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").
On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 31 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. During 1999, Host
Marriott sold two of the hotels and terminated the leases on those hotels. As
of December 31, 1999, the Company leased 29 full-service hotels from Host
Marriott.
The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase as cash equivalents.
Restricted Cash
In connection with the lender requirements of one of the leased hotels, the
Company is required to maintain a separate account with the lender on behalf
of the Company for the operating profit and incentive management fees of the
hotel. Following the annual audit, amounts will be distributed to the hotel's
manager and to the Company, in accordance with the loan agreement.
Revenues
The Company records the gross property-level revenues generated by the
hotels as revenues.
34
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2. Leases
Hotel Leases
The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 31 full-service hotels. Each hotel lease has an initial
term of nine years. The hotel leases generally have four seven-year renewal
options at the option of the Company, however, Host Marriott may terminate any
unexercised renewal options. The Tenant Subsidiaries are required to pay the
greater of (i) a minimum rent specified in each hotel lease or (ii) a
percentage rent based upon a specified percentage of aggregate revenues from
the hotel, including room revenues, food and beverage revenues, and other
income, in excess of specified thresholds. The amount of minimum rent is
increased each year based upon 50% of the increase in CPI during the previous
twelve months. Percentage rent thresholds are increased each year based on a
blend of the increases in CPI and the Employment Cost Index during the
previous twelve months. The hotel leases generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures. The rent during any renewal periods will be negotiated
at fair market value at the time the renewal option is exercised.
The Tenant Subsidiaries are responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries are responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott is responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.
In the event that Host Marriott disposes of a hotel free and clear of the
hotel lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the hotel lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the hotel lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve of Crestline's leases
without having to pay a termination fee. During 1999, Host Marriott exercised
its right to terminate three of Crestline's hotel leases, however, none of
these were the Company's hotel leases. Conversely, Crestline may terminate up
to twelve full-service hotel leases without penalty upon 180 days notice to
Host Marriott. During 1999, Crestline exercised its right to terminate three
of the Company's hotel leases, as well as two additional Crestline hotel
leases. These hotel leases will terminate in 2000, 180 days after each
respective notification date. In 1999, Host Marriott terminated two of the
Company's hotel leases with no termination fee as stipulated in those specific
lease agreements.
As a result of the recent tax legislation discussed below, Host Marriott may
purchase all, but not less than all, of its hotel leases with Crestline
beginning January 1, 2001 with the purchase price calculated as discussed
above. The payment of the termination fee will be payable in cash or, subject
to certain conditions, shares of Host Marriott common stock at the election of
Host Marriott.
35
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.
FF&E Leases
Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the FF&E Leases
is a fixed amount. The Company will have the option at the expiration of the
FF&E Lease term to either (i) renew the FF&E Leases for consecutive one-year
renewal terms at fair market rental rate, or (ii) purchase the Excess FF&E for
a price equal to its fair market value. If the Company does not exercise its
purchase or renewal option, the Company is required to pay a termination fee
equal to approximately one month's rent.
Guaranty and Pooling Agreement
In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provides a full guarantee and Crestline
provides a limited guarantee of all of the hotel lease obligations.
The cumulative limit of Crestline's guarantee obligation is the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement is
reduced to zero, the Company can terminate the agreement and Host Marriott can
terminate the Company's hotel leases without penalty.
All of the Company's leases are cross-defaulted and the Company's
obligations under the guaranty are secured by all the funds received from its
Tenant Subsidiaries.
Recent Tax Legislation
On December 17, 1999 President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effect January 1, 2001, will allow a REIT to lease hotels to a "taxable REIT
subsidiary" if the hotel is operated and managed on behalf of such subsidiary
by an independent third party. A taxable REIT subsidiary is a corporation that
is owned more than 35 percent by a REIT. This law will enable Host Marriott,
beginning in 2001 to lease its hotels to a taxable REIT subsidiary. Host
Marriott may, at its discretion, elect to terminate the Company's leases,
beginning in 2001, and pay termination fees determined according to formulas
specified in the leases. If Host Marriott elects to terminate the full-service
hotel leases, it would have to terminate all of Crestline's full-service hotel
leases.
36
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum annual rental commitments for all non-cancelable leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................ $ 162,014
2001............................................................ 155,465
2002............................................................ 155,465
2003............................................................ 155,465
2004............................................................ 155,465
Thereafter...................................................... 466,395
----------
Total minimum lease payments.................................. $1,250,269
==========
Lease expense for 1999 consisted of the following (in
thousands):
Base rent....................................................... $ 168,910
Percentage rent................................................. 126,653
----------
$ 295,563
==========
</TABLE>
Note 3. Working Capital Notes
Upon the commencement of the hotel leases, the Company purchased the working
capital of the leased hotels from Host Marriott for $22,046,000 with the
purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
Upon termination of the hotel lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note, the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note,
Host Marriott will pay the Company the difference in cash. As of December 31,
1999, the outstanding balance of the working capital notes was $21,697,000.
Debt maturities at December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................. $ --
2001................................................................. --
2002................................................................. --
2003................................................................. --
2004................................................................. --
Thereafter........................................................... 21,697
-------
$21,697
=======
</TABLE>
Cash paid for interest expense in 1999 totaled $1,042,000.
Note 4. Management Agreements
All of the Company's hotels are operated by hotel management companies under
long-term hotel management agreements between Host Marriott and hotel
management companies.
Assignment of Management Agreements
The existing management agreements were assigned to the Tenant Subsidiaries
upon the execution of the hotel leases for the term of each corresponding
hotel lease. The Tenant Subsidiaries are obligated to perform all of the
obligations of Host Marriott under the hotel management agreements including
payment of fees due under the management agreements other than certain
obligations including payment of property taxes, property casualty
37
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
insurance and ground rent, maintaining a reserve fund for FF&E replacements
and capital expenditures for which Host Marriott retains responsibility.
Marriott International Management Agreements
Marriott International manages 18 of the 29 hotels under long-term
management agreements assigned to the Tenant Subsidiaries, generally for an
initial term of 15 to 20 years with renewal terms at the option of Marriott
International of up to an additional 16 to 30 years. The management agreements
generally provide for payment of base management fees equal to one to four
percent of revenues and incentive management fees generally equal to 20% to
50% of Operating Profit (as defined in the management agreements) over a
priority return (as defined) to the Tenant Subsidiaries, with total incentive
management fees not to exceed 20% of cumulative Operating Profit, or 20% of
current year Operating Profit.
Pursuant to the terms of the management agreements, Marriott International
is required to furnish the hotels with certain services ("Chain Services")
which are generally provided on a central or regional basis to all hotels in
the Marriott International hotel system. Chain Services include central
training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.
Ritz-Carlton Hotel Management Agreements
The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of
Marriott International, manages three of the leased hotels under long-term
Hotel Management Agreements assigned to the Company. These agreements have an
initial term of 15 to 25 years with renewal terms at the option of Ritz-
Carlton of up to an additional 10 to 40 years. Base Management fees vary from
two to four percent of revenues and incentive management fees are generally
equal to 20% of available cash flow or operating profit, up to a maximum of
2.1% of revenues, as defined in the agreements.
Other Hotel Management Agreements
The Company's remaining eight hotels are managed by other hotel management
companies. Two of the hotels are managed by Swissotel Management (USA) LLC,
one is managed by the Hyatt Corporation, and the remaining five hotels are
managed by other independent hotel management companies under the "Marriott"
brand pursuant to franchise agreements. The managers of the hotels provide
similar services as Marriott International under its management agreements and
receive base management fees, generally calculated as a percentage of
revenues, and in most cases, incentive management fees, which are generally
calculated as a percentage of operating profits.
The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with respect to a single
lodging facility is cross-collateralized or cross-defaulted to any other
agreement and a single agreement may be canceled under certain conditions,
although such cancellation will not trigger the cancellation of any other
agreement.
Franchise Agreements
Five of the Company's hotels are managed under franchise agreements between
Host Marriott and Marriott International for terms ranging from 15 to 30
years. In connection with the assignment of the corresponding
38
<PAGE>
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management agreement, the Tenant Subsidiaries assumed the franchise agreements
for these hotels and will be the franchisee for the term of the corresponding
hotel lease. Pursuant to the franchise agreements, the Tenant Subsidiaries
generally pay a franchise fee based on a percentage of room revenues and food
and beverage revenues as well as certain other fees for advertising and
reservations. Franchise fees for room revenues vary from four to six percent,
while fees for food and beverage revenues vary from two to three percent of
revenues.
Note 5. Income Taxes
The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and net state tax expense allocated
for the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.
The provision for income taxes for 1999 consists of the following (in
thousands):
<TABLE>
<S> <C>
Current--Federal..................................................... $2,792
--State....................................................... 478
------
3,270
------
Deferred--Federal.................................................... 292
--State...................................................... 50
------
342
------
$3,612
======
</TABLE>
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for 1999 follows:
<TABLE>
<S> <C>
Statutory federal tax rate............................................. 35.0%
State income taxes, net of federal tax benefit......................... 6.0
----
41.0%
====
</TABLE>
As of December 31, 1999, the Company had no deferred tax assets. The tax
effect of the temporary differences that gives rise to the Company's deferred
tax liability is attributable to the hotel working capital.
39
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
With Independent Public Accountants' Report Thereon
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCHP IV Corporation:
We have audited the accompanying consolidated balance sheet of CCHP IV
Corporation and its subsidiaries (a Maryland corporation) as of December 31,
1999, and the related consolidated statements of operations, shareholder's
equity and cash flows for the fiscal year ended December 31, 1999. These
consolidated financial statements are the responsibility of CCHP IV
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP IV
Corporation and its subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the fiscal year then ended in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
February 24, 2000
41
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As Of December 31, 1999
(in thousands, except share data)
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents............................................ $ 3,487
Due from hotel managers.............................................. 14,571
Due from Crestline Capital........................................... 3,487
-------
21,545
Hotel working capital.................................................. 16,522
-------
$38,067
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Lease payable to Host Marriott....................................... $20,348
Other................................................................ 456
-------
20,804
Hotel working capital notes payable to Host Marriott................... 16,522
Deferred income taxes.................................................. 741
-------
Total liabilities.................................................. 38,067
-------
Shareholder's equity
Common stock (100 shares issued at $1.00 par value).................. --
Retained earnings.................................................... --
Total shareholder's equity......................................... --
-------
$38,067
=======
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<S> <C>
REVENUES
Rooms............................................................... $578,321
Food and beverage................................................... 333,120
Other............................................................... 77,368
--------
Total revenues.................................................... 988,809
--------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
Rooms............................................................... 129,051
Food and beverage................................................... 234,310
Other............................................................... 231,547
Other operating costs and expenses
Lease expense to Host Marriott...................................... 316,654
Management fees..................................................... 66,514
--------
Total operating costs and expenses................................ 978,076
--------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............... 10,733
Corporate expenses.................................................... (1,449)
Interest expense...................................................... (846)
Interest income....................................................... 16
--------
INCOME BEFORE INCOME TAXES............................................ 8,454
Provision for income taxes............................................ (3,466)
--------
NET INCOME............................................................ $ 4,988
========
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------ -------- ------
<S> <C> <C> <C>
Balance, January 1, 1999................................ $-- $ -- $ --
Dividend to Crestline Capital......................... -- (4,988) (4,988)
Net income............................................ -- 4,988 4,988
---- ------ ------
Balance, December 31, 1999.............................. $-- $ -- $ --
==== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Year Ended December 31, 1999
(in thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 4,988
Change in amounts due from hotel managers.............................. (14,124)
Change in lease payable to Host Marriott............................... 20,348
Changes in other operating accounts.................................... 750
-------
Cash from operations................................................. 11,962
-------
INVESTING ACTIVITIES................................................... --
-------
FINANCING ACTIVITIES
Amounts advanced to Crestline Capital.................................. (3,487)
Dividend to Crestline Capital.......................................... (4,988)
-------
Cash used in financing activities.................................... (8,475)
-------
Increase in cash and cash equivalents.................................. 3,487
Cash and cash equivalents, beginning of year........................... --
-------
Cash and cash equivalents, end of year................................. $ 3,487
=======
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
CCHP IV Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").
On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 27 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. As of December 31,
1999, the Company leased 27 full-service hotels from Host Marriott.
The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase as cash equivalents.
Revenues
The Company records the gross property-level revenues generated by the
hotels as revenues.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
46
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Leases
Hotel Leases
The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 27 full-service hotels. Each hotel lease has an initial
term of ten years. The hotel leases generally have four seven-year renewal
options at the option of the Company, however, Host Marriott may terminate any
unexercised renewal options. The Tenant Subsidiaries are required to pay the
greater of (i) a minimum rent specified in each hotel lease or (ii) a
percentage rent based upon a specified percentage of aggregate revenues from
the hotel, including room revenues, food and beverage revenues, and other
income, in excess of specified thresholds. The amount of minimum rent is
increased each year based upon 50% of the increase in CPI during the previous
twelve months. Percentage rent thresholds are increased each year based on a
blend of the increases in CPI and the Employment Cost Index during the
previous twelve months. The hotel leases generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures. The rent during any renewal periods will be negotiated
at fair market value at the time this renewal option is exercised.
The Tenant Subsidiaries are responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries are responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott is responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.
In the event that Host Marriott disposes of a hotel free and clear of the
hotel lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the hotel lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the hotel lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve of Crestline's leases
without having to pay a termination fee. During 1999, Host Marriott exercised
its right to terminate three of Crestline's hotel leases, however, none of
these were the Company's hotel leases. Conversely, Crestline may terminate up
to twelve full-service hotel leases without penalty upon 180 days notice to
Host Marriott. During 1999, Crestline exercised its right to terminate five of
its hotel leases, however, none of these were the Company's hotel leases.
As a result of the recent tax legislation discussed below, Host Marriott may
purchase all, but not less than all, of its hotel leases with Crestline
beginning January 1, 2001 with the purchase price calculated as discussed
above. The payment of the termination fee will be payable in cash or, subject
to certain conditions, shares of Host Marriott common stock at the election of
Host Marriott.
For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.
FF&E Leases
Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the FF&E Leases
is a fixed amount. The Company will have the option at the expiration of the
FF&E Lease term to
47
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
either (i) renew the FF&E Leases for consecutive one-year renewal terms at
fair market rental rate, or (ii) purchase the Excess FF&E for a price equal to
its fair market value. If the Company does not exercise its purchase or
renewal option, the Company is required to pay a termination fee equal to
approximately one month's rent.
Guaranty and Pooling Agreement
In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provides a full guarantee and Crestline
provides a limited guarantee of all of the hotel lease obligations.
The cumulative limit of Crestline's guarantee obligation is the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement is
reduced to zero, the Company can terminate the agreement and Host Marriott can
terminate the Company's hotel leases without penalty.
All of the Company's leases are cross-defaulted and the Company's
obligations under the guaranty are secured by all the funds received from its
Tenant Subsidiaries.
Recent Tax Legislation
On December 17, 1999 President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effect January 1, 2001, will allow a REIT to lease hotels to a "taxable REIT
subsidiary" if the hotel is operated and managed on behalf of such subsidiary
by an independent third party. A taxable REIT subsidiary is a corporation that
is owned more than 35 percent by a REIT. This law will enable Host Marriott,
beginning in 2001 to lease its hotels to a taxable REIT subsidiary. Host
Marriott may, at its discretion, elect to terminate the Company's leases,
beginning in 2001, and pay termination fees determined according to formulas
specified in the leases. If Host Marriott elects to terminate the full-service
hotel leases, it would have to terminate all of Crestline's full-service hotel
leases.
Future minimum annual rental commitments for all non-cancelable leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................ $ 186,420
2001............................................................ 186,420
2002............................................................ 186,420
2003............................................................ 186,420
2004............................................................ 186,420
Thereafter...................................................... 745,679
----------
Total minimum lease payments.................................. $1,677,779
==========
Lease expense for 1999 consisted of the following (in
thousands):
Base rent....................................................... $ 183,048
Percentage rent................................................. 133,606
----------
$ 316,654
==========
</TABLE>
48
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Working Capital Notes
Upon the commencement of the hotel leases, the Company purchased the working
capital of the leased hotels from Host Marriott for $16,522,000 with the
purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
Upon termination of the hotel lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note, the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note,
Host Marriott will pay the Company the difference in cash. As of December 31,
1999, the outstanding balance of the working capital notes was $16,522,000
Debt maturities at December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................. $ --
2001................................................................. --
2002................................................................. --
2003................................................................. --
2004................................................................. --
Thereafter........................................................... 16,522
-------
$16,522
=======
</TABLE>
Cash paid for interest expense in 1999 totaled $781,000.
Note 4. Management Agreements
All of the Company's hotels are operated by hotel management companies under
long-term hotel management agreements between Host Marriott and hotel
management companies.
Assignment of Management Agreements
The existing management agreements were assigned to the Tenant Subsidiaries
upon the execution of the hotel leases for the term of each corresponding
hotel lease. The Tenant Subsidiaries are obligated to perform all of the
obligations of Host Marriott under the hotel management agreements including
payment of fees due under the management agreements other than certain
obligations including payment of property taxes, property casualty insurance
and ground rent, maintaining a reserve fund for FF&E replacements and capital
expenditures for which Host Marriott retains responsibility.
Marriott International Management Agreements
Marriott International manages 20 of the 27 hotels under long-term
management agreements assigned to the Tenant Subsidiaries, generally for an
initial term of 15 to 20 years with renewal terms at the option of Marriott
International of up to an additional 16 to 30 years. The management agreements
generally provide for payment of base management fees equal to one to four
percent of revenues and incentive management fees generally equal to 20% to
50% of Operating Profit (as defined in the management agreements) over a
priority return (as defined) to the Tenant Subsidiaries, with total incentive
management fees not to exceed 20% of cumulative Operating Profit, or 20% of
current year Operating Profit.
Pursuant to the terms of the management agreements, Marriott International
is required to furnish the hotels with certain services ("Chain Services")
which are generally provided on a central or regional basis to all hotels
49
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in the Marriott International hotel system. Chain Services include central
training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.
Ritz-Carlton Hotel Management Agreements
The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of
Marriott International, manages three of the leased hotels under long-term
Hotel Management Agreements assigned to the Company. These agreements have an
initial term of 15 to 25 years with renewal terms at the option of Ritz-
Carlton of up to an additional 10 to 40 years. Base Management fees vary from
two to four percent of revenues and incentive management fees are generally
equal to 20% of available cash flow or operating profit, as defined in the
agreements.
Other Hotel Management Agreements
The Company's remaining four hotels are managed by other hotel management
companies. Two of the hotels are managed by the Hyatt Corporation, one of the
hotels is managed by Swissotel Management (USA) LLC, and one is managed by
Four Seasons Hotel Limited. The managers of the hotels provide similar
services as Marriott International under its management agreements and receive
base management fees, generally calculated as a percentage of revenues, and in
most cases, incentive management fees, which are generally calculated as a
percentage of operating profits.
The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with respect to a single
lodging facility is cross-collateralized or cross-defaulted to any other
agreement and a single agreement may be canceled under certain conditions,
although such cancellation will not trigger the cancellation of any other
agreement.
Note 5. Income Taxes
The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and net state tax expense allocated
for the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.
The provision for income taxes for 1999 consists of the following (in
thousands):
<TABLE>
<S> <C>
Current--Federal...................................................... $2,326
--State........................................................ 399
------
2,725
------
Deferred--Federal..................................................... 633
--State........................................................ 108
------
741
------
$3,466
======
</TABLE>
50
<PAGE>
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for 1999 follows:
<TABLE>
<S> <C>
Statutory federal tax rate............................................. 35.0%
State income taxes, net of federal tax benefit......................... 6.0
----
41.0%
====
</TABLE>
As of December 31, 1999, the Company had no deferred tax assets. The tax
effect of the temporary differences that gives rise to the Company's deferred
tax liability is attributable to the hotel working capital.
51
<PAGE>
The businesses to be acquired by Host LP are the subsidiaries of
Crestline whose primary assets are the leasehold interests with respect to 117
hotel properties owned by Host LP. In conjunction with these leases, Crestline
and certain of its subsidiaries entered into limited guarantees of the lease
obligations of each lessee. The 117 full-service hotel leases are grouped into
four lease pools, with Crestline's guarantee limited to the greater of 10% of
the aggregate rent payable for the preceding year or 10% of the aggregate rent
payable under all leases in the respective pool. Additionally, the lessee's
obligation under each lease agreement is guaranteed by all other lessees in the
respective lease pool. As a result, Host LP believes that the operating results
of each full-service lease pool may be material to its financial statements.
Further information regarding these leases and Crestline's limited guarantees
may be found in Host LP's annual report on Form 10-K for the fiscal year ended
December 31, 1999.
The results of operations for the twelve and thirty-six weeks ended
September 8, 2000 and September 10, 1999, and summarized balance sheet data as
of September 8, 2000 and December 31, 1999 of the four lease pools in which the
117 hotels are organized are as follows (unaudited, in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended September 8, 2000
------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $ 147 $ 156 $ 137 $ 141 $ 581
Food and beverage.......................... 60 66 57 69 252
Other...................................... 14 16 16 19 65
----- ----- ----- ----- -----
Total hotel sales..................... 221 238 210 229 898
Operating Costs and Expenses
Rooms...................................... 36 40 34 33 143
Food and beverage.......................... 49 54 45 54 202
Other...................................... 62 58 57 57 234
Management fees............................ 10 15 10 14 49
Lease expense.............................. 63 67 62 70 262
----- ----- ----- ----- -----
Total operating expenses.............. 220 234 208 228 890
----- ----- ----- ----- -----
Operating Profit................................ 1 4 2 1 8
Corporate and Interest Expenses................. -- -- (1) -- (1)
----- ----- ----- ----- -----
Income before taxes....................... 1 4 1 1 7
Income taxes.............................. (1) (2) -- -- (3)
----- ----- ----- ----- -----
Net Income............................ $ -- $ 2 $ 1 $ 1 $ 4
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Twelve Weeks Ended September 10, 1999
-------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $ 135 $ 142 $ 126 $ 128 $ 531
Food and beverage.......................... 57 59 55 67 238
Other...................................... 16 15 16 17 64
----- ----- ----- ----- -----
Total hotel sales..................... 208 216 197 212 833
Operating Costs and Expenses
Rooms...................................... 34 40 32 30 136
Food and beverage.......................... 46 48 44 50 188
Other...................................... 58 50 54 55 217
Management fees............................ 9 13 9 13 44
Lease expense.............................. 57 59 56 61 233
----- ----- ----- ----- -----
Total operating expenses.............. 204 210 195 209 818
----- ----- ----- ----- -----
Operating Profit................................ 4 6 2 3 15
Corporate and Interest Expenses................. (1) (1) -- (1) (3)
----- ----- ----- ----- -----
Income before taxes....................... 3 5 2 2 12
Income taxes.............................. (1) (3) (1) (1) (6)
----- ----- ----- ----- -----
Net Income............................ $ 2 $ 2 $ 1 $ 1 $ 6
===== ===== ===== ===== =====
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Thirty-six Weeks Ended September 8, 2000
----------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $428 $469 $409 $433 $1,739
Food and beverage.......................... 188 219 189 235 831
Other...................................... 44 46 59 60 209
---- ---- ---- ---- ------
Total hotel sales..................... 660 734 657 728 2,779
Operating Costs and Expenses
Rooms...................................... 102 116 96 96 410
Food and beverage.......................... 145 165 140 167 617
Other...................................... 173 167 166 170 676
Management fees............................ 32 50 32 52 166
Lease expense.............................. 200 224 214 237 875
---- ---- ---- ---- ------
Total operating expenses.............. 652 722 648 722 2,744
---- ---- ---- ---- ------
Operating Profit................................ 8 12 9 6 35
Corporate and Interest Expenses................. (1) (1) (1) (1) (4)
---- ---- ---- ---- ------
Income before taxes....................... 7 11 8 5 31
Income taxes.............................. (3) (5) (3) (2) (13)
---- ---- ---- ---- ------
Net Income............................ $ 4 $ 6 $ 5 $ 3 $ 18
==== ==== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
Thirty-six Weeks Ended September 10, 1999
-----------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $408 $436 $394 $401 $1,639
Food and beverage.......................... 184 196 183 220 783
Other...................................... 46 44 54 51 195
---- ---- ---- ---- ------
Total hotel sales..................... 638 676 631 672 2,617
Operating Costs and Expenses
Rooms...................................... 98 108 95 88 389
Food and beverage.......................... 143 150 135 154 582
Other...................................... 168 157 161 158 644
Management fees............................ 29 43 30 46 148
Lease expense.............................. 190 206 202 218 816
---- ---- ---- ---- ------
Total operating expenses.............. 628 664 623 664 2,579
---- ---- ---- ---- ------
Operating Profit................................ 10 12 8 8 38
Corporate and Interest Expenses................. (2) (2) (1) (2) (7)
---- ---- ---- ---- ------
Income before taxes....................... 8 10 7 6 31
Income taxes.............................. (3) (5) (3) (2) (13)
---- ---- ---- ---- ------
Net Income............................ $ 5 $ 5 $ 4 $ 4 $ 18
==== ==== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
As of September 8, 2000
-----------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Assets.......................................... $37 $34 $40 $37 $148
Liabilities..................................... 30 27 34 34 125
Equity.......................................... 7 7 6 3 23
</TABLE>
<TABLE>
<CAPTION>
As December 31, 1999
--------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Assets.......................................... $39 $37 $41 $38 $155
Liabilities..................................... 36 36 40 38 150
Equity.......................................... 3 1 1 -- 5
</TABLE>
53
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF HOST MARRIOTT, L.P.
The pro forma financial information of Host LP set forth below is based on
the unaudited consolidated financial statements as of and for the thirty-six
weeks ended September 8, 2000 ("First Three Quarters 2000") and audited
consolidated financial statements for the fiscal year ended December 31, 1999.
The pro forma financial statements reflect the following transactions:
2000 Transactions:
. Acquisition by the TRS of the entities owning the leasehold interests to
117 hotels owned by Host LP from Crestline for approximately $205 million,
of which $40 million will be funded through additional borrowings under the
bank credit facility;
. November cash payments of $6 million by Host LP and $82 million by a
non-controlled subsidiary ("NCS") of Host LP (of which $52 million in cash
was advanced to the NCS by Host LP) in settlement of certain litigation.
The settlement of the litigation includes the acquisition of a 50% non-
controlling interest in a joint venture owning the limited partner
interests in two affiliated partnerships;
. October issuance of $250 million of Series F senior notes and
application of a portion of the proceeds therefrom to repay $26 million
debt outstanding under the bank credit facility;
. September cash payment of $12 million by Host LP and $19 million by the
NCS in settlement of litigation with plaintiffs in four partnerships;
. Repurchases of 4.9 million shares of Host REIT common stock, 0.4 million
shares of convertible preferred securities of Host REIT, and 0.3 million OP
units for an aggregate consideration of approximately $62 million;
preferred securities of Host REIT, and 0.3 million OP units for an
aggregate consideration of approximately $62 million.
. June modifications to our bank credit facility to extend the term for
two additional years and to permanently reduce the total line from $1.25
billion at origination to $775 million as of June 16, 2000, consisting
of a $150 million term loan and a $625 million revolver.
1999 Transactions:
. November issuance of Class B preferred stock;
. Fourth quarter repurchases of 5.8 million shares of Host REIT common
stock, 1.1 million shares of convertible preferred securities of Host
REIT, and 0.3 million OP units for an aggregate consideration of
approximately $89 million;
. Repayments of $225 million on a term loan entered into as part of our
bank credit facility;
. Third quarter prepayment on mortgages of two hotels;
. August issuance of Class A preferred stock;
. July refinancing of the mortgages on eight hotels;
. April refinancing of the mortgage on the New York Marriott Marquis
Hotel;
. February issuance of Series D senior notes and their subsequent exchange
for Series E senior notes, and the application of proceeds therefrom to
repay, refinance, or acquire certain debt;
. Disposition of five hotels.
All of the above transactions except for the acquisition of the Crestline
entities, the litigation settlements, and the issuance of Series F senior notes
and the application of the proceeds therefrom are already reflected in our
consolidated balance sheet as of September 8, 2000 and, therefore, no pro forma
adjustments for these transactions were necessary in the unaudited pro forma
balance sheet.
Our unaudited pro forma statements of operations reflect the transactions
described above for the fiscal year ended December 31, 1999 and the First Three
Quarters 2000 as if those transactions had been completed at the beginning of
the periods presented. Our unaudited pro forma statements of operations which
we present below include only income before extraordinary items.
Our unaudited pro forma financial statements do not purport to represent
what our results of operations or financial condition would actually have been
if these transactions had in fact occurred at the beginning of the periods
presented, or to project our results of operations or financial condition for
any future period.
54
<PAGE>
Our unaudited pro forma financial statements are based upon available
information and upon assumptions and estimates, some of which are set forth in
the notes to the unaudited pro forma financial statements, that we believe are
reasonable under the circumstances. The unaudited pro forma financial
statements and accompanying notes should be read in conjunction with our
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in our filings with the
Securities and Exchange Commission.
55
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
September 8, 2000
(in millions)
<TABLE>
<CAPTION>
(C)
Host (B, D) Series F
Marriott L.P. (A) Litigation Debt
Historical Acquisitions Settlements Issuance Pro Forma
------------- ------------ ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Property and equipment, net........ $7,101 $ -- $ -- $-- $7,101
Notes and other receivables, net... 172 (88) 36 -- 120
Due from hotel managers............ -- 88 -- -- 88
Rent receivable.................... 72 -- -- -- 72
Investments in affiliates.......... 99 -- 16 -- 134
19
Other assets....................... 550 85 -- 5 640
Cash and cash equivalents.......... 188 (205) (31) 245 153
40 (58) (26)
------ ------ ------ ---- ------
$8,182 $ (80) $ (18) $224 $8,308
====== ====== ====== ==== ======
Liabilities and Equity
Debt............................... $5,101 $ 40 $ -- $250 $5,365
(26)
Convertible debt obligation to Host
Marriott Corporation.............. 492 -- -- -- 492
Accounts payable and accrued
expenses.......................... 147 -- -- -- 147
Deferred income taxes.............. 48 -- -- -- 48
Deferred rent...................... 366 (349) -- -- 17
Other liabilities.................. 373 -- (6) -- 355
(12)
------ ------ ------ ---- ------
Total liabilities.................. 6,527 (309) (18) 224 6,424
Minority interest.................. 133 -- -- -- 133
Cumulative redeemable preferred
limited partnership interests of
third parties at redemption value
("Preferred OP Units")
(representing 0.6 million units).. 7 -- -- -- 7
Limited Partnership interests of
third parties at redemption value
(representing
63.2 million units)............... 687 -- -- -- 687
Partners' Capital..................
General partner................... 1 -- -- -- 1
Cumulative redeemable preferred
limited partner.................. 196 -- -- -- 196
Limited partner................... 628 (120) -- -- 857
349
Accumulated other comprehensive
income........................... 3 -- -- -- 3
------ ------ ------ ---- ------
Total partners' capital............ 828 229 -- -- 1,057
------ ------ ------ ---- ------
$8,182 $ (80) $ (18) $224 $8,308
====== ====== ====== ==== ======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
56
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
First Three Quarters 2000
(in millions, except per unit amounts)
<TABLE>
<CAPTION>
(G)
Debt
Host (F,H) Issuances
Marriott L.P. (E) Litigation and Pro
Historical Acquisitions Settlements Refinancings Forma
------------- ------------ ---------------- ------------ -----
<S> <C> <C> <C> <C> <C>
REVENUE
Rental income......................... $ 580 $ (508) $ -- $ -- $ 72
Hotel property-level revenues
Rooms............................... -- 1,723 -- -- 1,723
Food and beverage................... -- 824 -- -- 824
Other............................... -- 206 -- -- 206
------- ------- ------- ------- -------
Total hotel property-level revenues... 580 2,245 -- -- 2,825
Net gains on property transactions.... 4 -- -- -- 4
Equity in earnings of affiliates
and other........................... 13 (18) 3 -- (2)
------- ------- ------- ------- -------
Total revenues........................ 597 2,227 3 -- 2,827
------- ------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms............................... -- (406) -- -- (406)
Food and beverages.................. -- (611) -- -- (611)
Other............................... -- (101) -- -- (101)
Management fees..................... -- (163) -- -- (163)
Other property-level costs
and expenses...................... (415) (570) -- -- (985)
------- ------- ------- ------- -------
Total hotel property-level costs
and expenses........................ (415) (1,851) -- -- (2,266)
------- ------- ------- ------- -------
OPERATING PROFIT BEFORE MINORITY
INTEREST, CORPORATE EXPENSES,
INTEREST AND OTHER EXPENSES......... 182 376 3 -- 561
Minority interest..................... (11) -- -- -- (11)
Corporate expenses.................... (27) -- -- -- (27)
Interest expense...................... (315) -- -- (20) (335)
Interest income....................... 26 (3) (1) -- 22
Other................................. (9) -- -- -- (9)
------- ------- ------- ------- -------
Income (loss) before income taxes..... (154) 373 2 (20) 201
Provision for income taxes............ (7) (151) -- -- (158)
------- ------- ------- ------- -------
Income (loss) before extraordinary
items............................... $ (161) $ 222 $ 2 $ (20) $ 43
======= ======= ======= ======= =======
Less:
Distributions on preferred units...... (16) (16)
------- -------
Income (loss) before extraordinary
items available to common
unitholders......................... $ (177) $ 27
======= =======
Basic earnings (loss) per unit before
extraordinary items available to
common unitholders (L)............. $ (.62) $ .10
======= =======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
57
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the year ended December 31, 1999
(in millions, except per units amounts)
<TABLE>
<CAPTION>
(G)
Host Marriott (F,H) Debt (J)
L.P. (E) Litigation Issuances and (I) OP Unit
Historical Acquisitions Settlements Refinancings Dispositions Repurchases Pro Forma
------------- ------------- ------------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental income............. $1,295 $(1,155) $ -- $ -- $(20) $ -- $ 120
Hotel property-level
revenues
Rooms.................. -- 2,336 -- -- -- -- 2,336
Food and beverage...... -- 1,163 -- -- -- -- 1,163
Other.................. -- 278 -- -- -- -- 278
------ ------- ------ ---- ---- ---- ------
Total hotel property-level
revenues................. 1,295 2,622 -- -- (20) -- 3,897
Net gains on property
transactions............. 28 -- -- -- (24) -- 4
Equity in earnings of
affiliates and other..... 14 (23) 5 -- -- -- (4)
------ ------- ------ ---- ---- ---- ------
Total revenues............ 1,337 2,599 5 -- (44) -- 3,897
------ ------- ------ ---- ---- ---- ------
OPERATING COSTS AND
EXPENSES
Hotel property-level
costs and expenses
Rooms.................. -- (555) -- -- -- -- (555)
Food and beverage...... -- (855) -- -- -- -- (855)
Other.................. -- (134) -- -- -- -- (134)
Management fees........ -- (213) -- -- -- -- (213)
Other property-level
costs and expenses.... (553) (787) -- -- 8 -- (1,332)
------ ------- ------ ---- ---- ---- ------
Total hotel property-
level costs and expenses. (553) (2,544) -- -- 8 -- (3,089)
------ ------- ------ ---- ---- ---- ------
OPERATING PROFIT BEFORE
MINORITY INTEREST,
CORPORATE EXPENSES,
INTEREST AND OTHER
EXPENSES................. 784 55 5 -- (36) -- 808
Minority interest......... (21) -- -- -- -- -- (21)
Corporate expenses........ (37) -- -- -- -- -- (37)
Interest expense.......... (469) -- -- (19) -- -- (488)
Interest income........... 39 (5) (2) -- -- (9) 23
Loss on litigation
settlement............... (40) -- -- -- -- -- (40)
Other..................... (16) -- -- -- -- -- (16)
------ ------- ------ ---- ---- ---- ------
Income (loss) before
income taxes............. 240 50 3 (19) (36) (9) 229
Benefit (provision) for
income taxes............. 16 (20) -- -- 5 -- 1
------ ------- ------ ---- ---- ---- ------
Income (loss) before
extraordinary items...... $ 256 $ 30 $ 3 $ (19) $(31) $ (9) $ 230
====== ======= ====== ==== ==== ==== ======
Less:
Distributions on
preferred units (K)...... (6) (20)
----- ------
Income before extra-
ordinary items available
to common unitholders.... $ 250 $ 210
===== ======
Basic earnings per unit
before extraordinary
items available to
common unitholders (L)... $ .86 $ .75
====== ======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
58
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
A. Represents the adjustment to record the acquisition by a wholly-owned
taxable REIT subsidiary ("TRS") of Host LP of the entities owning the lease
rights to 117 hotels owned by Host LP from Crestline for approximately $205
million:
. Record the transfer of working capital of approximately $88 million from
Crestline to Host LP by increasing due from hotel managers and decreasing
notes receivable.
. Record a deferred tax asset of approximately $85 million.
. Record the decrease in cash and cash equivalents of $205 million.
. Record the $40 million increase in cash and cash equivalents and
corresponding $40 million increase in debt, representing the additional
borrowings under the bank credit facility.
. Record the $120 million reduction of partners' capital as a result of the
non-recurring loss on the acquisition.
B. Represents the adjustment to record the November 2000 settlement of
certain litigation.
. Record an affiliate note receivable of $36 million for cash advanced to
the NCS by Host LP.
. Record the increase in investments in affiliates of $16 million.
. Record the decrease in cash of $58 million.
. Reduce accrued liabilities by $6 million.
C. Represents the adjustment to record the offering of Series F senior notes
and partial application of the proceeds therefrom to paydown the bank credit
facility:
. Record the issuance of $250 million of notes.
. Record the deferred financing fees of $5 million.
. Record net cash proceeds of $245 million.
. Record the $26 million use of cash to repay the revolver portion of the
bank credit facility.
D. Represents the adjustment to record the September 2000 settlement of
litigation with plaintiffs from four partnerships:
. Record the increase in investments in affiliates of $19 million.
. Record the decrease in cash and cash equivalents of $31 million.
. Record the decrease in other liabilities of $12 million.
E. Represents the adjustment for the acquisition by the TRS of the entities
owning the leasehold interests to 117 hotels owned by Host LP from Crestline. We
anticipate recording a non-recurring loss of approximately $120 million that is
not presented in the pro forma results of operations.
. Reduce rental income by $1,155 million and $508 million for fiscal year
1999 and the First Three Quarters 2000, respectively.
. Reduce equity in earnings of affiliates by $23 million and $18
million for fiscal year 1999 and the First Three Quarters 2000,
respectively, to reverse FF&E Rental Income paid by Crestline to a non-
controlled subsidiary of Host LP.
. Record hotel property revenues of $3,777 million and $2,753 million and
hotel operating costs and expenses of $2,544 million and $1,851 million
for fiscal year 1999 and the First Three Quarters 2000, respectively.
Historical rental income for the First Three Quarters 2000 does not
include approximately $349 million of contingent rent related to the 117
leased hotels, which has been deferred in accordance with Staff Accounting
Bulletin 101. The pro forma statements for the First Three Quarters 2000
have been adjusted to include the impact of the reversal of the contingent
rent.
. Reduce interest income by $5 million and $3 million for fiscal year 1999
and the First Three Quarters 2000, respectively, for the interest income
earned on the $88 million in working capital notes receivable due from
Crestline.
. Record a provision for federal and state income taxes applicable to the
TRS of $20 million and $151 million, respectively, for fiscal year 1999
and the First Three Quarters, 2000, using an effective tax rate of 40.5%.
F. Represents the adjustment to record equity in earnings of affiliates of $5
million and $3 million for fiscal year 1999 and the First Three Quarters 2000,
respectively, associated with Host LP's share of the earnings of the joint
venture formed by a NCS of Host LP to acquire the limited partner interests in
two partnerships.
G. Represents the adjustment to record interest expense and related
amortization of deferred financing fees as a result of the $40 million net
borrowings under the bank credit facility to partially fund the acquisition of
the Crestline entities, the issuance of the Series F senior notes, the
retirement of $75 million of the convertible debt obligation to Host REIT in
connection with the repurchase of Host REIT's convertible preferred securities,
the refinancing of the New York Marriott Marquis, the prepayment or refinancing
of the various mortgages, and the paydowns and modifications to the bank credit
facility. The adjustments exclude net extraordinary gains of $3 million for the
First Three Quarters 2000 and $29 million for the fiscal year ended December 31,
1999 resulting from the early extinguishments of debt.
The following table represents the adjustment to decrease (increase)
interest expense, including amortization of deferred financing fees for the
respective periods (in millions):
<TABLE>
<CAPTION>
First Three
Quarters Fiscal Year
2000 1999
--------- -----------
<S> <C> <C>
Issuance of Series F senior notes....................... $(17) $(24)
Series D senior notes and subsequent exchange for Series
E senior notes......................................... -- (4)
Debt repaid, refinanced, or acquired with proceeds of
Series D senior notes.................................. -- 4
Bank credit facility, as amended ....................... (3) 7
Retirement of $75 million of convertible debt obligation
to Host REIT........................................... -- 4
New York Marriott Marquis refinancing .................. -- (4)
$665 million mortgage refinancing for eight hotel
properties............................................. -- (6)
Prepayments on mortgages for two hotel properties ...... -- 4
---- ----
$(20) $(19)
==== ====
</TABLE>
H. Represents the adjustment to reduce interest income for the cash payment
of approximately $31 million made from corporate cash balances during
September 2000, to settle litigation with plaintiffs from four partnerships.
I. Represents the adjustment to reduce the historical revenues and property
level expenses for the 1999 sales of the Minneapolis/Bloomington Airport
Marriott, the Saddle Brook Marriott, Marriott's Grand Hotel and Golf Resort,
The Ritz-Carlton, Boston, and the El Paso Marriott, including the elimination
of the non-recurring gains and taxes on the sales totaling $24 million and $5
million, respectively, in fiscal year 1999.
J. Represents the adjustment to reduce interest income for approximately
$150 million in cash payments made during 1999 and 2000 to repurchase Host REIT
common stock, OP units and Host REIT's convertible preferred securities in
connection with our stock buyback plan.
59
<PAGE>
K. Represents the adjustment to record full-year distributions on 8.16
million units of cumulative redeemable preferred limited partner units, which
were issued during the second half of 1999. Holders of the units are entitled
to receive a cash distribution of $2.50 per unit annually.
L. The historical weighted average common OP units outstanding was 291.6
million and 284.2 million for fiscal year 1999 and the First Three Quarters
2000, respectively. On a pro forma basis, weighted average common OP units
outstanding for fiscal year 1999 and the First Three Quarters 2000 would be
280.6 million and 283.2 million, respectively, to reflect units repurchased in
conjunction with the stock repurchase plan.
60
