<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1998
REGISTRATION NO. 333-64793
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HMC MERGER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENT)
MARYLAND 7011 53-0085950
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION OR
ORGANIZATION) 10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
CHRISTOPHER G. TOWNSEND
GENERAL COUNSEL
HMC MERGER CORPORATION
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
J. WARREN GORRELL, JR., ESQ.
HOWARD I. FLACK, ESQ.
HOGAN & HARTSON L.L.P.
555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004-1109
(202) 637-5600
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
HOST MARRIOTT CORPORATION
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817-1109
(301) 380-9000
NOVEMBER , 1998
Dear Fellow Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Host Marriott Corporation, a Delaware corporation ("Host"), which will be held
at the Ritz-Carlton Hotel, 1700 Tysons Boulevard, McLean, Virginia, 22102, on
December 15, 1998 at 10:00 a.m., local time (the "Special Meeting").
At the Special Meeting, you will be asked to approve (a) the Agreement and
Plan of Merger (the "Agreement"), entered into by and among Host, HMC Merger
Corporation, a wholly-owned, newly formed Maryland subsidiary of Host
(referred to herein as "Host REIT", which will be renamed "Host Marriott
Corporation" following the merger described below), and Host Marriott, L.P., a
recently formed Delaware limited partnership organized and currently wholly-
owned by Host and of which Host will be the sole general partner (the
"Operating Partnership") and (b) such other matters as may properly come
before the meeting or any adjournments or postponements thereof. The Agreement
contemplates certain restructuring transactions (the "Restructuring
Transactions") consisting of (i) the contribution by Host of its wholly-owned
full-service hotels, its interests in certain hotel partnerships and certain
other assets to the Operating Partnership in exchange for units of limited and
general partnership interest in the Operating Partnership and the assumption
of liabilities (the "OP Contribution") and (ii) the reincorporation of Host
from the State of Delaware to the State of Maryland (the "Reincorporation") by
means of a merger (the "Merger") of Host with and into Host REIT, which was
formed for the sole purpose of effecting the Reincorporation. As a result of
the Reincorporation by means of the Merger, each outstanding share of common
stock of Host, together with the associated right issued under Host's existing
stockholder rights plan, will be converted into one share of common stock of
Host REIT, together with the associated right under a stockholder rights plan
to be adopted by Host REIT prior to the Merger.
As described in the attached Proxy Statement/Prospectus, the Restructuring
Transactions are part of an overall plan (the "REIT Conversion") adopted by
Host to restructure its business operations so that it will qualify as a real
estate investment trust ("REIT") for federal income tax purposes. If Host REIT
qualifies as a REIT, it generally will not be subject to federal corporate
income taxes on that portion of its ordinary income or capital gain that is
distributed to its stockholders. Such treatment would substantially eliminate
the federal "double taxation" on earnings (at the corporate and stockholder
levels) that generally results from investment in a corporation. If the
Agreement is approved by the stockholders of Host at the Special Meeting and
the Restructuring Transactions are consummated, Host REIT expects to qualify
as a REIT beginning with its first full taxable year commencing after the REIT
Conversion is completed, which currently is expected to be the year commencing
January 1, 1999 (but which might not be until the year beginning January 1,
2000).
The Host Board of Directors is proposing the Restructuring Transactions
primarily for the following reasons:
. The Restructuring Transactions are essential components of Host's
conversion to REIT status for federal income tax purposes. In particular,
the OP Contribution will enable Host REIT, following the Merger, to
operate, together with the Operating Partnership, in an umbrella
partnership REIT ("UPREIT") structure, through which Host REIT would
continue the full-service hotel ownership business currently conducted by
Host. Host believes that the UPREIT structure will improve its ability to
acquire additional properties in the future on favorable terms.
. The provisions of Maryland law have generally been viewed as favorable to
REITs organized in corporate or trust form, as evidenced by the large
number of publicly traded REITs that have chosen to operate as a regular
Maryland corporation or as a special statutory Maryland real estate
investment trust.
<PAGE>
. In particular, in order to satisfy certain requirements that are
applicable to REITs in general, many REITs impose through their charters
ownership limits and transfer restrictions similar to the ownership limit
proposed by Host REIT in its charter, as described in the accompanying
Proxy Statement/Prospectus. Under Delaware law, such restrictions would
not be binding with respect to securities issued prior to adoption of the
restriction unless holders of such securities agree to, or vote in favor
of, such restriction. However, under Maryland law and by reason of the
Merger, all shares of common stock of Host REIT issued in the Merger and
thereafter would be subject to the ownership limit under Host REIT's
charter, for which authority exists under Maryland law.
. Host's principal executive offices and a substantial number of Host's
employees are employed in Maryland.
The Board of Directors of Host believes that the Agreement, which
contemplates the Restructuring Transactions, and the other transactions
comprising the REIT Conversion described in the accompanying Proxy
Statement/Prospectus are advisable for Host and its stockholders, based on the
belief that: (i) the REIT structure, as a more efficient tax structure, will
provide improved operating results through changing economic conditions and
all phases of the hotel economic cycle; (ii) the REIT Conversion, which will
reduce corporate-level taxes and the need to incur debt to reduce corporate
taxes through interest deductions, will improve its financial flexibility and
allow it to continue to strengthen its balance sheet by reducing its overall
debt to equity ratio over time; (iii) as a REIT, Host will be able to compete
more effectively with other public lodging real estate companies that already
are organized as REITs and to make performance comparisons with its peers more
meaningful; (iv) by becoming a dividend paying company, Host's stockholder
base will expand to include investors attracted by yield as well as asset
quality, which is expected to facilitate Host REIT's capital-raising efforts
and provide a less volatile stockholder base; and (v) the adoption of an
UPREIT structure will facilitate tax-deferred acquisition of additional
hotels. Host believes that these benefits justify the REIT Conversion even if
the REIT Conversion does not occur in time for Host REIT to elect REIT status
effective January 1, 1999 (in which event the effectiveness of Host REIT's
election could be delayed until January 1, 2000).
The Merger will not be consummated unless Host's Board of Directors shall
have determined prior to consummating the Merger that the conditions to the
Merger (including approval of the Agreement by the stockholders of Host) have
been satisfied or waived, and in particular, that the transactions
constituting the REIT Conversion which impact Host REIT's status as a REIT for
federal income tax purposes have occurred or are reasonably likely to occur,
and based on advice of counsel, that Host REIT can elect to be treated as a
REIT for federal income tax purposes effective no later than the first full
taxable year commencing after the REIT Conversion is completed (which might
not be until the year commencing January 1, 2000 if the REIT Conversion is not
completed prior to January 1, 1999). In the event the Agreement is not
approved by Host stockholders at the Special Meeting, Host will continue to
operate as a Delaware corporation, and the REIT Conversion will not be
completed at this time.
Details of the Agreement, including the proposed Restructuring Transactions,
as well as the other transactions comprising the REIT Conversion, are
contained in the attached Proxy Statement/Prospectus, which you are encouraged
to read carefully.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS DETERMINED THE
AGREEMENT, WHICH CONTEMPLATES THE RESTRUCTURING TRANSACTIONS, TO BE ADVISABLE
FOR HOST AND ITS STOCKHOLDERS. ACCORDINGLY, YOUR BOARD OF DIRECTORS HAS
APPROVED THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND
RECOMMENDS THAT ALL STOCKHOLDERS VOTE "FOR" APPROVAL OF THE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
The affirmative vote of holders of two-thirds (66 2/3%) of the outstanding
shares of Host common stock is necessary to approve the Agreement. Therefore,
whether or not you plan to attend the Special Meeting, please complete, sign
and date the enclosed proxy card and return it promptly in the enclosed
postage prepaid envelope, or vote your proxy by telephone or the internet in
accordance with the instructions on the admission ticket attached to the
enclosed proxy card. You may revoke your proxy in the manner discussed in the
2
<PAGE>
accompanying Proxy Statement/Prospectus at any time before it has been voted
at the Special Meeting. If you attend the Special Meeting, you may vote in
person if you wish, even if you have previously submitted your proxy. Your
prompt cooperation will be greatly appreciated. This solicitation is made on
behalf of the Board of Directors of Host.
Sincerely,
RICHARD E. MARRIOTT
Chairman of the Board
YOUR VOTE IS IMPORTANT
PLEASE PROMPTLY COMPLETE, SIGN AND DATE AND RETURN
THE ENCLOSED PROXY CARD OR PROMPTLY VOTE
YOUR PROXY BY TELEPHONE OR THE INTERNET
IF THE RESTRUCTURING TRANSACTIONS AND THE OTHER TRANSACTIONS COMPRISING
THE REIT CONVERSION DO NOT OCCUR IN TIME FOR HOST REIT TO ELECT REIT
STATUS EFFECTIVE JANUARY 1, 1999, THE EFFECTIVENESS OF HOST REIT'S
ELECTION COULD BE DELAYED TO JANUARY 1, 2000, WHICH WOULD RESULT IN HOST
OR HOST REIT CONTINUING TO PAY SUBSTANTIAL CORPORATE-LEVEL INCOME TAXES IN
1999 AND COULD CAUSE OTHER RELATED TRANSACTIONS NOT TO BE CONSUMMATED.
THEREFORE, IT IS EXTREMELY IMPORTANT THAT STOCKHOLDERS SUBMIT THEIR
PROXIES AS SOON AS POSSIBLE. ANY DELAY IN RETURNING PROXIES COULD CAUSE
THE SPECIAL MEETING TO BE DELAYED, WHICH COULD PREVENT THE RESTRUCTURING
TRANSACTIONS AND THE OTHER TRANSACTIONS COMPRISING THE REIT CONVERSION
FROM BEING EFFECTIVE JANUARY 1, 1999.
3
<PAGE>
HOST MARRIOTT CORPORATION
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817-1109
(301) 380-9000
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 15, 1998
----------------
To the Stockholders of Host Marriott Corporation:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Host
Marriott Corporation, a Delaware corporation ("Host"), will be held at the
Ritz-Carlton Hotel, 1700 Tysons Boulevard, McLean, Virginia, 22102, on
December 15, 1998 at 10:00 a.m., local time (the "Special Meeting"), for the
following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger dated November , 1998 (the "Agreement") by and among Host, HMC
Merger Corporation, a wholly-owned, newly formed Maryland subsidiary of
Host (referred to as "Host REIT", which will be renamed "Host Marriott
Corporation" following the merger described below), and Host Marriott,
L.P., a recently formed Delaware limited partnership organized and
currently wholly-owned by Host and of which Host will be the sole general
partner (the "Operating Partnership"). The Agreement contemplates certain
restructuring transactions (the "Restructuring Transactions") consisting of
(i) the contribution by Host of its wholly-owned full-service hotels, its
interests in certain hotel partnerships and certain other assets to the
Operating Partnership in exchange for units of limited and general
partnership interest in the Operating Partnership and the assumption of
liabilities (the "OP Contribution") and (ii) the reincorporation of Host
from the State of Delaware to the State of Maryland (the "Reincorporation")
by means of a merger (the "Merger") of Host with and into Host REIT, which
was formed for the sole purpose of effecting the Reincorporation. If the
Agreement is approved by Host stockholders and the Merger is consummated,
Host REIT will be the surviving entity in the Merger, the separate
existence of Host will terminate and each issued and outstanding share of
common stock, par value $1.00 per share, of Host (the "Host Common Stock"),
together with the associated right issued under the Rights Agreement dated
as of February 3, 1989 between Host and the Bank of New York, will be
converted into one share of common stock, par value $.01 per share, of Host
REIT (the "Host REIT Common Stock"), together with the associated right
issued under a stockholder rights plan to be adopted by Host REIT prior to
the Merger. In addition, the Agreement provides that, in the Merger,
outstanding options and other rights to acquire Host Common Stock will be
converted into rights to acquire Host REIT Common Stock, subject to certain
adjustments and except as otherwise set forth in the Agreement, and any
outstanding shares of preferred stock of Host would be converted into an
equal number of shares of preferred stock of Host REIT having substantially
the same rights and preferences. Upon consummation of the Merger, holders
of Host REIT Common Stock will become subject to the Ownership Limit
(described below) under the Articles of Incorporation of Host REIT that
will be in effect upon consummation of the Merger (the "Host REIT
Charter"). Primarily to satisfy certain requirements under the Internal
Revenue Code of 1986, as amended (the "Code"), that are applicable to REITs
in general, the Host REIT Charter will provide that no person or group of
persons may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than 9.8% of the lesser of the number or value
of shares of Host REIT Common Stock (or any class or series of Host REIT
preferred stock) outstanding (the "Ownership Limit"), subject to waiver or
modification by Host REIT in certain limited circumstances and to certain
limited exceptions for a holder of shares of Host REIT Common Stock solely
by reason of the Merger in excess of the Ownership Limit so long as such
holder would not own, directly or by attribution under the Code, more than
9.9% by value of the outstanding capital stock of Host REIT as of 12:01
a.m. (Eastern Time) on the first day after the effective time of the
Merger. THE AGREEMENT, THE RESTRUCTURING TRANSACTIONS, INCLUDING THE TERMS
OF THE MERGER, AND THE OWNERSHIP LIMIT ARE MORE COMPLETELY DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS AND THE APPENDICES THERETO, WHICH
FORM A PART OF THIS NOTICE. A COPY OF THE AGREEMENT IS ATTACHED AS APPENDIX
A TO THE PROXY STATEMENT/PROSPECTUS.
<PAGE>
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
Host reserves the right to cancel or defer the Restructuring Transactions
even if stockholders of Host approve the Agreement and the other conditions to
the consummation of the Restructuring Transactions are satisfied or waived.
Only stockholders of record of Host Common Stock at the close of business on
November 13, 1998 (the "Record Date") are entitled to notice of, and to vote
at, the Special Meeting and any adjournments or postponements thereof.
Approval of the Agreement requires the affirmative vote of the holders of
two-thirds (66 2/3%) of the shares of Host Common Stock outstanding on the
Record Date for the Special Meeting.
Pursuant to Delaware law, stockholders of Host will not be entitled to
appraisal rights as a result of the Merger or other Restructuring
Transactions.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN
PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE AS PROMPTLY AS POSSIBLE OR VOTE YOUR PROXY BY TELEPHONE OR THE
INTERNET. IF A PROXY IS SIGNED BUT NO VOTING INSTRUCTIONS ARE INDICATED
THEREON, SUCH PROXY WILL BE VOTED "FOR" APPROVAL OF THE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY
WITHDRAW YOUR PROXY AND VOTE IN PERSON.
HOST'S STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
By Order of the Board of Directors,
CHRISTOPHER G. TOWNSEND
Secretary
Bethesda, Maryland
November , 1998
2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROXY STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN +
+OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY +
+SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR +
+SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED NOVEMBER 10, 1998
PROXY STATEMENT
OF
HOST MARRIOTT CORPORATION
AND
PROSPECTUS
OF
HMC MERGER CORPORATION
This Proxy Statement/Prospectus is being furnished to the holders of the
common stock, par value $1.00 per share (the "Host Common Stock"), of Host
Marriott Corporation, a Delaware corporation ("Host"), in connection with the
solicitation of proxies on behalf of the Board of Directors of Host for use at
a special meeting of stockholders of Host to be held at the Ritz-Carlton Hotel,
1700 Tysons Boulevard, McLean, Virginia, 22102, on December 15, 1998 at 10:00
a.m., local time, and at any adjournments or postponements thereof (the
"Special Meeting"). At the Special Meeting, stockholders of Host will be asked
to approve (a) the Agreement and Plan of Merger dated November , 1998 (the
"Agreement"), by and among Host, HMC Merger Corporation, a wholly-owned, newly
formed Maryland subsidiary of Host (referred to herein as "Host REIT", which
will be renamed "Host Marriott Corporation" following the merger described
below), and Host Marriott, L.P., a recently formed Delaware limited partnership
organized and currently wholly-owned by Host and of which Host will be the sole
general partner (the "Operating Partnership"); and (b) such other matters as
may properly come before the meeting or any adjournments or postponements
thereof. The Agreement contemplates certain restructuring transactions (the
"Restructuring Transactions") consisting of (i) the contribution by Host of its
wholly-owned full-service hotels, its interests in certain hotel partnerships
and certain other assets to the Operating Partnership in exchange for units of
limited and general partnership interest in the Operating Partnership and the
assumption of liabilities (the "OP Contribution") and (ii) the reincorporation
of Host from the State of Delaware to the State of Maryland (the
"Reincorporation") by means of a merger (the "Merger") of Host with and into
Host REIT, which was formed for the sole purpose of effecting the
Reincorporation. A copy of the Agreement is attached hereto as Appendix A. The
Restructuring Transactions are part of an overall plan (the "REIT Conversion")
adopted by Host to restructure its business operations so that it will qualify
as a real estate investment trust ("REIT") for federal income tax purposes.
SEE "RISK FACTORS" BEGINNING ON PAGE 32 FOR MATERIAL RISKS THAT SHOULD BE
CONSIDERED WHEN VOTING ON THE AGREEMENT, INCLUDING THE FOLLOWING:
. Since Host REIT will lease virtually all of its hotels to lessees, Host
REIT will be dependent for its revenue upon the ability of the lessees of
Host REIT's hotels, Marriott International, Inc. ("Marriott
International"), which currently manages all but 16 of Host's hotels, and
other companies that manage the hotels and upon various non-controlled
subsidiaries of Host REIT, and Host REIT will have limited control over
the operation of the hotels and no control over the non-controlled
subsidiaries.
. Rental payments from the lessees of Host REIT's hotels will be the primary
source of Host REIT's revenues.
. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the effectiveness of Host REIT's
election could be delayed until January 1, 2000, which would result in
Host or Host REIT continuing to pay substantial corporate-level income
taxes in 1999 (which would reduce Host REIT's cash distributions) and
could cause the Blackstone Acquisition (as defined herein) not to be
consummated.
. The current stock price of Host reflects the current market valuation of
Host's current business and assets and not the business and assets of Host
REIT following the REIT Conversion.
. After the REIT Conversion, Host REIT, as the sole general partner of the
Operating Partnership, will have fiduciary obligations to the limited
partners in the Operating Partnership, and the discharge of such
obligations could result in decisions that may fail to reflect fully the
interests of all holders of Host REIT Common Stock (as defined below) and
limited partners of the Operating Partnership. Conflicts of interest also
may be involved in Host REIT's relationships with Marriott International
and the lessees of Host REIT's hotels.
. The preliminary estimated initial annual cash distributions of the
Operating Partnership during the twelve months ending December 31, 1999
($231 million) will exceed its estimated cash available for distribution
and cash from contingent rents during the twelve months ending December
31, 1999, which would require borrowings by the Operating Partnership of
approximately $9 million to make such distributions.
. There are several uncertainties relating to the REIT Conversion that will
exist at the time Host stockholders vote on the Agreement. There is no
assurance as to the outcome of various matters, and if certain of these
events or transactions are not consummated as expected, it is possible
that the REIT Conversion may not be completed, the value of the Host REIT
Common Stock and the cash available for distribution to stockholders of
Host REIT could be materially adversely affected or Host REIT could fail
to qualify as a REIT for federal income tax purposes.
. The inability of Host, the Operating Partnership and Host REIT to obtain
one or more third-party consents prior to consummation of the REIT
Conversion could have a material adverse effect on the Operating
Partnership and Host REIT, and thus could reduce the value of the Host
REIT Common Stock.
<PAGE>
. The Ownership Limit under Host REIT's charter will adversely affect the
value of any Host REIT Common Stock held in excess of such Ownership
Limit and may have the effect of delaying, deferring or preventing a
change in control of Host REIT.
.Host REIT's charter and bylaws, the Maryland General Corporation Law, as
amended (the "MGCL"), Host REIT's stockholder rights plan and certain
existing rights of Marriott International contain or will contain a number
of provisions that may limit the ability of outside parties to acquire, or
discourage them from acquiring, control of Host REIT.
. Taxation of Host REIT as a regular corporation if it fails to qualify as
a REIT, or taxation of the Operating Partnership as a corporation if it
fails to qualify as a partnership for federal income tax purposes, would,
among other things, result in a material decrease in cash available for
distribution and a material reduction in the value of the Host REIT
Common Stock.
. No assurance can be provided that new legislation, Treasury Regulations,
administrative interpretations or court decisions will not significantly
change the tax laws with respect to Host REIT's qualification as a REIT
or the federal income tax consequences of such qualification.
If the Agreement is approved by the stockholders of Host at the Special
Meeting and the Restructuring Transactions are consummated, Host REIT expects
to qualify as a REIT beginning with its first full taxable year commencing
after the REIT Conversion is completed, which currently is expected to be the
year commencing January 1, 1999 (but which might not be until the year
beginning January 1, 2000). See "Federal Income Tax Consequences."
This Proxy Statement/Prospectus also constitutes the prospectus of Host REIT
relating to the common stock, par value $.01 per share, of Host REIT (the
"Host REIT Common Stock") into which the outstanding shares of Host Common
Stock will be converted as part of the Reincorporation by means of the Merger.
If the Agreement is approved by the Host stockholders and the Merger is
consummated, Host REIT will be the surviving entity in the Merger, the
separate existence of Host will terminate and each issued and outstanding
share of Host Common Stock, together with the associated right (the "Host
Right") issued under the Rights Agreement dated as of February 3, 1989 between
Host and the Bank of New York (the "Host Rights Agreement"), will be converted
into one share of Host REIT Common Stock, together with the associated right
("Host REIT Right") issued under a stockholder rights plan to be adopted by
Host REIT prior to the Merger (the "Host REIT Rights Agreement"). In addition,
the Agreement provides that, in the Merger, outstanding options and other
rights to acquire Host Common Stock will be converted into rights to acquire
Host REIT Common Stock, subject to certain adjustments to take into account
aspects of the REIT Conversion, and except as set forth in the Agreement and
any outstanding shares of preferred stock of Host would be converted into an
equal number of shares of preferred stock of Host REIT having substantially
the same rights and preferences. See "The Restructuring Transactions."
ANY SHARES OF HOST REIT COMMON STOCK HELD AT THE EFFECTIVE TIME OF THE
MERGER AND NOT SUBSEQUENTLY TRANSFERRED PRIOR TO THE SPECIAL MERGER OWNERSHIP
LIMIT EFFECTIVE TIME (AS DEFINED HEREIN), OR ACQUIRED OR HELD AT ANY TIME
AFTER THE EFFECTIVE TIME OF THE MERGER, IN VIOLATION OF THE OWNERSHIP LIMIT
(AS DEFINED HEREIN) WILL BE TRANSFERRED AUTOMATICALLY TO A TRUST FOR THE
BENEFIT OF A DESIGNATED CHARITABLE BENEFICIARY, AND THE PERSON WHO HOLDS SUCH
EXCESS SHARES OF HOST REIT COMMON STOCK WILL NOT BE ENTITLED TO ANY
DISTRIBUTIONS THEREON OR TO VOTE SUCH EXCESS SHARES OF HOST REIT COMMON STOCK.
TO AVOID THE ADVERSE EFFECTS OF THE OWNERSHIP LIMIT, ANY HOLDER OF HOST COMMON
STOCK WHO WOULD OWN SHARES IN EXCESS OF THE OWNERSHIP LIMIT AT THE EFFECTIVE
TIME OF THE MERGER SHOULD DISPOSE OF ANY SUCH EXCESS SHARES PRIOR THERETO. SEE
"DESCRIPTION OF HOST REIT CAPITAL STOCK--RESTRICTIONS ON OWNERSHIP AND
TRANSFER."
The Board of Directors has fixed the close of business on November 13, 1998
as the record date for the determination of stockholders entitled to receive
notice of and vote at the Special Meeting (the "Record Date"). As of the
Record Date, there were outstanding shares of Host Common Stock and
holders of record. See "Voting and Proxies."
This Proxy Statement/Prospectus and the accompanying proxy card are first
being mailed to stockholders of Host on or about November , 1998.
This Proxy Statement/Prospectus does not cover any resales of Host REIT
Common Stock to be received by stockholders of Host upon consummation of the
Merger, and no person is authorized to make use of this Proxy
Statement/Prospectus in connection with any such resale.
---------------
THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOVEMBER , 1998.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 1
Forward-Looking Statements.............................................. 1
Certain Key Definitions................................................. 2
Overview................................................................ 4
Risk Factors............................................................ 10
Date, Time, Place and Purpose of Special Meeting........................ 15
Stockholders Entitled to Vote........................................... 15
Vote Required; No Dissenters' Rights.................................... 15
The Restructuring Transactions.......................................... 16
The REIT Conversion..................................................... 21
Federal Income Tax Consequences......................................... 27
Recommendation of the Board of Directors................................ 28
Distributions and Market Prices of Host Common Stock.................... 28
Distribution and Dividend Policy After the Merger....................... 29
Unaudited Per Share Data................................................ 30
Summary Financial Information........................................... 30
RISK FACTORS.............................................................. 32
Risks and Effects of the Merger and the REIT Conversion................. 32
Lack of Control over Hotel Operations................................. 32
Lack of Control over Non-Controlled Subsidiaries...................... 32
Dependence upon Crestline............................................. 32
Current Host Common Stock Price Is Not Necessarily Indicative of the
Price of Host REIT Common Stock Following the REIT Conversion........ 33
Cash Distributions May Exceed Cash Available for Distribution......... 33
Timing of the Restructuring Transactions and the REIT Conversion...... 33
Conflicts of Interest................................................. 34
Uncertainties at the Time of Voting on the Agreement.................. 34
Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect............................................................... 35
Expiration of the Leases and Possible Inability to Find Other
Lessees.............................................................. 35
Leases Could Impair the Sale or Other Disposition of Host REIT's
Hotels............................................................... 35
Limitations on Sale or Refinancing of Certain Hotels.................. 35
Risks of Ownership of Host REIT Common Stock............................ 36
Possible Adverse Consequences of Limits on Ownership of Host REIT
Common Stock......................................................... 36
Limitations on Acquisition of Host REIT Common Stock and Change in
Control.............................................................. 37
Effect on Stock Price of Shares Available for Future Sale............. 40
Effect on Stock Price of Market Conditions............................ 40
Effect on Stock Price of Earnings and Cash Distributions.............. 40
Effect on Stock Price of Market Interest Rates........................ 41
Effect on Stock Price of Unrelated Events............................. 41
Dependence on External Sources of Capital............................. 41
Federal Income Tax Risks Relating to REIT Qualification................. 41
General............................................................... 41
Required Distributions and Payments................................... 41
Consequences of Failure to Qualify as a REIT.......................... 42
"Earnings and Profits" Attributable to "C" Corporation Taxable Years.. 42
Treatment of Leases................................................... 42
Other Tax Liabilities; Host REIT's Substantial Deferred and Contingent
Tax Liabilities...................................................... 43
Failure of the Operating Partnership to Qualify as a Partnership...... 43
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Other Tax Risks......................................................... 43
Tax Consequences of the OP Contribution............................... 43
Effects of Subsequent Events upon Recognition of Gain................. 44
Risks of Operation...................................................... 44
Competition in the Lodging Industry................................... 44
Substantial Indebtedness of Host REIT................................. 44
No Limitation on Debt................................................. 45
The Board May Change Investment and Other Policies Without Stockholder
Approval............................................................. 45
Management Agreements Could Impair the Sale or Other Disposition of
Host REIT's Hotels................................................... 45
Rental Revenues from Hotels Subject to Prior Rights of Lenders........ 45
Hotels Subject to Ground Leases May Affect Host REIT's Revenues....... 45
General Real Estate Investment Risks.................................. 46
Possible Underperformance of New Acquisitions......................... 46
Seasonality........................................................... 46
Illiquidity of Real Estate............................................ 46
Miscellaneous Risks..................................................... 46
Changes in Laws....................................................... 46
Dependence upon Key Personnel......................................... 47
Potential Litigation Related to the REIT Conversion................... 47
Risk Involved in Investments through Partnerships or Joint Ventures... 47
Year 2000 Problem..................................................... 47
Uninsured Loss........................................................ 48
Americans with Disabilities Act....................................... 48
Other Regulatory Issues............................................... 48
Possible Environmental Liabilities.................................... 48
CONFLICTS OF INTEREST..................................................... 50
Responsibilities of Host REIT to Other Limited Partners in the Operating
Partnership............................................................ 50
Potential Conflicts Involving Marriott International and Crestline...... 50
Policies with Respect to Conflicts of Interest.......................... 50
VOTING AND PROXIES........................................................ 51
Matters to be Considered at the Special Meeting......................... 51
Record Date and Outstanding Shares...................................... 51
Voting of Proxies....................................................... 51
Vote Required........................................................... 51
Quorum; Abstentions and Treatment of Broker Non-Votes; Adjournment; Rev-
ocation................................................................ 52
Solicitation of Proxies and Expenses.................................... 53
THE RESTRUCTURING TRANSACTIONS............................................ 54
Background and Reasons for the Restructuring Transactions and the REIT
Conversion............................................................. 54
The OP Contribution..................................................... 56
Terms of the Merger..................................................... 57
Absence of Dissenters' Rights........................................... 59
Accounting Treatment.................................................... 59
Conditions to the Merger................................................ 59
Comparison of Rights of Stockholders of Host and Host REIT.............. 60
Limitation of Liability and Indemnification of Directors and Officers... 75
THE REIT CONVERSION....................................................... 77
The Initial E&P Distribution............................................ 78
Other Transactions Comprising the REIT Conversion....................... 79
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OPINION OF FINANCIAL ADVISOR.............................................. 85
Opinion of BT Wolfensohn, Financial Advisor to Host..................... 85
BUSINESS AND PROPERTIES................................................... 89
Business of the Company................................................. 89
General................................................................. 90
Business Objectives..................................................... 90
Business Strategy....................................................... 90
Hotel Lodging Industry.................................................. 93
Hotel Lodging Properties................................................ 94
Hotel Properties........................................................ 99
1998 Acquisitions....................................................... 101
Blackstone Acquisition.................................................. 101
Investments in Affiliated Partnerships.................................. 102
Marketing............................................................... 102
Competition............................................................. 103
Relationship with HM Services........................................... 103
Relationship with Marriott International; Marriott International
Distribution........................................................... 103
Employees............................................................... 104
Environmental and Regulatory Matters.................................... 104
Legal Proceedings....................................................... 104
The Leases.............................................................. 105
The Management Agreements............................................... 111
Noncompetition Agreement................................................ 114
Indebtedness............................................................ 115
DISTRIBUTION AND OTHER POLICIES........................................... 117
Distribution Policy..................................................... 117
Investment Policies..................................................... 120
Financing Policies...................................................... 121
Lending Policies........................................................ 121
Conflicts of Interest Policies.......................................... 121
Policies with Respect to Other Activities............................... 123
SELECTED FINANCIAL DATA................................................... 124
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 126
Lack of Comparability Following the Merger and the REIT Conversion...... 126
Historical Results of Operations........................................ 126
First Three Quarters 1998 Compared to First Three Quarters 1997
(Historical).......................................................... 126
1997 Compared to 1996 (Historical)..................................... 128
1996 Compared to 1995 (Historical)..................................... 130
Pro Forma Results of Operations......................................... 131
100% Participation with No Notes Issued--First Three Quarters 1998
Compared to First Three Quarters 1997 (Pro Forma)..................... 132
100% Participation with Notes Issued--First Three Quarters 1998
Compared to First Three Quarters 1997 (Pro Forma)..................... 133
100% Participation with No Notes Issued--1997 Compared to 1996 (Pro
Forma)................................................................ 134
100% Participation with Notes Issued--1997 Compared to 1996 (Pro
Forma)................................................................ 135
Pro Forma Results if No Partnerships Participate in the REIT
Conversion............................................................. 136
Pro Forma Results if Host REIT's Election is Delayed until January 1,
2000................................................................... 136
Liquidity and Capital Resources......................................... 137
Year 2000 Problem....................................................... 144
MANAGEMENT................................................................ 148
Directors and Executive Officers of Host REIT........................... 148
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Committees of the Board of Directors.................................... 150
Compensation of Directors............................................... 151
Executive Compensation.................................................. 151
Aggregated Stock Option Exercises and Year-End Value.................... 153
Long-Term Incentive Plan................................................ 154
Employment Agreements................................................... 154
1998 Employee Benefits Allocation Agreement............................. 154
Comprehensive Stock Incentive Plan...................................... 155
Stock Purchase Plan..................................................... 156
401(k) Plan............................................................. 156
Non-Employee Director Plan.............................................. 156
Deferred Compensation Plan.............................................. 156
Limitation of Liability and Indemnification............................. 157
Indemnification Agreements.............................................. 157
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 158
Relationship Between Host and Marriott International.................... 158
Relationship Between Host and Host Marriott Services Corporation........ 161
Relationship Between Host and Crestline Capital Corporation After the
Initial E&P Distribution............................................... 162
PRINCIPAL STOCKHOLDERS.................................................... 165
DESCRIPTION OF HOST REIT CAPITAL STOCK.................................... 167
General................................................................. 167
Host REIT Common Stock.................................................. 167
Preferred Stock......................................................... 168
Power to Issue Additional Host REIT Common Stock and Preferred Stock.... 168
Restrictions on Ownership and Transfer.................................. 168
Transfer Agent and Registrar............................................ 171
CERTAIN PROVISIONS OF MARYLAND LAW AND THE HOST REIT CHARTER AND BYLAWS... 172
Number of Directors; Classification and Removal of Board of Directors;
Other Provisions....................................................... 172
Changes in Control Pursuant to Maryland Law............................. 173
Advance Notice of Director Nominations and New Business................. 174
Meetings of Stockholders; Call of Special Meetings; Stockholder Action
in Lieu of Meeting by Unanimous Consent................................ 174
Merger, Consolidation, Share Exchange and Transfer of Assets of Host
REIT................................................................... 175
Amendments to the Host REIT Charter and Bylaws.......................... 175
Anti-Takeover Effect of Certain Provisions of Maryland Law and the Host
REIT Charter and Bylaws................................................ 175
Marriott International Purchase Right................................... 176
Stockholder Rights Plan................................................. 176
DESCRIPTION OF THE PARTNERSHIP AGREEMENT AND OP UNITS..................... 178
General................................................................. 178
Formation............................................................... 178
Purposes, Business and Management....................................... 178
Host REIT May Not Engage in Other Businesses; Conflicts of Interest..... 179
Distributions; Allocations of Income and Loss........................... 179
Borrowing by the Operating Partnership.................................. 179
Reimbursement of Host REIT; Transactions with Host REIT and its
Affiliates............................................................. 179
Liability of Host REIT and Limited Partners............................. 180
Exculpation and Indemnification of Host REIT............................ 180
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Sales of Assets.......................................................... 181
Removal or Withdrawal of Host REIT; Transfer of Host REIT's Interests.... 181
Certain Voting Rights of Holders of OP Units During the First Year
Following the Effective Date of the Partnership Mergers................. 182
Restrictions on Transfers of Interests by Limited Partners............... 182
Unit Redemption Right.................................................... 183
No Withdrawal by Limited Partners........................................ 183
Issuance of Limited Partnership Interests................................ 183
Meetings; Voting......................................................... 184
Amendment of the Partnership Agreement................................... 184
Books and Reports........................................................ 185
Power of Attorney........................................................ 185
Dissolution, Winding Up and Termination.................................. 185
Ownership Limitation..................................................... 186
ERISA CONSIDERATIONS....................................................... 187
Status of Host REIT and the Operating Partnership Under ERISA............ 187
FEDERAL INCOME TAX CONSEQUENCES............................................ 188
Introduction............................................................. 188
Federal Income Tax Consequences of the Merger............................ 189
Federal Income Tax Consequences of the Initial E&P Distribution.......... 190
Federal Income Tax Consequences of the OP Contribution................... 193
Federal Income Taxation of Host REIT Following the Merger................ 194
Taxation of Taxable U.S. Stockholders Generally.......................... 206
Backup Withholding for Host REIT Distributions........................... 208
Taxation of Tax-Exempt Stockholders of Host REIT......................... 209
Taxation of Non-U.S. Stockholders........................................ 209
Tax Aspects of Host REIT's Ownership of OP Units......................... 212
Other Tax Consequences for Host REIT and Its Stockholders................ 215
LEGAL MATTERS.............................................................. 216
EXPERTS.................................................................... 216
OTHER MATTERS.............................................................. 216
STOCKHOLDER PROPOSALS...................................................... 216
AVAILABLE INFORMATION; INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..... 216
GLOSSARY................................................................... 218
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
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APPENDICES
Appendix A--Agreement and Plan of Merger
Appendix B--Opinion of BT Wolfensohn
Appendix C--Tax opinion of Hogan & Hartson L.L.P. with respect to the tax
consequences of the Merger
Appendix D--Tax opinion of Hogan & Hartson L.L.P. with respect to the
qualification of Host REIT as a REIT
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SUMMARY
This Summary does not purport to be complete and is qualified in its entirety
by the more detailed information appearing elsewhere in this Proxy
Statement/Prospectus, including the appendices attached hereto (this "Proxy
Statement/Prospectus"), and is presented solely to provide an overview of the
transactions described in detail in the remainder of this Proxy
Statement/Prospectus and of the business and investment considerations and
risks that should be considered carefully when voting on the Agreement.
Stockholders are advised not to rely on this Summary, but to carefully review
this entire Proxy Statement/Prospectus.
The information contained herein, unless otherwise indicated, assumes the
Restructuring Transactions and the other transactions comprising the REIT
Conversion (including the Blackstone Acquisition, as defined below) occur, all
Partnerships (as defined below) participate in the Partnership Mergers (as
defined below) and no shares of Host REIT Common Stock or Notes (as defined
below) are issued in the Partnership Mergers (the "Full Participation
Scenario").
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein or delivered in connection with this Proxy
Statement/Prospectus are forward-looking statements. Certain, but not
necessarily all, of such forward-looking statements can be identified by the
use of forward-looking terminology, such as "believes," "expects," "may,"
"will," "should," "estimates" or "anticipates" or the negative thereof or other
variations thereof or comparable terminology. All forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause the actual transactions, results, performance or achievements of Host or
Host REIT to be materially different from any future transactions, results,
performance or achievements expressed or implied by such forward-looking
statements. The cautionary statements set forth under the caption "Risk
Factors" and elsewhere in this Proxy Statement/Prospectus identify important
factors with respect to such forward-looking statements, including the
following factors that could affect such forward-looking statements: (i)
national and local economic and business conditions that will, among other
things, affect demand for hotels and other properties, the level of rates and
occupancy that can be achieved by such properties and the availability and
terms of financing; (ii) the ability to maintain the properties in a first-
class manner (including meeting capital expenditure requirements); (iii) Host
REIT's ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures; (iv) Host REIT's ability to
acquire or develop additional properties and the risk that potential
acquisitions or developments may not perform in accordance with expectations;
(v) Host's or Host REIT's ability to obtain required consents of stockholders,
lenders, debt holders, partners and ground lessors of Host and its affiliates
and of other third parties in connection with the REIT Conversion and to
consummate all of the transactions constituting part of the REIT Conversion
(including the Blackstone Acquisition); (vi) changes in travel patterns, taxes
and government regulations which influence or determine wages, prices,
construction procedures and costs; (vii) governmental approvals, actions and
initiatives, including the need for compliance with environmental and safety
requirements, and changes in laws and regulations or the interpretation
thereof; (viii) the effects of tax legislative action; (ix) the effect on Host
and Host REIT of the Year 2000 issue; and (x) the timing of Host REIT's
election to be taxed as a REIT and the ability of Host REIT to satisfy complex
rules in order to qualify for taxation as a REIT for federal income tax
purposes and to operate effectively within the limitations imposed by these
rules. Although Host and Host REIT believe the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, they can give
no assurance that their expectations will be attained or that any deviations
will not be material. Neither Host nor Host REIT undertakes any obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
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CERTAIN KEY DEFINITIONS
The following terms have the meanings set forth below. See the "Glossary" on
page 218 for the definitions of other capitalized terms used in this Proxy
Statement/Prospectus.
"Host"........................ Host Marriott Corporation, a Delaware
corporation, and either the general partner or
an affiliate of the general partner of each
Partnership (as defined below), or, as the
context may require, Host Marriott Corporation
together with its subsidiaries or any of such
subsidiaries.
"Host Common Stock"........... Shares of the common stock, par value $1.00 per
share, of Host.
"Host REIT"................... HMC Merger Corporation, a wholly-owned, newly
formed Maryland subsidiary of Host (to be
renamed "Host Marriott Corporation" in
connection with the Merger), which was formed
for the sole purpose of effecting the
Reincorporation by means of the Merger, and
which will be the sole general partner of the
Operating Partnership, and the successor to
Host, or, as the context may require, HMC
Merger Corporation and the Operating
Partnership collectively together with their
subsidiaries or any of such subsidiaries.
"Host REIT Common Stock"...... Shares of common stock, par value $.01 per
share, of Host REIT.
"Operating Partnership"....... Host Marriott L.P., a Delaware limited
partnership, the sole general partner of which
will be Host REIT, or as the context may
require, such entity together with its
subsidiaries, including the Non-Controlled
Subsidiaries (as defined below), or any of
them.
"Company"..................... Host (to the extent of its business and assets
to be contributed to the Operating Partnership)
with respect to the period prior to the REIT
Conversion, and Host REIT and the Operating
Partnership collectively with respect to the
period after the REIT Conversion.
"Non-Controlled
Subsidiaries"................. The taxable corporations in which the Operating
Partnership will own 95% of the economic
interest but no voting stock and which will
hold various assets contributed by Host and its
subsidiaries to the Operating Partnership,
which assets, if owned directly by the
Operating Partnership, could jeopardize Host
REIT's status as a REIT.
"Crestline"................... Crestline Capital Corporation (formerly HMC
Senior Communities, Inc.), a Maryland
corporation, or, as the context may require,
such entity together with the Lessees (as
defined below) and its other subsidiaries or
any of them, which currently is a wholly-owned
subsidiary of Host but will become a separate
public company as part of the REIT Conversion
when Host or Host REIT distributes the common
stock of Crestline to its existing stockholders
as part of the Initial E&P Distribution.
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"REIT Conversion"............. (i) The OP Contribution, (ii) the
Reincorporation by means of the Merger, (iii)
the Initial E&P Distribution, (iv) the recently
completed refinancing and amendment of the debt
securities and certain credit facilities of
Host substantially in the manner described
herein, (v) the Partnership Mergers (if and to
the extent consummated), (vi) the Private
Partnership Transactions (if and to the extent
consummated), (vii) the Blackstone Acquisition
(if and to the extent consummated), (viii) the
creation and capitalization of the Non-
Controlled Subsidiaries, (ix) the leasing of
virtually all of the full-service Hotels (as
defined below) owned or controlled by the
Operating Partnership for initial terms ranging
generally from seven to ten years (the
"Leases") to lessees, which will be indirect
wholly-owned subsidiaries of Crestline (the
"Lessees"), whereby the Lessees will operate
the hotels under their existing brand names and
pursuant to their existing management
agreements, and (x) such other related
transactions described in "The REIT Conversion"
and such other steps occurring prior to,
substantially concurrent with or within a
reasonable time after the Effective Date, as
Host may determine in its sole discretion to be
necessary or desirable to complete or
facilitate the transactions contemplated herein
or otherwise to permit Host REIT to elect to be
treated as a REIT for federal income tax
purposes for the first full taxable year
commencing after the REIT Conversion.
"OP Contribution"............. The contribution by Host of its wholly-owned
full-service hotels, its interests in certain
hotel partnerships and certain other assets to
the Operating Partnership in exchange for units
of limited and general partnership interest in
the Operating Partnership and the assumption of
liabilities.
"Reincorporation"............. The reincorporation of Host from the State of
Delaware to the State of Maryland by means of
the Merger.
"Merger"...................... The proposed merger of Host with and into Host
REIT, as described in this Proxy
Statement/Prospectus.
"Effective Date".............. The date upon which the Reincorporation by
means of the Merger is consummated.
"Restructuring
Transactions"................. The OP Contribution and the Reincorporation by
means of the Merger.
"Initial E&P Distribution".... One or more taxable distributions by Host or
Host REIT to its stockholders in connection
with the REIT Conversion consisting of shares
of common stock of Crestline and cash or other
consideration in an amount to be determined.
"OP Units".................... The limited partnership interests in the
Operating Partnership.
"Partnership Mergers"......... The acquisition by merger, if and to the extent
consummated, of up to eight limited
partnerships (the "Partnerships") that own
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full-service hotels in which Host or its
subsidiaries are general partners in exchange
for OP Units (which may be exchanged for Host
REIT Common Stock or unsecured notes of the
Operating Partnership (the "Notes")).
"Private Partnership
Transactions"................. The acquisition of the partnership interests
from unaffiliated partners of four partnerships
("Private Partnerships") that own one or more
full-service hotels and that, prior to the REIT
Conversion, are partially but not wholly-owned
by Host or one of its subsidiaries in exchange
for OP Units, if and to the extent such
acquisitions are consummated.
"Blackstone Acquisition"...... The expected acquisition from The Blackstone
Group and a series of funds controlled by
Blackstone Real Estate Partners (collectively,
the "Blackstone Entities") of ownership of, or
controlling interests in, twelve hotels and a
mortgage loan secured by a thirteenth hotel in
exchange for OP Units, the assumption of
certain liabilities and other consideration,
including up to 18% of the shares of Crestline
common stock, to the extent such acquisition is
consummated.
"Ownership Limit"............. The prohibition in the Articles of
Incorporation of Host REIT that will be in
effect upon consummation of the Merger (the
"Host REIT Charter") against ownership,
directly or indirectly by virtue of the
attribution provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), by any
person or persons acting as a group of more
than (i) 9.8% of the lesser of the number or
value of shares of Host REIT Common Stock
outstanding or (ii) 9.8% of the lesser of the
number or value of the issued and outstanding
shares of any class or series of Host REIT
preferred stock, subject to waiver or
modification by Host REIT in certain limited
circumstances and to certain limited exceptions
for a holder of shares of Host REIT Common
Stock solely by reason of the Merger in excess
of the Ownership Limit so long as such holder
would not own, directly or by attribution under
the Code, more than 9.9% by value of the
outstanding capital stock of Host REIT as of
12:01 a.m. (Eastern Time) on the first day
after the effective time of the Merger (the
"Special Merger Ownership Limit Effective
Time").
OVERVIEW
General. Host has adopted a plan to restructure its business operations so
that it will qualify as a REIT for federal income tax purposes. Host REIT was
organized as a Maryland subsidiary of Host on September 28, 1998 for the sole
purpose of effecting the Reincorporation by means of the Merger. Upon
consummation of the Restructuring Transactions, Host REIT will succeed to and
continue the business of Host. The Restructuring Transactions are part of a
series of transactions comprising the REIT Conversion. If Host REIT qualifies
as a REIT, it generally will not be subject to federal corporate income taxes
on that portion of its ordinary income or capital gain that is distributed to
its stockholders. Such treatment would substantially eliminate the federal
"double taxation" on earnings (at the corporate and stockholder levels) that
generally results from investment in a corporation. See "Federal Income Tax
Consequences." Host REIT has conducted no business to date other
4
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than that incident to the REIT Conversion. This Proxy Statement/Prospectus is
being furnished to the holders of Host Common Stock to solicit their approval
of the Agreement, which contemplates the OP Contribution and the
Reincorporation by means of the Merger.
The principal executive offices of both Host and Host REIT are located at
10400 Fernwood Road, Bethesda, Maryland, 20817-1109, telephone number (301)
380-9000.
The OP Contribution. Subject to approval of the Agreement at the Special
Meeting, after the Special Meeting Host will contribute, as the OP
Contribution, its wholly-owned full-service hotels, its interests in certain
of the Partnerships and the Private Partnerships and certain other assets to
the Operating Partnership. As a preliminary step in the REIT Conversion,
during 1998, various subsidiaries of Host also have contributed or will
contribute the wholly-owned full-service hotels held by such entities, their
interests in certain of the Partnerships and Private Partnerships and certain
other assets to the Operating Partnership (including its subsidiaries). In
exchange for these contributions, the Operating Partnership will issue to Host
in the aggregate a number of OP Units equal to the number of shares of Host
REIT Common Stock that will be outstanding upon completion of the REIT
Conversion (reduced by any OP Units to be owned by subsidiaries of Host REIT)
and will assume Host's liabilities. Following these contributions, the
Operating Partnership and its subsidiaries will directly or indirectly own all
of Host's and its subsidiaries' wholly-owned hotels, substantially all of
Host's direct and indirect interests in both the Partnerships and the Private
Partnerships and all of Host's other assets (excluding its senior living
assets and the cash or other consideration to be distributed as part of the
Initial E&P Distribution and certain other de minimis assets that cannot be
contributed to the Operating Partnership). These contributions, which include
the OP Contribution, will enable Host REIT, following the Reincorporation by
means of the Merger, to operate together with the Operating Partnership in an
umbrella partnership REIT ("UPREIT") structure, through which Host REIT would
continue the full-service hotel ownership business currently conducted by
Host, and which is expected to improve Host REIT's ability to acquire
additional hotel and other properties in the future on favorable terms. See
"The Restructuring Transactions--The OP Contribution."
Federal Income Tax Consequences of the OP Contribution. Section 721 of the
Code provides that no gain or loss is recognized in the case of a contribution
of property to a partnership in exchange for an interest in the partnership.
However, there are a number of potential exceptions to the availability of
such treatment. The application of these exceptions is highly complex and
depends upon a number of factual determinations and other outside events which
may or may not occur, but Host believes that it will not recognize a material
amount of gain in connection with the OP Contribution. See "Federal Income Tax
Consequences--Federal Income Tax Consequences of the OP Contribution." Host is
not obtaining an opinion of outside counsel as to the tax consequences to it
of the OP Contribution.
The Reincorporation by Means of the Merger. If the requisite stockholder
approval of the Agreement is obtained and certain other conditions to
consummation of the Merger are satisfied (including, among others,
determination by the Host Board of Directors that Host REIT can elect to be
treated as a REIT for federal income tax purposes effective no later than the
first full taxable year commencing after the REIT Conversion is completed
(which might not be until the year commencing January 1, 2000 if the REIT
Conversion is not completed prior to January 1, 1999), approval of the Host
REIT Common Stock for listing on the New York Stock Exchange (the "NYSE"), the
receipt of governmental and material third-party consents and certain other
conditions relating to the REIT Conversion), then pursuant to the Merger, Host
would be merged with and into Host REIT, Host REIT would be the surviving
entity in the Merger, the separate existence of Host would terminate and each
issued and outstanding share of Host Common Stock, together with the
associated Host Right under the Host Rights Agreement, would be converted into
one share of Host REIT Common Stock, together with the associated Host REIT
Right under the Host REIT Rights Agreement, in accordance with the terms of
the Agreement. In addition, in the Merger, outstanding options and other
rights to acquire Host Common Stock would be converted into rights to acquire
Host REIT Common Stock, subject to adjustment for the Initial E&P Distribution
and except as otherwise set forth in the Agreement, and any outstanding shares
of preferred stock of Host would be converted into an equal number of shares
of preferred stock of Host REIT having substantially the same rights and
preferences. It is expected that, upon consummation of the Merger, the Host
REIT Common
5
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Stock will be listed and trade on the NYSE under the "HMT" symbol in the same
manner as shares of Host Common Stock currently trade on the NYSE. See "The
Restructuring Transactions--Terms of the Merger" and "--Conditions to the
Merger."
Federal Income Tax Consequences of the Merger. Host has received an opinion
of counsel to the effect that the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Code, and
accordingly: (i) no gain or loss will be recognized by Host or Host REIT as a
result of the Merger; (ii) no gain or loss will be recognized by holders of
shares of Host Common Stock upon the conversion of such shares into Host REIT
Common Stock (except for certain stockholders who are not considered "U.S.
persons" for purposes of the Code and who own (or have owned) in excess of 5%
of Host); (iii) the tax basis of shares of Host REIT Common Stock received by a
former holder of Host Common Stock pursuant to the Merger in the aggregate will
be the same as the holder's adjusted tax basis in the shares of Host Common
Stock being converted in the Merger (subject to any adjustment resulting from
the Initial E&P Distribution); and (iv) the holding period of shares of Host
REIT Common Stock received by a former holder of Host Common Stock pursuant to
the Merger will include the holder's holding period with respect to the shares
of Host Common Stock being converted in the Merger, assuming that the Host
Common Stock was held as a capital asset at the effective time of the Merger.
See "Federal Income Tax Consequences--Federal Income Tax Consequences of the
Merger."
The Initial E&P Distribution. In order to qualify as a REIT for federal
income tax purposes, Host REIT and/or Host, as its predecessor, must have
distributed all of the accumulated "earnings and profits" ("E&P") of Host to
its stockholders in one or more taxable dividends prior to the end of the first
full taxable year for which the REIT election of Host is effective, which
currently is expected to be the taxable year commencing January 1, 1999 (but
which might not be until the year beginning January 1, 2000). In order to help
accomplish the requisite distributions of the accumulated E&P of Host, Host or
Host REIT will make the Initial E&P Distribution, consisting of one or more
taxable distributions to its stockholders consisting of shares of common stock
of Crestline and cash or other consideration in an amount to be determined.
Although there is no assurance as to what form such other consideration
comprising the Initial E&P Distribution will take, it is currently contemplated
that it will include a special dividend (the "Special Dividend") payable, at
each stockholder's election, in cash or Host Common Stock (or Host REIT Common
Stock if the Merger has occurred). The actual amount of the Initial E&P
Distribution will be based in part upon the estimated amount of accumulated E&P
of Host as of the last day of its taxable year ending on or immediately
following completion of the REIT Conversion. To the extent that the Initial E&P
Distribution is not sufficient to eliminate Host's estimated accumulated E&P,
Host REIT will make one or more additional taxable distributions to its
stockholders (in the form of cash or securities) prior to the last day of Host
REIT's first full taxable year as a REIT (currently expected to be December 31,
1999 but which instead might be December 31, 2000) in an amount intended to be
sufficient to eliminate such E&P, and the Operating Partnership will make
corresponding distributions to all holders of OP Units (including Host REIT) in
an amount sufficient to permit Host REIT to make such additional distributions.
See "The REIT Conversion--The Initial E&P Distribution."
Federal Income Tax Consequences of the Initial E&P Distribution. Generally,
the Initial E&P Distribution will be a taxable dividend to a Host stockholder
to the extent that the Initial E&P Distribution is made out of the Host
stockholder's share of the portion of the current and accumulated E&P of Host
and Host REIT allocable to the Initial E&P Distribution. Host and Host REIT
currently believe that the substantial majority, if not all, of the Initial E&P
Distribution (the fair market value of which Host currently estimates will
range from approximately $2.10 to $2.50 per share of Host Common Stock) will be
considered made out of such E&P and, therefore, will be taxable as a dividend.
See "Federal Income Tax Consequences--Federal Income Tax Consequences of the
Initial E&P Distribution."
The Ownership Limit. Primarily to satisfy certain additional requirements
under the Code that are applicable to REITs in general, the Ownership Limit
under the Host REIT Charter will provide that no person or persons acting as a
group may own, or be deemed to own by virtue of the attribution provisions of
the Code,
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more than 9.8% of the lesser of the number or value of shares of Host REIT
Common Stock (or any other class or series of Host REIT preferred stock)
outstanding, subject to waiver or modification by Host REIT in certain limited
circumstances and to certain limited exceptions for a holder of shares of Host
REIT Common Stock solely by reason of the Merger in excess of the Ownership
Limit so long as such holder would not own, directly or by attribution under
the Code, more than 9.9% by value of the outstanding capital stock of Host REIT
after the Special Merger Ownership Limit Effective Time. See "Description of
Host REIT Capital Stock--Restrictions on Ownership and Transfer."
Other Transactions Comprising the REIT Conversion. In addition to the
Restructuring Transactions and the Initial E&P Distribution, the REIT
Conversion includes the following transactions, among others: (i) the recently
completed refinancing and amendment of the debt securities and certain credit
facilities of Host substantially in the manner described herein; (ii) the
Partnership Mergers (if and to the extent consummated); (iii) the Private
Partnership Transactions (if and to the extent consummated); (iv) the
Blackstone Acquisition (if consummated); (v) the creation and capitalization of
the Non-Controlled Subsidiaries; (vi) the leasing of virtually all of the full-
service Hotels (as defined below) to the Lessees; and (vii) such other related
transactions and such other steps occurring prior to, concurrent with or within
a reasonable time after the Effective Date as may be necessary or desirable to
complete the transactions contemplated herein or otherwise to permit Host REIT
to elect to be treated as a REIT for federal income tax purposes for the first
full taxable year commencing after the REIT Conversion. See "The REIT
Conversion--Other Transactions Comprising the REIT Conversion."
Because REITs are not permitted under current federal income tax law to
derive revenues directly from the operation of hotels, Host REIT will lease the
Hotels to Lessees that will operate the Hotels under the existing long-term
management agreements (the "Management Agreements") and pay rent to Host REIT
as more fully described under "Business and Properties--The Leases." The
Lessees will be indirect, wholly-owned subsidiaries of Crestline. Crestline,
which currently is a wholly-owned subsidiary of Host, will become a separate
public company when Host distributes common stock of Crestline to its existing
stockholders as part of the Initial E&P Distribution. Shares of Host REIT
Common Stock and Crestline common stock will be separately traded securities,
and the companies will operate independently. There will be no overlap between
the boards of Host REIT and Crestline. There will be a substantial overlap of
stockholders of the two companies initially, but this overlap will diverge over
time.
As the first step in a strategy to acquire non-Marriott as well as Marriott
branded hotels, Host has entered into an agreement with various affiliates of
the Blackstone Entities to acquire from the Blackstone Entities ownership of,
or controlling interests in, twelve upscale and luxury full-service hotel
properties (the "Blackstone Hotels") and certain other related assets
(including a mortgage loan secured by an additional hotel) in exchange for a
combination of cash and the assumption of debt totalling $862 million, 43.7
million OP Units (based upon a negotiated value of $20.00 per OP Unit) and up
to 18% of the shares of Crestline common stock and other consideration. If the
Blackstone Acquisition is consummated, the interests in the Blackstone Hotels
will be contributed by the Blackstone Entities to the Operating Partnership as
part of the REIT Conversion. The Blackstone Hotels will be leased to Lessees
that are subsidiaries of Crestline and will continue to be managed under their
existing management agreements. See "Business and Properties--Blackstone
Acquisition."
Reasons for the Restructuring Transactions and the REIT Conversion. The Host
Board of Directors is proposing the Restructuring Transactions primarily for
the following reasons:
. The Restructuring Transactions are essential components of Host's
conversion to REIT status for federal income tax purposes. In particular,
the OP Contribution will enable Host REIT, following the Merger, to
operate, together with the Operating Partnership, in an UPREIT structure,
through which Host REIT would continue the full-service hotel ownership
business currently conducted by Host. Host believes that the UPREIT
structure will improve its ability to acquire additional properties in
the future on favorable terms. Specifically, under certain circumstances,
OP Units could be issued to acquire properties in
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transactions that would not trigger immediate tax obligations for certain
sellers. Accordingly, converting to an UPREIT structure could enable Host
REIT to acquire hotel and other properties in the future at lower prices
because of the tax advantages to some sellers of receiving OP Units as
consideration. OP Units would subsequently be redeemable for cash or
common stock of Host REIT (at the option of Host REIT) at such time as the
recipient desires liquidity.
. The provisions of Maryland law have generally been viewed as favorable to
REITs organized in corporate or trust form. As discussed below, Maryland
law facilitates qualification as a REIT by authorizing the charter of a
Maryland corporation to provide for restrictions on ownership and
transferability designed to permit a corporation to qualify as a REIT
under the Code or for any other purpose. In addition, unlike Delaware,
Maryland does not impose a franchise tax on corporations, which will
result in cost savings to Host in annual franchise tax payments and
related fees of approximately $150,000. Maryland's status as a
jurisdiction favorable to REITs is evidenced by the large number of
publicly-traded REITs that have chosen to operate as a regular Maryland
corporation or as a special statutory Maryland real estate investment
trust. According to the National Association of Real Estate Investment
Trusts, Inc. ("NAREIT"), as of September 1998, there were over 100
publicly-traded REITs organized under Maryland law.
. In order to satisfy certain requirements that are applicable to REITs in
general, many REITs impose ownership limits and transfer restrictions,
similar to the Ownership Limit under the Host REIT Charter, by inclusion
of such provisions in their charters. Under Delaware law, such
restrictions would not be binding with respect to securities issued prior
to adoption of the restriction unless holders of such securities agree to
or vote in favor of such restriction. However, under Maryland law and by
reason of the Merger, all shares of Host REIT Common Stock issued in the
Merger and thereafter would be subject to the Ownership Limit, for which
authority exists under Maryland law.
. Host's principal executive offices and a substantial number of Host's
employees are employed in Maryland.
The Board of Directors of Host believes that the Restructuring Transactions
and the other transactions comprising the REIT Conversion are advisable for
Host and its stockholders based on the belief that:
. The REIT structure, as a more tax efficient structure, will provide
improved operating results through changing economic conditions and all
phases of the hotel economic cycle.
. The REIT Conversion, which will reduce corporate-level taxes and the need
to incur debt to reduce corporate taxes through interest deductions, will
improve its financial flexibility and allow it to continue to strengthen
its balance sheet by reducing its overall debt to equity ratio over time.
. As a REIT, Host will be able to compete more effectively with other
public lodging real estate companies that already are organized as REITs
and to make performance comparisons with its peers more meaningful.
. By becoming a dividend paying company, Host's stockholder base will
expand to include investors attracted by yield as well as asset quality,
which is expected to facilitate Host REIT's capital-raising efforts and
provide a less volatile stockholder base.
. The adoption of an UPREIT structure will facilitate tax-deferred
acquisition of additional hotels (such as in the case of the Blackstone
Acquisition and the Partnership Mergers).
Host believes that these benefits justify the REIT Conversion even if the REIT
Conversion does not occur in time for Host REIT to elect REIT status effective
January 1, 1999 (in which event the effectiveness of Host REIT's election could
be delayed until January 1, 2000). See "The Restructuring Transactions--
Background and Reasons for the Restructuring Transactions and the REIT
Conversion."
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Opinion of Financial Advisor. Host's Board of Directors has received an
opinion dated November , 1998 from BT Wolfensohn, which acted as financial
advisor to Host in connection with the REIT Conversion, to the effect that the
REIT Transactions (as defined in such opinion), taken together, are fair from a
financial point of view to the holders of Host Common Stock. See "Opinion of
Financial Advisor." The Host Board of Directors considered such opinion as well
as other matters it deemed relevant in determining the advisability of the
Agreement.
Certain Effects of the REIT Conversion. The Host Board believes that Host's
conversion to a REIT and the distribution of Crestline shares as part of the
Initial E&P Distribution will benefit Host's stockholders by providing them
with a tax advantaged REIT security that is expected to provide both the
opportunity for regular cash dividends and capital appreciation as Host REIT
acquires additional properties, as well as a continuing interest in Crestline,
Host's senior living company and the initial lessee of substantially all of
Host REIT's hotels, if a Host stockholder continues to hold the Crestline
common stock. As a REIT, Host REIT would be able to benefit from the tax
advantages that apply to REITs, and stockholders would receive quarterly
distributions that are expected to be at least sufficient to satisfy the annual
distribution requirements applicable to REITs under the Code. The Host Board
believes that this will highlight the value of Host REIT's hotel properties and
permit stockholders to realize a regular cash return on that value. Upon
completion of the REIT Conversion, Crestline is expected to own Host's 31
senior living communities, which will continue to be managed by Marriott
International, and a 25% interest in the Swissotel management company expected
to be acquired in the Blackstone Acquisition, and will lease substantially all
of the Hotels (as defined below) owned by Host REIT and its affiliates, as
further described in this Proxy Statement/Prospectus. At that time, Crestline
will operate independently of Host, will be publicly traded and separately
listed on the NYSE, and will pursue its own growth opportunities.
Following the Restructuring Transactions and the other transactions
comprising the REIT Conversion (including the Blackstone Acquisition), Host
REIT and its subsidiaries are expected initially to own outright, or have
controlling interests in, approximately 125 full-service hotels operated
primarily under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt
brand names (the "Hotels"). Upon completion of the REIT Conversion, Host REIT
will be the sole general partner of the Operating Partnership and is expected
to own approximately 74% of the OP Units in the Operating Partnership, and the
remaining OP Units, which are intended to be substantially equivalent on an
economic basis to shares of Host REIT Common Stock, will be owned by the
limited partners (that are unaffiliated with Host) of the Partnerships
participating in the Partnership Mergers (the "Limited Partners"), unaffiliated
partners of the four Private Partnerships participating in the Private
Partnership Transactions and the Blackstone Entities. Host REIT and its
subsidiaries will own a number of OP Units equal to the number of shares of
Host REIT Common Stock outstanding. Host REIT will be managed by its Board of
Directors and will have no employees who are not also employees of the
Operating Partnership.
Although a number of the transactions comprising the REIT Conversion are
expected to be consummated immediately prior to, or in certain instances
immediately following, the Merger, the Merger will not be consummated unless
the conditions to the Merger have been satisfied or waived, and in particular,
a determination by Host's Board of Directors that the transactions constituting
the REIT Conversion which impact Host REIT's status as a REIT for federal
income tax purposes have occurred or are reasonably likely to occur, and based
on advice of counsel, that Host REIT can elect to be treated as a REIT for
federal income tax purposes effective no later than the first full taxable year
commencing after the REIT Conversion is completed (which might not be until the
year commencing January 1, 2000 if the REIT Conversion is not completed prior
to January 1, 1999). Consistent with the foregoing, Host intends to pursue the
transactions constituting the REIT Conversion at least through the date of the
Special Meeting of Host stockholders. If the Agreement is approved by Host
stockholders at the Special Meeting, Host intends to continue pursuing those
transactions constituting the REIT Conversion which have not yet been
completed, including the Blackstone Acquisition (which is not expected to be
consummated any earlier than December 29, 1998), and, if the Board of Directors
has determined that the conditions to the Merger have been or likely will be
satisfied or waived (and, in particular, that the
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transactions constituting the REIT Conversion which impact Host REIT's status
as a REIT for federal income tax purposes have occurred or are reasonably
likely to occur), declare the Initial E&P Distribution and enter into the
Leases with the Lessees (which will be indirect, wholly-owned subsidiaries of
Crestline), even though there is no assurance that the Merger and other
transactions comprising the REIT Conversion might not be delayed or possibly
might never be consummated. Assuming the Agreement is approved by Host
stockholders at the Special Meeting and the Host Board of Directors makes the
determination described above, it is currently contemplated that the Merger
would be consummated on or about December 29, 1998, subject to satisfaction or
waiver of the remaining conditions. If, however, the Agreement is not approved
by the Host stockholders at the Special Meeting or the Host Board of Directors
does not make the requisite determinations, Host will continue to operate as a
Delaware corporation, the REIT Conversion will not be completed at this time
and the Initial E&P Distribution will not be made.
If the REIT Conversion otherwise does not occur in time for Host REIT to
elect REIT status effective January 1, 1999, the effectiveness of Host REIT's
election could be delayed until January 1, 2000, which would result in Host
REIT continuing to pay substantial corporate-level income taxes in 1999 (which
would reduce Host REIT's estimated cash distributions per share of Host REIT
Common Stock) and could cause the Blackstone Acquisition (which is conditioned,
among other things, on consummation of the REIT Conversion by March 31, 1999
and Host REIT qualifying as a REIT for 1999) not to be consummated. If Host
REIT's election to be taxed as a REIT is not effective on January 1, 1999, Host
REIT intends to operate following the REIT Conversion in a manner that would
permit it to qualify as a REIT at the earliest time practicable, and it might
pursue a merger with another entity or other transaction that would permit it
to commence a new taxable year and elect REIT status prior to January 1, 2000,
although no assurance can be given that the Company will enter into or
consummate such other transaction or otherwise qualify as a REIT prior to
January 1, 2000. Host REIT in any event would elect to be treated as a REIT for
federal income tax purposes no later than its taxable year commencing January
1, 2000. See "The REIT Conversion."
RISK FACTORS
The following is a summary of the material risks associated with the
Restructuring Transactions and the other transactions comprising the REIT
Conversion. This summary is qualified in its entirety by the detailed
discussion in the section entitled "Risk Factors" contained in this Proxy
Statement/Prospectus. Some of the significant matters that stockholders of Host
should consider carefully when voting on the Agreement, and the transactions
contemplated thereby, include:
. Lack of Control over Hotel Operations and Non-Controlled
Subsidiaries. Due to current federal income tax law restrictions on a
REIT's ability to derive revenues directly from the operation of a hotel,
Host REIT will lease virtually all of its consolidated Hotels to the
Lessees, which will operate the Hotels by continuing to retain the
existing managers of the Hotels (the "Managers") pursuant to the existing
long-term Management Agreements. Host REIT will not operate the Hotels or
participate in the decisions affecting the daily operations of the
Hotels. Host REIT will have only a limited ability to require the Lessees
or the Managers to operate or manage the Hotels in any particular manner,
and no ability to govern any particular aspect of their day-to-day
operation or management. Host REIT also will not own any of the voting
stock of the Non-Controlled Subsidiaries, which may own, in the
aggregate, up to 20% by value of Host REIT's assets. Therefore, Host REIT
will be dependent for its revenue upon the ability of the Lessees and the
Managers to operate and manage the Hotels and the Non-Controlled
Subsidiaries to operate and manage their businesses.
. Dependence upon Crestline. Subsidiaries of Crestline will be the Lessees
of virtually all of the Hotels and their rent payments will be the
primary source of Host REIT's revenues. Upon the REIT Conversion, all
fees payable under the Management Agreements for subsequent periods will
become the primary obligations of the Lessees, to be paid by the Lessees
for so long as the Leases remain in effect. The obligations of the
Lessees will be guaranteed by Crestline, subject to specified liability
limitations. Crestline's and each Lessee's financial condition and
ability to meet its obligations under the Leases and the Management
Agreements will determine the Operating Partnership's ability to make
distributions to
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holders of OP Units, including Host REIT, and Host REIT's ability, in
turn, to make distributions to its stockholders. As of September 11, 1998,
on a pro forma basis, after giving effect to the REIT Conversion,
Crestline would have had approximately $300 million of indebtedness
(including approximately $85 million due to Host REIT to pay for hotel
working capital purchased from Host REIT but not including guarantees of
obligations of Crestline's subsidiaries under the Leases and the
Management Agreements), and Crestline can incur additional indebtedness in
the future. There can be no assurance that Crestline or any Lessee will
have sufficient assets, income and access to financing to enable it to
satisfy its obligations under the Leases or to make payments of fees under
the Management Agreements. Host REIT remains obligated to the Managers in
case the Lessee fails to pay these fees (but it would be entitled to
reimbursement from the Lessee under the terms of the Leases). In addition,
the credit rating of the Operating Partnership and Host REIT will be
affected by the general creditworthiness of Crestline.
. Current Host Common Stock Price Is Not Necessarily Indicative of the
Price of Host REIT Common Stock Following the REIT Conversion. Host's
current stock price is not necessarily indicative of how the market will
value Host REIT Common Stock following the REIT Conversion. The current
stock price of Host reflects the current market valuation of Host's
current business and assets (including the Crestline common stock and
cash or other consideration to be distributed in connection with the
Initial E&P Distribution) and not solely the business and assets of Host
REIT following the REIT Conversion. Host's current stock price also is
affected by general market conditions.
. Cash Distributions May Exceed Cash Available for Distribution. The
preliminary estimated initial annual cash distributions of the Operating
Partnership during the twelve months ending December 31, 1999 ($231
million) will exceed its estimated cash available for distribution ($158
million) and cash from contingent rents ($64 million) during the twelve
months ending December 31, 1999, which would require borrowings by the
Operating Partnership of approximately $9 million to make such
distributions in accordance with the Operating Partnership's distribution
policy. Moreover, if estimated cash from contingent rents were less than
$64 million, then the Operating Partnership also would be required to
borrow any such shortfall in order to make such distributions.
. Timing of the Restructuring Transactions and the REIT Conversion. Host
intends to cause the Restructuring Transactions and the other
transactions comprising the REIT Conversion to be completed as soon as
possible, but there is no assurance that the REIT Conversion will be
completed during 1998 in time for Host REIT to elect REIT status
effective January 1, 1999. If the REIT Conversion does not occur in time
for Host REIT to elect REIT status effective January 1, 1999, the
effectiveness of Host REIT's election could be delayed until January 1,
2000, which would result in Host REIT continuing to pay substantial
corporate-level income taxes in 1999 (which would be expected to reduce
Host REIT's estimated cash distributions during 1999 to $0.52 per share
from $0.84 per share if its REIT election were effective on January 1,
1999) and could cause the Blackstone Acquisition (which is conditioned,
among other things, on consummation of the REIT Conversion by March 31,
1999 and Host REIT qualifying as a REIT for 1999) not to be consummated.
. Responsibilities of Host REIT to Other Limited Partners in the Operating
Partnership. Maryland law imposes certain duties on the Board of
Directors of Host REIT to its stockholders. In addition, after the REIT
Conversion, Host REIT, as the sole general partner of the Operating
Partnership, will have fiduciary obligations under Delaware law with
respect to the other limited partners in the Operating Partnership (to
the extent such duties have not been modified or eliminated pursuant to
the terms of the Partnership Agreement). Although Delaware law provides
that Host REIT, as general partner, is subject to the duties of care and
loyalty with respect to the limited partners of the Operating
Partnership, the Partnership Agreement imposes certain limitations on
Host REIT's fiduciary obligations with respect to such limited partners.
See "Distribution and Other Policies--Conflicts of Interest Policies."
Notwithstanding the contractual limitations in the Partnership Agreement,
the discharge of Host REIT's obligations to its stockholders and to the
limited partners in the Operating Partnership could result in decisions
that may
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fail to reflect fully the interest of all holders of Host REIT Common
Stock and limited partners of the Operating Partnership.
. Relationships with Marriott International and Crestline. Marriott
International currently serves as manager for all but 16 of Host's
Hotels, and will continue to manage those Hotels pursuant to the
Management Agreements that will be assigned to the Lessees. In addition,
Marriott International acts as manager of hotels that compete with Host
REIT's Hotels. As a result, Marriott International may make decisions
regarding competing lodging facilities which it manages that would not
necessarily be in the best interests of Host REIT or the Lessees.
Further, J.W. Marriott, Jr. and Richard E. Marriott, who are brothers,
currently serve as directors of Host and directors (and, in the case of
J.W. Marriott, Jr., also an officer) of Marriott International. After the
REIT Conversion, J.W. Marriott, Jr. will serve as a director of Host REIT
and will continue to serve as a director of Marriott International, and
Richard E. Marriott will serve as Chairman of the Board of Host REIT and
continue to serve as a director of Marriott International. J.W. Marriott,
Jr. and Richard E. Marriott also beneficially own (as determined for
securities law purposes) approximately 10.6% and 10.2%, respectively, of
the outstanding shares of common stock of Marriott International, and
will beneficially own approximately 5.33% and 5.31%, respectively, of the
outstanding shares of common stock of Crestline (but neither will serve
as an officer or director thereof). As a result, J.W. Marriott, Jr. and
Richard E. Marriott may have a potential conflict of interest with
respect to their obligations as directors of Host REIT in connection with
any decisions regarding Marriott International itself (including
decisions relating to the Management Agreements involving the Hotels),
Marriott International's management of competing lodging properties and
Crestline's leasing and other businesses that would not necessarily be in
the best interests of Host REIT.
. Uncertainties at the Time of Voting on the Agreement. There are several
uncertainties relating to the REIT Conversion that will exist at the time
Host stockholders vote on the Agreement, including (i) the occurrence of
the Blackstone Acquisition, (ii) the results of the Partnership Mergers
and the number and value of the OP Units to be issued to the Limited
Partners therein, (iii) the assets and liabilities of the Non-Controlled
Subsidiaries and (iv) the value and components of the Initial E&P
Distribution. There is no assurance as to the outcome of such matters,
and if certain of these transactions or events are not consummated as
expected, either the REIT Conversion may not be consummated or the value
of Host REIT Common Stock and the amount of cash available for
distribution to stockholders could be adversely affected, and Host REIT
could fail to qualify as a REIT for federal income tax purposes.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Restructuring Transactions and the
other transactions comprising the REIT Conversion. The inability of Host,
the Operating Partnership or Host REIT to obtain one or more such
consents could cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material
adverse effect on the Operating Partnership and Host REIT and thus could
reduce the value of Host REIT Common Stock.
. Expiration of the Leases and Possible Inability to Find Other
Lessees. The Leases generally will expire seven to ten years after the
Effective Date, and there can be no assurance that the affected Hotels
will be relet (or if relet, will be relet on terms as favorable to Host
REIT). If the Hotels are not relet to the Lessees, Host REIT will be
required to find other lessees, which lessees must meet certain
requirements set forth in the Management Agreements and the Code. There
can be no assurance that satisfactory lessees could be found or as to the
terms and conditions on which Host REIT would be able to relet the Hotels
or enter into new leases with such lessees, which could result in a
failure of Host REIT to qualify as a REIT or in reduced cash available
for distribution.
. Leases Could Impair the Sale or Other Disposition of Host REIT's
Hotels. Each Lease generally provides for a termination payment if the
Lease is terminated by Host REIT prior to the expiration of the term of
such Lease, except following a default by a Lessee and in certain other
circumstances (including in connection with the sale of up to 12 Hotels
without a termination payment) or unless Host REIT leases
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to the Lessee a comparable substitute hotel. The payment of such
termination fee under the Leases could have the effect of impairing the
ability of Host REIT to sell its Hotels if market conditions otherwise
warrant such a sale and would reduce the net proceeds of any such sale.
. Limitations on Sale or Refinancing of Certain Hotels. For reasons
relating to federal income tax considerations, the agreements by which
the Operating Partnership will acquire certain Hotels (or obtain consent
to lease certain Hotels to the Lessees) will also restrict the ability of
the Operating Partnership to dispose of or refinance the debt secured by
such Hotels for varying periods from the Effective Date, depending on the
Hotel. Similarly, the Operating Partnership will agree generally not to
dispose of the Blackstone Hotels for five or ten years, depending on the
circumstances. Thus, it may be difficult or impossible for Host REIT to
sell such Hotels or refinance such debt during their respective lock-out
periods.
. Possible Adverse Consequences of the Ownership Limit. Any shares of Host
REIT Common Stock held at the effective time of the Merger and not
subsequently transferred prior to the Special Merger Ownership Limit
Effective Time, or acquired or held at any time after the effective time
of the Merger, in violation of the Ownership Limit, will be transferred
automatically to a trust for the benefit of a designated charitable
beneficiary, and the person holding such excess shares of Host REIT
Common Stock will not be entitled to any distributions thereon or to vote
such excess shares of Host REIT Common Stock. The holder of any such
excess shares of Host REIT Common Stock will receive the lesser of the
value of such excess shares as of the effective time of the Merger or the
cash proceeds from the sale of such excess shares of Host REIT Common
Stock by the designated charitable beneficiary. After the effective time
of the Merger, any person who acquires Host REIT Common Stock in excess
of the Ownership Limit will not receive any proceeds from the subsequent
sale thereof in excess of the lesser of the price paid therefor or the
amount realized from such sale. As a result, the Ownership Limit would
adversely effect the value of any Host REIT Common Stock held in excess
of the Ownership Limit. In addition, the Ownership Limit may have the
effect of delaying, deferring or preventing a change in control of Host
REIT and, as a result, could adversely effect the value of Host REIT
Common Stock.
. Anti-Takeover Effect of Certain Provisions of the Host REIT Charter and
Bylaws, Maryland Law and the Host REIT Rights Agreement. The Host REIT
Charter and the bylaws of Host REIT (the "Host REIT Bylaws") to be
effective upon completion of the Merger, as well as provisions of
Maryland law, contain certain provisions that could have the effect of
delaying, deferring or preventing a change in control of Host REIT. These
provisions could limit the price that certain investors might be willing
to pay in the future for Host REIT Common Stock. Certain of these
provisions provide for a staggered board and allow Host REIT to issue,
without stockholder approval, preferred stock or other stock having
rights senior to those of the Host REIT Common Stock. The Board of
Directors also is authorized, without a vote of stockholders, to classify
or reclassify unissued common stock or preferred stock into another class
or series of stock. Other provisions impose various procedural and other
requirements that could make it difficult for stockholders to effect
certain corporate actions. The Host REIT Charter also provides that no
person or persons acting as a group may own more that 9.8% (in number or
value) of the outstanding shares of any class or series of Host REIT
stock, subject to certain exceptions. Host REIT also intends to adopt the
Host REIT Rights Agreement to replace the existing stockholder rights
plan of Host. Host REIT also will become subject to the business
combination and control share provisions under Maryland law. Marriott
International has the right to purchase 20% of each class of Host's
outstanding voting stock at the then fair market value upon the
occurrence of certain change of control (or potential change of control)
events involving Host, which right will continue in effect after the
Merger until June 2017, subject to certain limitations intended to
protect the REIT status of Host REIT. See "Certain Provisions of Maryland
Law and the Host REIT Charter and Bylaws--Marriott International Purchase
Right."
. Failure of Host REIT to Qualify as a REIT for Tax Purposes. Taxation of
Host REIT as a corporation if it fails to qualify as a REIT, and Host
REIT's subsequent liability for federal, state and local taxes on
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its income and property, would, among other things, have the effect of
reducing cash available for distribution to Host REIT's stockholders and
materially reducing the value of the Host REIT Common Stock.
. Change in Tax Laws. No assurance can be provided that new legislation,
Treasury Regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to Host REIT's
qualification as a REIT or the federal income tax consequences of such
qualification.
. Failure of the Operating Partnership to Qualify as a Partnership for Tax
Purposes. Taxation of the Operating Partnership as a corporation if it
fails to qualify as a partnership and the Operating Partnership's
subsequent liability for federal, state and local income taxes would,
among other things, have the effect of reducing cash available for
distribution to Host REIT stockholders and causing Host REIT to fail to
qualify as a REIT for tax purposes, thereby materially reducing the value
of the Host REIT Common Stock.
. Failure of the Leases to Qualify as Leases. If one or more of the Leases
of the Hotels to the Lessees were to be disregarded for tax purposes (for
example, because a Lease was determined to lack economic substance), Host
REIT would fail to qualify as a REIT and the Operating Partnership might
be treated as a corporation for federal income tax purposes, all of which
would have a material adverse impact on Host REIT and the value of the
Host REIT Common Stock.
. Host REIT's Substantial Deferred and Contingent Tax Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations that are likely to be recognized in the next
ten years (notwithstanding Host REIT's status as a REIT), and the IRS
could assert substantial additional liabilities for taxes against Host
for taxable years prior to the time Host REIT qualifies as a REIT.
. Competition in the Lodging Industry. The profitability of the Hotels is
subject to general economic conditions, the management abilities of the
Managers (including primarily Marriott International), competition, the
desirability of particular locations and other factors relating to the
operation of the Hotels. The full-service segment of the lodging
industry, in which virtually all of the Hotels operate, is highly
competitive, and the Hotels generally operate in geographical markets
that contain numerous competitors. The Hotels' success will be dependent,
in large part, upon their ability to compete in such areas as access,
location, quality of accommodations, room rate structure, the quality and
scope of food and beverage facilities and other services and amenities.
The lodging industry, including the Hotels (and thus Host REIT), may be
adversely affected in the future by (i) national and regional economic
conditions, (ii) changes in travel patterns, (iii) taxes and government
regulations which influence or determine wages, prices, interest rates,
construction procedures and costs, (iv) the availability of credit and
(v) other factors beyond the control of Host REIT.
. Substantial Indebtedness of Host REIT. Host REIT will have substantial
indebtedness. As of September 11, 1998, on a pro forma basis assuming the
Full Participation Scenario, Host REIT had outstanding indebtedness
totaling approximately $5 billion, which represents an approximately 59%
debt-to-total market capitalization ratio on a pro forma basis at such
date (based upon an assumed price per share of Host REIT Common Stock of
$12.50 after giving effect to the REIT Conversion). Host REIT's business
is capital intensive and it will have significant capital requirements in
the future. Host REIT's leverage level and other factors beyond its
control (including market conditions) could affect its ability to (i)
obtain financing in the future, (ii) undertake refinancings on terms and
subject to conditions deemed acceptable by Host REIT, (iii) make
distributions, (iv) pursue its acquisition strategy or (v) compete
effectively or operate successfully under adverse economic conditions.
. No Limitation on Debt. There are no limitations in the Operating
Partnership's or Host REIT's organizational documents limiting the amount
of indebtedness that either may incur, although certain of Host REIT's
debt instruments will contain a number of restrictions on the amount of
indebtedness that Host REIT may incur. In addition, Host REIT will have a
policy of incurring debt only if upon such
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incurrence the debt-to-total market capitalization of Host REIT and the
Operating Partnership would be 60% or less. Host REIT's Board of
Directors, however, may unilaterally change this policy without
stockholder approval. If Host REIT's policy of incurring debt were
changed, Host REIT could become more highly leveraged which could
adversely affect Host REIT's cash flow and the cash available for
distribution to stockholders of Host REIT, and could increase the risk of
default on Host REIT's indebtedness.
. The Board May Change Investment and Other Policies Without Stockholder
Approval. Host REIT's Board of Directors may change the investment,
financing and other policies of Host REIT without stockholder approval.
Such policy changes may have adverse consequences to Host REIT.
. Management Agreements Could Impair the Sale or Other Disposition of Host
REIT's Hotels. The Hotels generally may not be sold, leased or otherwise
transferred unless the transferee assumes the Management Agreements
relating thereto and meets certain other conditions. The possible desire
of Host REIT, from time to time, to finance, refinance or effect a sale
of any of the properties managed by Marriott International (which
currently serves as manager for all but 16 of Host REIT's Hotels) may,
depending upon the structure of such transactions, result in a need to
obtain Marriott International's consent, which could include modification
of the Management Agreement with Marriott International with respect to
such property. The lack of any required consent from Marriott
International would prohibit Host REIT from consummating such financing
or sale without breaching such Management Agreement.
.Year 2000 Problem. Year 2000 issues have arisen because many existing
computer programs and chip-based embedded technology systems use only the
last two digits to refer to a year, and therefore do not properly
recognize a year that begins with "20" instead of the familiar "19".
Although Host has adopted a compliance program in recognition of the
possible interruptions that may occur as a result of Year 2000 issues and
taken certain steps toward Year 2000 remediation, there can be no
assurances that the steps taken toward Year 2000 remediation by Host or
third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on Host, its business and its
financial condition. Following the REIT Conversion, Host REIT will be
dependent upon Crestline to interface with third parties in addressing
Year 2000 issues at the Hotels leased to Crestline.
DATE, TIME, PLACE AND PURPOSE OF SPECIAL MEETING
The Special Meeting will be held at the Ritz-Carlton Hotel, 1700 Tysons
Boulevard, McLean, Virginia, 22102, on December 15, 1998 at 10:00 a.m., local
time, to approve the Agreement.
STOCKHOLDERS ENTITLED TO VOTE
The Board of Directors has fixed the close of business on November 13, 1998
as the Record Date for the determination of stockholders entitled to receive
notice of and vote at the Special Meeting. As of the Record Date, Host had
outstanding and entitled to vote shares of Host Common Stock and
holders of record. See "Voting and Proxies."
VOTE REQUIRED; NO DISSENTERS' RIGHTS
Under the Delaware General Corporation Law, as amended (the "DGCL"), the
affirmative vote of a majority of the outstanding capital stock of the
corporation entitled to vote thereon is needed to adopt a merger agreement.
Similarly, if the OP Contribution were deemed to constitute a sale, lease or
exchange of all or substantially all of the assets of Host under the DGCL, the
affirmative vote of a majority of the outstanding
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capital stock of the corporation entitled to vote thereon would be needed to
approve the OP Contribution. Pursuant to Host's Restated Certificate of
Incorporation (the "Host Certificate"), the affirmative vote of the holders of
two-thirds (66 2/3%) of the outstanding shares of Host Common Stock is
necessary for approval of the Merger, as well as the OP Contribution if it were
deemed to constitute a sale, lease or exchange of all or substantially all of
the assets of Host. On the Record Date, directors and executive officers of
Host, together with their affiliates, as a group, beneficially owned
approximately % of the issued and outstanding shares of Host Common Stock. It
is currently expected that each director and executive officer of Host will
vote the shares of Host Common Stock beneficially owned by such director or
executive officer for approval of the Agreement and the transactions
contemplated thereby. See "Principal Stockholders."
Under the DGCL, Host's stockholders will not be entitled to dissenters'
rights of appraisal as a result of the Merger or other Restructuring
Transactions. See "Voting and Proxies" and "The Restructuring Transactions--
Absence of Dissenters' Rights."
IF THE RESTRUCTURING TRANSACTIONS AND THE OTHER TRANSACTIONS COMPRISING THE
REIT CONVERSION DO NOT OCCUR IN TIME FOR HOST REIT TO ELECT REIT STATUS
EFFECTIVE JANUARY 1, 1999, THE EFFECTIVENESS OF HOST REIT'S ELECTION COULD BE
DELAYED TO JANUARY 1, 2000, WHICH WOULD RESULT IN HOST OR HOST REIT CONTINUING
TO PAY SUBSTANTIAL CORPORATE-LEVEL INCOME TAXES IN 1999 AND COULD CAUSE THE
BLACKSTONE ACQUISITION (WHICH IS CONDITIONED, AMONG OTHER THINGS, ON
CONSUMMATION OF THE REIT CONVERSION BY MARCH 31, 1999 AND HOST REIT QUALIFYING
AS A REIT FOR 1999) NOT TO BE CONSUMMATED. THEREFORE, IT IS EXTREMELY IMPORTANT
THAT STOCKHOLDERS RETURN THE PROXY CARDS AS SOON AS POSSIBLE OR PROPERLY SUBMIT
THEIR PROXIES BY TELEPHONE OR THE INTERNET IN ACCORDANCE WITH THE INSTRUCTIONS
ON THE ADMISSION TICKET ATTACHED TO THE ENCLOSED PROXY CARD. ANY DELAY IN
RETURNING PROXIES COULD CAUSE THE SPECIAL MEETING TO BE DELAYED, WHICH COULD
PREVENT THE RESTRUCTURING TRANSACTIONS AND THE OTHER TRANSACTIONS COMPRISING
THE REIT CONVERSION FROM BEING EFFECTIVE JANUARY 1, 1999.
THE RESTRUCTURING TRANSACTIONS
Background and Reasons for the Restructuring Transactions and the REIT
Conversion. Host is proposing the Restructuring Transactions in connection with
a plan adopted by Host to restructure its business operations so that it will
qualify as a REIT under the Code. Host REIT expects to qualify as a REIT
beginning with its first full taxable year commencing after the REIT Conversion
is completed, which currently is expected to be the year commencing January 1,
1999 (but which might not be until the year beginning January 1, 2000). The
Host Board of Directors is proposing the Restructuring Transactions primarily
for the following reasons:
. The Restructuring Transactions are essential components of Host's
conversion to REIT status for federal income tax purposes. In particular,
the OP Contribution will enable Host REIT, following the Merger, to
operate, together with the Operating Partnership, in an UPREIT structure,
through which Host REIT would continue the full-service hotel ownership
business currently conducted by Host. Host believes that the UPREIT
structure will improve its ability to acquire additional properties in
the future on favorable terms. Specifically, under certain circumstances,
OP Units could be issued to acquire properties in transactions that would
not trigger immediate tax obligations for certain sellers. Accordingly,
converting to an UPREIT structure could enable Host REIT to acquire
hotels and other properties in the future at lower prices because of the
tax advantages to some sellers of receiving OP Units as consideration. OP
Units would subsequently be redeemable for cash or common stock of Host
REIT (at the option of Host REIT) at such time as the recipient desires
liquidity.
. The provisions of Maryland law have generally been viewed as favorable to
REITs organized in corporate or trust form. As discussed below, Maryland
law facilitates qualification as a REIT by authorizing the charter of a
Maryland corporation to provide for restrictions on ownership and
transferability designed to permit a corporation to qualify as a REIT
under the Code or for any other purpose. In addition, unlike Delaware,
Maryland does not impose a franchise tax on corporations, which will
result in cost savings to
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Host in annual franchise tax payments and related fees of approximately
$150,000. Maryland's status as a jurisdiction favorable to REITs is
evidenced by the large number of publicly-traded REITs that have chosen to
operate as a regular Maryland corporation or as a special statutory
Maryland real estate investment trust. According to NAREIT, as of
September 1998, there were over 100 publicly-traded REITs organized under
Maryland law.
. In particular, in order to satisfy certain requirements that are
applicable to REITs in general, many REITs impose ownership limits and
transfer restrictions, similar to the Ownership Limit under the Host REIT
Charter, by inclusion of such provisions in their charters. Under
Delaware law, such restrictions would not be binding with respect to
securities issued prior to adoption of the restriction unless holders of
such securities agree to or vote in favor of such restriction. However,
under Maryland law and by reason of the Merger, all shares of Host REIT
Common Stock issued in the Merger and thereafter would be subject to the
Ownership Limit, for which authority exists under Maryland law.
. Host's principal executive offices and a substantial number of Host's
employees are employed in Maryland.
The Board of Directors of Host believes that the Restructuring Transactions
and the other transactions comprising the REIT Conversion are advisable for
Host and its stockholders based on the belief that:
. The REIT structure, as a more tax efficient structure, will provide
improved operating results through changing economic conditions and all
phases of the hotel economic cycle.
. The REIT Conversion, which will reduce corporate-level taxes and the need
to incur debt to reduce corporate taxes through interest deductions, will
improve its financial flexibility and allow it to continue to strengthen
its balance sheet by reducing its overall debt to equity ratio over time.
. As a REIT, Host will be able to compete more effectively with other
public lodging real estate companies that already are organized as REITs
and to make performance comparisons with its peers more meaningful.
. By becoming a dividend paying company, Host's stockholder base will
expand to include investors attracted by yield as well as asset quality,
which is expected to facilitate Host REIT's capital-raising efforts and
provide a less volatile stockholder base.
. The adoption of an UPREIT structure will facilitate tax-deferred
acquisition of additional hotels (such as in the case of the Blackstone
Acquisition and the Partnership Mergers).
Host believes that these benefits justify the REIT Conversion even if the REIT
Conversion does not occur in time for Host REIT to elect REIT status effective
January 1, 1999 (in which event the effectiveness of Host's REIT election could
be delayed until January 1, 2000).
Host explored the possibility of engaging in a business combination with a
so-called "paired share" REIT, Santa Anita, in December 1996 and January 1997.
Based upon an analysis of potential costs, the pricing of the transaction, the
time requirement to complete such a transaction and the possible legislative
risks associated with the "paired share" structure, Host decided not to pursue
such a transaction. During the fourth quarter of 1997, Host began to explore
internally the possibility of reorganizing as a REIT on a stand-alone basis. In
April 1998, Host and the Operating Partnership entered into agreements with the
Blackstone Entities for the Blackstone Acquisition and concurrently reached a
decision and publicly announced that it would be advantageous if Host were to
convert to a REIT. See "Restructuring Transactions--Background and Reasons for
the Restructuring Transactions and the REIT Conversion."
The Host Board believes that Host's conversion to a REIT and the distribution
of Crestline shares as part of the Initial E&P Distribution will benefit Host's
stockholders by providing them with a tax advantaged REIT security that is
expected to provide both the opportunity for regular cash dividends and capital
appreciation as
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Host REIT acquires additional properties, as well as a continuing interest in
Crestline, Host's senior living company and the initial lessee of substantially
all of Host REIT's Hotels, if a Host stockholder continues to hold the
Crestline common stock. If Host REIT qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on that portion
of its ordinary income or capital gain that is distributed to stockholders. As
a REIT, Host REIT would be able to benefit from the tax advantages that apply
to REITs, and stockholders will receive quarterly distributions that are at
least sufficient to satisfy the annual distribution requirements applicable to
REITs under the Code. The Host Board believes that this will highlight the
value of Host REIT's hotel properties and permit stockholders to realize a
regular cash return on that value. Upon completion of the REIT Conversion,
Crestline is expected to own Host's 31 senior living communities, which will
continue to be managed by Marriott International, and a 25% interest in the
Swissotel management company expected to be acquired in the Blackstone
Acquisition, and will lease substantially all of the Hotels owned by Host REIT
and its affiliates. At that time, Crestline will operate independently of Host,
will be publicly traded and separately listed on the NYSE, and will pursue its
own growth opportunities.
Host's Board of Directors has received an opinion dated November , 1998 from
BT Wolfensohn, which acted as financial advisor to Host in connection with the
REIT Conversion, to the effect that the REIT Transactions (as defined in the
opinion), taken together, are fair from a financial point of view to the
holders of Host Common Stock. See "Opinion of Financial Advisor." The Host
Board of Directors considered such opinion as well as other matters it deemed
relevant in determining the advisability of the Agreement.
Following the Restructuring Transactions and the other transactions
comprising the REIT Conversion (including the Blackstone Acquisition), Host
REIT and its subsidiaries are expected initially to own outright, or have
controlling interests in, approximately 125 full-service Hotels operated
primarily under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt
brand names. Upon completion of the REIT Conversion, Host REIT will be the sole
general partner of the Operating Partnership and is expected to own
approximately 74% of the OP Units in the Operating Partnership, and the
remaining OP Units, which are intended to be substantially equivalent on an
economic basis to shares of Host REIT Common Stock, will be owned by the
Limited Partners, unaffiliated partners of the Private Partnerships and the
Blackstone Entities. Host REIT and its subsidiaries will own a number of OP
Units equal to the number of shares of Host REIT Common Stock outstanding. Host
REIT will be managed by its Board of Directors and will have no employees who
are not also employees of the Operating Partnership.
THE BOARD OF DIRECTORS OF HOST BELIEVES THAT THE AGREEMENT, WHICH
CONTEMPLATES THE RESTRUCTURING TRANSACTIONS, IS ADVISABLE FOR HOST AND ITS
STOCKHOLDERS AND RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. In the event the Agreement
is not approved by Host stockholders at the Special Meeting, Host will continue
to operate as a Delaware corporation and the REIT Conversion (including the
Initial E&P Distribution) will not be completed at this time. See "The
Restructuring Transactions--Background and Reasons for the Restructuring
Transactions and the REIT Conversion" and "--Comparison of Rights of
Stockholders of Host and Host REIT."
The OP Contribution. Subject to approval of the Agreement at the Special
Meeting, after the Special Meeting Host will contribute, as the OP
Contribution, its wholly-owned full-service hotels, interests in certain of the
Partnerships and the Private Partnerships (other than their interests in the
general partners of the Partnerships, each of which is Host or a wholly-owned,
direct or indirect subsidiary of Host, and certain other subsidiaries of Host
who will remain in existence as subsidiaries of Host REIT and will receive OP
Units in the Partnership Mergers) and certain other assets (excluding Host's
senior living assets and the cash or other consideration to be distributed in
connection with the Initial E&P Distribution and certain other de minimis
assets that cannot be contributed to the Operating Partnership) to the
Operating Partnership. As a preliminary step in the REIT Conversion, during
1998, various subsidiaries of Host also have contributed or will contribute the
wholly-owned full-service hotels held by such entities, their interests in
certain of the Partnerships and Private Partnerships and certain other assets
to the Operating Partnership (including its subsidiaries). In exchange for
these contributions,
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the Operating Partnership (i) will issue to Host in the aggregate a number of
OP Units equal to the number of outstanding shares of Host Common Stock at the
completion of the REIT Conversion, reduced by the number of OP Units to be
received by the general partners of the Partnerships and other subsidiaries of
Host in the Partnership Mergers (together with preferred partnership interests
in the Operating Partnership corresponding to any shares of Host preferred
stock outstanding at the time of the REIT Conversion) and (ii) will assume all
liabilities of Host, including past and future contingent liabilities, other
than liabilities of Crestline. Following these contributions, the Operating
Partnership and its subsidiaries will directly or indirectly own all of Host's
and its subsidiaries' wholly-owned hotels, substantially all of Host's direct
and indirect interests in both the Partnerships and the Private Partnerships
and all of Host's other assets (excluding its senior living assets, the cash or
other consideration to be distributed in connection with the Initial E&P
Distribution, and certain other de minimis assets that cannot be contributed to
the Operating Partnership). See "The Restructuring Transactions--The OP
Contribution."
The above-described contributions, which include the OP Contribution, will
enable Host REIT, following the Reincorporation by means of the Merger, to
operate together with the Operating Partnership in an UPREIT structure, which
is expected to improve Host REIT's ability to acquire additional hotels and
other properties in the future on favorable terms.
Terms of the Merger. The Reincorporation will be effected through the merger
of Host with and into Host REIT. As a result of the Merger, Host REIT will be
the surviving entity, the separate existence of Host will terminate and each
issued and outstanding share of Host Common Stock, together with the associated
Host Right, will be converted into one share of Host REIT Common Stock,
together with the associated Host REIT Right under the Host REIT Rights
Agreement. In addition, in the Merger, outstanding options and certain other
rights to acquire Host Common Stock will be converted into rights to acquire
Host REIT Common Stock, subject to adjustment for the Initial E&P Distribution
and except as otherwise set forth in the Agreement, and any outstanding shares
of preferred stock of Host would be converted into an equal number of shares of
preferred stock of Host REIT having substantially the same rights and
preferences. Upon consummation of the Merger, the holders of Host REIT Common
Stock will become subject to the Ownership Limit under the Host REIT Charter.
THE OWNERSHIP LIMIT WILL PROVIDE THAT NO PERSON OR PERSONS ACTING AS A GROUP
MAY OWN, OR BE DEEMED TO OWN BY VIRTUE OF THE ATTRIBUTION PROVISIONS OF THE
CODE, MORE THAN (I) 9.8% OF THE LESSER OF THE NUMBER OR VALUE OF SHARES OF HOST
REIT COMMON STOCK OUTSTANDING OR (II) 9.8% OF THE LESSER OF THE NUMBER OR VALUE
OF THE ISSUED AND OUTSTANDING SHARES OF ANY CLASS OR SERIES OF HOST REIT
PREFERRED STOCK, SUBJECT TO WAIVER OR MODIFICATION BY HOST REIT IN CERTAIN
LIMITED CIRCUMSTANCES AND SUBJECT TO (A) AN EXCEPTION FOR A HOLDER OF SHARES OF
HOST REIT COMMON STOCK SOLELY BY REASON OF THE MERGER IN EXCESS OF THE
OWNERSHIP LIMIT SO LONG AS SUCH HOLDER WOULD NOT OWN, DIRECTLY OR BY
ATTRIBUTION UNDER THE CODE, MORE THAN 9.9% BY VALUE OF THE OUTSTANDING CAPITAL
STOCK OF HOST REIT AS OF THE SPECIAL MERGER OWNERSHIP LIMIT EFFECTIVE TIME, AND
(B) A LIMITATION ON THE APPLICATION OF THE "GROUP" LIMITATION (BUT NO OTHER
ELEMENT OF THE OWNERSHIP LIMIT) TO ANY "GROUP" THAT OTHERWISE WOULD EXCEED THE
OWNERSHIP LIMIT AT THE EFFECTIVE TIME OF THE MERGER SOLELY BY REASON OF ITS
STATUS AS A "GROUP." THE OWNERSHIP LIMIT WILL BECOME APPLICABLE TO ALL HOST
REIT STOCKHOLDERS AS OF THE EFFECTIVE TIME OF THE MERGER. ANY SHARES OF HOST
REIT COMMON STOCK HELD AT THE EFFECTIVE TIME OF THE MERGER AND NOT SUBSEQUENTLY
TRANSFERRED PRIOR TO THE SPECIAL MERGER OWNERSHIP LIMIT EFFECTIVE TIME, OR
OTHERWISE HELD AT ANY TIME AFTER THE EFFECTIVE TIME OF THE MERGER IN VIOLATION
OF THE OWNERSHIP LIMIT, WILL BE TRANSFERRED AUTOMATICALLY TO A TRUST FOR THE
BENEFIT OF A DESIGNATED CHARITABLE BENEFICIARY, AND THE PERSON WHO ACQUIRED (OR
HELD) SUCH EXCESS SHARES OF HOST REIT COMMON STOCK WILL NOT BE ENTITLED TO ANY
DISTRIBUTIONS THEREON OR TO VOTE SUCH EXCESS SHARES OF HOST REIT COMMON STOCK.
THE HOLDER OF ANY SUCH EXCESS SHARES OF HOST REIT COMMON STOCK WILL RECEIVE THE
LESSER OF THE VALUE OF SUCH EXCESS SHARES AS OF THE EFFECTIVE TIME OF THE
MERGER OR THE CASH PROCEEDS FROM THE SALE OF SUCH EXCESS SHARES OF HOST REIT
COMMON STOCK BY THE TRUSTEE OF THE TRUST. AFTER THE EFFECTIVE TIME OF THE
MERGER, ANY PERSON WHO ACQUIRES HOST REIT COMMON STOCK IN EXCESS OF THE
OWNERSHIP LIMIT WILL NOT RECEIVE ANY PROCEEDS FROM THE SUBSEQUENT SALE THEREOF
IN EXCESS OF THE LESSER OF THE PRICE PAID THEREFOR OR THE AMOUNT REALIZED FROM
SUCH SALE. A TRANSFER OF HOST REIT COMMON STOCK TO
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A PERSON WHO, AS A RESULT OF THE TRANSFER, VIOLATES THE OWNERSHIP LIMIT MAY BE
VOID UNDER CERTAIN CIRCUMSTANCES, AND, IN ANY EVENT, WOULD DENY THE TRANSFEREE
ANY OF THE ECONOMIC BENEFITS OF OWNING SHARES OF HOST REIT COMMON STOCK IN
EXCESS OF THE OWNERSHIP LIMIT. TO AVOID THE ADVERSE EFFECTS OF THE OWNERSHIP
LIMIT, ANY HOLDER OF HOST COMMON STOCK WHO WOULD OWN SHARES IN EXCESS OF THE
OWNERSHIP LIMIT AT THE EFFECTIVE TIME OF THE MERGER SHOULD DISPOSE OF ANY SUCH
EXCESS SHARES PRIOR THERETO. See "Description of Host REIT Capital Stock--
Restrictions on Ownership and Transfer."
As a consequence of the Merger, among other things, the assets of Host will
become assets of Host REIT without further action, and Host REIT will become
liable for all the debts and obligations of Host. As soon as practicable
following the Merger, Host REIT will complete any other transactions comprising
the REIT Conversion that have not already been completed. See "The REIT
Conversion."
Following the Merger, each person who was a director of Host will continue as
a director of Host REIT, certain of the officers of Host will remain officers
of Host REIT (others will have become officers of Crestline in connection the
distribution of Crestline shares as part of the Initial E&P Distribution) and
the rights of stockholders of Host REIT will be governed by the Host REIT
Charter attached to the Agreement as Exhibit B and the Host REIT Bylaws
attached to the Agreement as Exhibit C. See "The Restructuring Transactions--
Comparison of Rights of Stockholders of Host and Host REIT."
The Agreement has been adopted by the Board of Directors of Host, subject to
stockholder approval. The Merger will become effective upon the later of the
time the Articles of Merger are accepted for filing by the State Department of
Assessments and Taxation of Maryland (the "SDAT") in accordance with the MGCL
and the time the Certificate of Merger is accepted for filing by the Secretary
of State of Delaware in accordance with the DGCL, or later if so specified in
such Articles and Certificate (the "Effective Time"). It is expected that the
listing of Host REIT Common Stock on the NYSE will occur at or prior to the
Effective Time and that the listing of Host Common Stock on the NYSE will be
terminated at the Effective Time.
Host anticipates that the Merger will become effective as promptly as
practicable following stockholder approval of the Agreement at the Special
Meeting and the satisfaction or waiver of the other conditions to the Merger.
The Agreement provides that the Merger may be abandoned by Host or Host REIT at
any time prior to its effectiveness. However, Host has no current intention of
abandoning or causing Host REIT to abandon the Merger subsequent to the Special
Meeting if stockholder approval is obtained and the other conditions to the
Merger are satisfied or waived. See "The Restructuring Transactions--Conditions
to the Merger."
In connection with the REIT Conversion and the Initial E&P Distribution, Host
expects to enter into the Employee Benefits and Other Employment Matters
Allocation Agreement (the "1998 Employee Benefits Allocation Agreement") among
Host, the Operating Partnership and Crestline. The 1998 Employee Benefits
Allocation Agreement is expected to provide that the Operating Partnership will
assume from Host, to the extent provided therein, the rights and obligations of
Host under the Host Marriott Corporation 1997 Comprehensive Stock Incentive
Plan (formerly called the Host Marriott Corporation 1993 Comprehensive Stock
Inventive Plan), the Host Marriott Corporation Employee Stock Purchase Plan,
the Host Marriott Corporation (HMC) Retirement and Savings Plan and the Host
Marriott Corporation Executive Deferred Compensation Plan (the "Plans"). See
"The Restructuring Transactions--Terms of the Merger," "Description of Host
REIT Capital Stock" and "Management--1998 Employee Benefits Allocation
Agreement."
Neither Host nor Host REIT is aware of any federal, state or local regulatory
requirements that must be complied with or approvals that must be obtained
prior to consummation of the Merger pursuant to the Agreement, other than
compliance with applicable federal and state securities laws, the filing of the
Articles of Merger as required under the MGCL and the filing of a Certificate
of Merger as required under the DGCL and various state and local governmental
authorizations. See "The Restructuring Transactions--Terms of the Merger."
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<PAGE>
Conditions to the Merger. Consummation of the Merger is subject to the
satisfaction or waiver of various conditions, including satisfaction of the
following conditions: (i) approval of the Agreement by the stockholders of
Host; (ii) determination by the Host Board of Directors that the transactions
constituting the REIT Conversion which impact Host REIT's status as a REIT for
federal income tax purposes have occurred or are reasonably likely to occur,
and that Host REIT can elect to be treated as a REIT for federal income tax
purposes effective no later than the first full taxable year commencing after
the REIT Conversion is completed (which might not be until the year commencing
January 1, 2000 if the REIT Conversion is not completed prior to January 1,
1999); (iii) approval of the Host REIT Common Stock for listing on the NYSE;
(iv) the receipt of all governmental and third-party consents to the
Restructuring Transactions except for consents as would not reasonably be
expected to have a material adverse effect on the business, financial condition
or results of operations of Host REIT, the Operating Partnership and their
subsidiaries taken as a whole; and (v) the United States Congress shall not
have proposed or enacted adverse tax legislation. See "The Restructuring
Transactions--Conditions to the Merger."
In addition, Host will amend the Host Rights Agreement to provide that each
Host Right issuable pursuant to the Host Rights Agreement will be converted
into a Host REIT Right issuable under the Host REIT Rights Agreement. Host REIT
intends to adopt the Host REIT Rights Agreement prior to the completion of the
Merger and each share of Host REIT Common Stock issued in the Merger will have
a Host REIT Right attached to it. See "Certain Provisions of Maryland Law and
the Host REIT Charter and Bylaws--Stockholder Rights Plan."
Comparison of Rights of Stockholders of Host and Stockholders of Host
REIT. The rights of stockholders of Host are currently governed by the DGCL,
the Host Certificate, the Amended Bylaws of Host (the "Host Bylaws") and the
Host Rights Agreement. If the Agreement is approved by Host's stockholders and
the Merger is consummated, Host REIT will be the surviving entity in the Merger
and the rights of the stockholders of Host REIT will be governed by the MGCL,
the Host REIT Charter, the Host REIT Bylaws and the Host REIT Rights Agreement.
Certain important differences exist between the rights of stockholders of Host
and the rights of stockholders of Host REIT. See "The Restructuring
Transactions--Comparison of Rights of Stockholders of Host and Host REIT."
Copies of the Host REIT Charter and Host REIT Bylaws are attached to the
Agreement (which is attached to this Proxy Statement/Prospectus) as Exhibits B
and C, respectively.
Limitation of Liability and Indemnification of Directors and Officers. The
Host REIT Charter and Host REIT Bylaws contain provisions limiting the
liability of Host REIT's present and former directors and officers to the
corporation and its stockholders and obligating Host REIT to indemnify present
and former directors and officers all in accordance with Maryland law. See "The
Restructuring Transactions--Limitation of Liability and Indemnification of
Directors and Officers."
THE REIT CONVERSION
The transactions summarized below, together with the Restructuring
Transactions, constitute the transactions pursuant to which Host will
restructure its business so that it will qualify as a REIT. If the required
approvals for the various transactions are obtained and other conditions to the
different steps in the REIT Conversion are satisfied or waived, these
transactions are expected to occur at various times prior to the end of 1998
(or as soon thereafter as practicable). Although the Restructuring Transactions
are expected to occur at the final stages of the REIT Conversion, certain of
the REIT Conversion transactions (such as the Partnership Mergers, the Private
Partnership Transactions and the Blackstone Acquisition) may occur following
the Restructuring Transactions to the extent they are consummated.
Although a number of the transactions comprising the REIT Conversion are
expected to be consummated immediately prior to, or in certain instances
immediately following, the Merger, the Merger will not be consummated unless
the conditions to the Merger have been satisfied or waived. In particular,
Host's Board of Directors will have determined, among other things, that the
transactions constituting the REIT Conversion which impact Host REIT's status
as a REIT for federal income tax purposes have occurred or are reasonably
likely to occur, and based on advice of counsel, that Host REIT can elect to be
treated as a REIT for federal
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<PAGE>
income tax purposes effective no later than the first full taxable year
commencing after the REIT Conversion is completed (which might not be until the
year commencing January 1, 2000 if the REIT Conversion is not completed prior
to January 1, 1999). Consistent with the foregoing, Host intends to pursue the
transactions constituting the REIT Conversion at least through the date of the
Special Meeting of Host stockholders. If the Agreement is approved by Host
stockholders at the Special Meeting, Host intends to continue pursuing those
transactions constituting the REIT Conversion which have not yet been
completed, including the Blackstone Acquisition (which is not expected to be
consummated any earlier than December 29, 1998), and, if the Board of Directors
has determined that the conditions to the Merger have been or likely will be
satisfied or waived (and, in particular, that the transactions constituting the
REIT Conversion which impact Host REIT's status as a REIT for federal income
tax purposes have occurred or are reasonably likely to occur), declare the
Initial E&P Distribution and enter into the Leases with the Lessees (which will
be indirect, wholly-owned subsidiaries of Crestline), even though there is no
assurance that the Merger and other transactions comprising the REIT Conversion
might not be delayed or possibly might never be consummated. Assuming the
Agreement is approved by Host stockholders at the Special Meeting and the Host
Board of Directors makes the determination described above, it is currently
contemplated that the Merger would be consummated on or about December 29,
1998, subject to satisfaction or waiver of the remaining conditions. If,
however, the Agreement is not approved by the Host stockholders at the Special
Meeting or the Host Board of Directors does not make the requisite
determinations, Host will continue to operate as a Delaware corporation, the
REIT Conversion will not be completed at this time and the Initial E&P
Distribution will not be made.
If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the effectiveness of Host REIT's election
could be delayed until January 1, 2000, which would result in Host REIT
continuing to pay substantial corporate-level income taxes in 1999 (which would
reduce Host REIT's estimated cash distributions per share of Host REIT Common
Stock) and could cause the Blackstone Acquisition (which is conditioned, among
other things, on consummation of the REIT Conversion by March 31, 1999 and Host
REIT qualifying as a REIT for 1999) not to be consummated. In view of the
complexity of the REIT Conversion, the number of transactions that must occur
to complete the REIT Conversion and the time and expense involved, Host
believes that it is advisable to complete the REIT Conversion, or as many of
the transactions comprising the REIT Conversion as possible, as soon as
practicable even if such completion is after January 1, 1999 (and, thus, a REIT
election would not be effective until January 1, 2000). Moreover, completion of
the REIT Conversion (or a significant number of the transactions comprising the
REIT Conversion) could possibly facilitate another transaction (such as a
merger into another entity) that would enable Host (or its successor) to elect
to be treated as a REIT prior to January 1, 2000. If Host REIT's election to be
taxed as a REIT is not effective on January 1, 1999, Host REIT intends to
operate following the REIT Conversion in a manner that would permit it to
qualify as a REIT at the earliest time practicable, and it might pursue a
merger with another entity or other transaction that would permit it to
commence a new taxable year and elect REIT status prior to January 1, 2000,
although no assurance can be given that the Company will enter into or
consummate such other transaction or otherwise qualify as a REIT prior to
January 1, 2000. Host REIT in any event would elect to be treated as a REIT for
federal income tax purposes no later than its taxable year commencing January
1, 2000.
The Initial E&P Distribution. In order to qualify as a REIT for federal
income tax purposes, among other things, Host REIT and/or Host, as its
predecessor, must have distributed all of the accumulated E&P of Host to its
stockholders in one or more taxable dividends prior to the end of the first
full taxable year for which the REIT election of Host is effective, which
currently is expected to be the taxable year commencing January 1, 1999 (but
which might not be until the year beginning January 1, 2000).
In an effort to help accomplish the requisite distributions of the
accumulated E&P of Host, Host or Host REIT will make the Initial E&P
Distribution, consisting of one or more taxable distributions, to its
stockholders in connection with the REIT Conversion. Such taxable distributions
would consist of shares of common stock of
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<PAGE>
Crestline and cash or other consideration in an amount to be determined.
Although there is no assurance as to what form such other consideration
comprising the Initial E&P Distribution will take, it is currently contemplated
that it will include the Special Dividend payable, at each stockholder's
election, in cash or Host Common Stock (or Host REIT Common Stock if the Merger
has occurred). If the Special Dividend is declared, stockholders of record on
the Special Dividend record date are expected to be given approximately 20 days
to decide whether to take cash, Host Common Stock (or Host REIT Common Stock if
the Merger has occurred), or a combination of cash and stock in payment of the
Special Dividend. It is anticipated that the cash/stock election will be
available on a per-share basis and that, once made, stockholders' elections
will be irrevocable. Stockholders entitled to the Special Dividend who fail to
make a timely election will receive shares of Host Common Stock (or Host REIT
Common Stock if the Merger has occurred), subject to the Ownership Limit, in
payment of the Special Dividend. In any event, cash would be paid in lieu of
fractional shares, and the Special Dividend payment would be made promptly
following expiration of the election period.
The aggregate value of the Crestline common stock and the cash or other
consideration to be distributed to Host stockholders (and the Blackstone
Entities) in connection with the Initial E&P Distribution is currently
estimated to be approximately $525 million to $625 million (approximately $2.10
to $2.50 per share to the Host stockholders), of which approximately $200 to
$300 million (or approximately $.80 to $1.20 per share) is expected to be
represented by the Special Dividend. The actual amount of the Initial E&P
Distribution will be based in part upon the estimated amount of accumulated E&P
of Host as of the last day of its taxable year ending on or immediately
following completion of the REIT Conversion. To the extent that the Initial E&P
Distribution is not sufficient to eliminate Host's accumulated E&P, Host REIT
will make one or more additional taxable distributions to its stockholders (in
the form of cash or securities) prior to the last day of Host REIT's first full
taxable year as a REIT (currently expected to be December 31, 1999 but which
instead might be December 31, 2000) in an amount intended to be sufficient to
eliminate such E&P, and the Operating Partnership will make corresponding
distributions to all holders of OP Units (including Host REIT) in an amount
sufficient to permit Host REIT to make such additional distributions.
Limited Partners who elect to receive Host REIT Common Stock in exchange for
OP Units in connection with the Partnership Mergers will not receive the
Crestline common stock or any other portion of the Initial E&P Distribution,
which will have been distributed before they become stockholders of Host REIT
(approximately 25 trading days after the effective date of the Partnership
Mergers). However, following receipt of such shares of Host REIT Common Stock,
such Limited Partners would participate as stockholders of Host REIT in other
dividends or distributions by Host REIT to holders of Host REIT Common Stock,
including any additional taxable distributions necessary to eliminate Host's
accumulated E&P to the extent the Initial E&P Distribution is not sufficient to
eliminate such accumulated E&P. The Limited Partners who elect to retain OP
Units also will participate in such additional distributions because
distributions by the Operating Partnership to its partners (including Host
REIT) would be the source of such additional distributions.
No holder of Host Common Stock will be required to pay any cash or other
consideration to Host or Host REIT for shares of Crestline common stock
received in the Initial E&P Distribution or to surrender or exchange their Host
Common Stock or Host REIT Common Stock in order to receive shares of Crestline
common stock or other cash or securities as part of the Initial E&P
Distribution. See "The REIT Conversion--The Initial E&P Distribution."
In addition, following the Restructuring Transactions, the Blackstone
Entities are entitled to receive a pro rata portion of the same consideration
received by Host REIT's stockholders in connection with the Initial E&P
Distribution, except to the extent the Blackstone Entities elected to receive
additional OP Units in lieu thereof pursuant to the terms of the Blackstone
Acquisition. The payment to the Blackstone Entities of Crestline common stock
and other consideration is expected to be approximately $90 to $110 million of
the aggregate Initial E&P Distribution of approximately $525 to $625 million if
the REIT Conversion and the Blackstone Acquisition are consummated. See
"Business and Properties--Blackstone Acquisition." Following the Initial E&P
Distribution, Crestline's principal assets will include the senior living
assets of Host, which are expected to consist of 31 senior living communities,
a 25% interest in the Swissotel management company acquired from the Blackstone
Entities
23
<PAGE>
and the Lessees. The shares of Crestline common stock distributed to Host
stockholders as part of the Initial E&P Distribution and the Blackstone
Entities will become a separately traded security from the Host REIT Common
Stock, and Crestline will operate independently from Host REIT. There will be
substantial overlap of stockholders of Crestline and Host REIT initially, but
this overlap likely will diverge over time.
The Host Board believes that the distribution of Crestline common stock to
Host stockholders as part of the Initial E&P Distribution will provide those
Host stockholders who continue to hold Crestline common stock with a separate
identifiable interest in a diversified company that generates revenue from both
its senior living business and its leasing business. Even under circumstances
where the Crestline common stock is distributed to Host stockholders as part of
the Initial E&P Distribution but the Merger or other transactions comprising
the REIT Conversion are delayed or possibly never consummated, the Host Board
believes that having existing leasing arrangements in place with Crestline
could facilitate any subsequent efforts by Host to qualify as a REIT for
federal income tax purposes (including efforts to pursue a merger with another
entity or another transaction that would permit it to commence a new taxable
year and elect REIT status prior to January 1, 2000).
Other Transactions Comprising the REIT Conversion. In addition to the
Restructuring Transactions and the Initial E&P Distribution, the REIT
Conversion includes the following additional transactions:
. Debt Refinancing. In August 1998, Host refinanced $1.55 billion of
outstanding senior notes (the "Senior Note Refinancing") through offers
to purchase such debt securities for cash and a concurrent solicitation
of consents to amend the terms of the debt securities to facilitate the
transactions constituting the REIT Conversion. Host obtained the funds
for the Senior Note Refinancing primarily from the issuance of new debt
securities and a new $1.25 billion credit facility (the "New Credit
Facility"). See "Business and Properties--Indebtedness. "
. Treatment of Convertible Preferred Securities. In the REIT Conversion,
the Operating Partnership will assume primary liability for repayment of
the $567 million of convertible subordinated debentures of Host
underlying the $550 million of outstanding Convertible Quarterly Income
Preferred Securities of Host (the "Convertible Preferred Securities"). As
the successor to Host, Host REIT also will be liable on the debentures
and the debentures will become convertible into Host REIT Common Stock,
but the Operating Partnership will have primary responsibility for
payment of the debentures, including all costs of conversion. Upon
conversion by a Convertible Preferred Securities holder, Host REIT will
issue shares of Host REIT Common Stock, which will be delivered to such
holder. Upon the issuance of such shares by Host REIT, the Operating
Partnership will issue to Host REIT a number of OP Units equal to the
number of shares of Host REIT Common Stock issued in exchange for the
debentures. As a result of the distribution of Crestline common stock and
any cash and other consideration to Host or Host REIT stockholders in
connection with the Initial E&P Distribution, the conversion ratio of the
Convertible Preferred Securities will be adjusted to take into account
certain effects of the REIT Conversion. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
. The Partnership Mergers. Immediately following the Effective Date, each
Partnership that participates in the Partnership Mergers will merge with
a subsidiary of the Operating Partnership. Such participating
Partnerships will be the surviving entities of the Partnership Mergers
and will continue in existence as indirect subsidiaries of the Operating
Partnership. In the Partnership Mergers, each Limited Partner will
receive a number of OP Units with a deemed value equal to the stated
exchange value of his respective partnership interest. If a Limited
Partner elects to receive Host REIT Common Stock or a Note in exchange
for OP Units in connection with the Partnership Mergers, such Limited
Partner will, upon receipt of his OP Units, tender (or be deemed to
tender) all of such OP Units to Host REIT in exchange for an equal number
of shares of Host REIT Common Stock or to the Operating Partnership in
exchange for a Note with a specified principal amount. The general
partners of the Partnerships and other subsidiaries of Host also will
receive OP Units in exchange for their interests in the Partnerships, and
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<PAGE>
such general partners will continue as wholly-owned, direct or indirect
subsidiaries of Host REIT. Partnerships that do not participate in a
Partnership Merger will continue as separate partnerships, but the
Operating Partnership would contribute some or all of the interests in
certain of these Partnerships that it receives from Host and its
subsidiaries to a Non-Controlled Subsidiary.
. Restructuring of the Private Partnerships. The Operating Partnership will
acquire in the Private Partnership Transactions the partnership interests
from unaffiliated partners of four Private Partnerships in exchange for
OP Units and, accordingly, will own all of the interests in those Private
Partnerships. For the remaining Private Partnerships, (i) the Operating
Partnership will be a partner in the partnership if the unaffiliated
partners consent to a lease of the partnership's Hotel(s) to a Lessee or
(ii) if the requisite consents to enter into a lease are not obtained,
the Operating Partnership may transfer its interest in such partnership
to a Non-Controlled Subsidiary.
.The Blackstone Acquisition. Subject to various terms and conditions, the
Operating Partnership expects to acquire from the Blackstone Entities
ownership of, or controlling interests in, the Blackstone Hotels. In
addition, Host REIT will acquire a 25% interest in the Swissotel
management company from the Blackstone Entities, which Host REIT will
transfer to Crestline. If the Blackstone Acquisition is consummated, the
Operating Partnership expects to issue approximately 43.7 million OP Units
(based upon a negotiated value of $20.00 per OP Unit), assume debt and
make cash payments totaling approximately $862 million and distribute up
to 18% of the shares of Crestline common stock and other consideration to
the Blackstone Entities. See "The REIT Conversion--Other Transactions
Comprising the REIT Conversion--The Blackstone Acquisition."
. Contribution of Assets to Non-Controlled Subsidiaries. The Operating
Partnership will organize the Non-Controlled Subsidiaries to hold various
assets (not exceeding, in the aggregate, 20% by value of the assets of
the Operating Partnership) contributed by Host and its subsidiaries to
the Operating Partnership. The direct ownership of most of these assets
by the Operating Partnership could jeopardize Host REIT's status as a
REIT. These assets primarily will consist of partnership or other
interests in hotels which are not leased, certain furniture, fixtures and
equipment ("FF&E") used in the Hotels and certain international hotels in
which Host owns interests. In exchange for the contribution of these
assets to the Non-Controlled Subsidiaries, the Operating Partnership will
receive nonvoting common stock representing 95% of the total economic
interests of the Non-Controlled Subsidiaries. In addition, the Operating
Partnership and, prior to the Partnership Mergers, certain of the
Partnerships (assuming they participate in the Partnership Mergers) will
sell to a Non-Controlled Subsidiary an estimated $180 million in value of
personal property associated with certain Hotels for notes or cash that
has been contributed or loaned to the Non-Controlled Subsidiary by the
Operating Partnership, or a combination thereof. The Operating
Partnership could not lease this personal property to the Lessees without
potentially jeopardizing Host REIT's qualification as a REIT. The Non-
Controlled Subsidiary will lease such personal property to the applicable
Lessees. The Host Marriott Statutory Employee/Charitable Trust, the
beneficiaries of which will be certain employees of Host REIT and a
designated charity (the "Host Employee/Charitable Trust"), and possibly
certain other investors will acquire all of the voting common stock
representing the remaining 5% of the total economic interests, and 100%
of the control, of each Non-Controlled Subsidiary. See "The REIT
Conversion--Other Transactions Comprising the REIT Conversion."
. Leases of Hotels. The Operating Partnership, its subsidiaries and its
controlled partnerships, including the Partnerships participating in the
Partnership Mergers, will lease virtually all of their Hotels to the
Lessees pursuant to the Leases. See "Business and Properties--The
Leases." The leased Hotels will be operated by the Lessees under their
existing brand names pursuant to their existing long-term Management
Agreements, which will be assigned to the Lessees for the terms of the
applicable Leases but under which the Operating Partnership will remain
obligated. See "Business and Properties--The Management Agreements."
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<PAGE>
Following the REIT Conversion, assuming the Full Participation Scenario, the
organizational structure of Host REIT is expected to be as follows:
[FLOW CHART APPEARS HERE]
(1) Represents Limited Partners and others who retain OP Units and do not elect
to receive shares of Host REIT Common Stock or Notes; excludes Host and its
subsidiaries.
(2) Also will include Limited Partners in the Partnership Mergers who elect to
receive shares of Host REIT Common Stock in exchange for the OP Units
received in the Partnership Mergers. Immediately following the
Restructuring Transactions and the distribution by Host of Crestline common
stock to its stockholders and receipt of Crestline common stock by the
Blackstone Entities, the stockholders of Crestline will consist of the
stockholders of Host REIT (other than Limited Partners who elect to receive
Host REIT Common Stock in connection with the Partnership Mergers) and the
Blackstone Entities. The common ownership of the two public companies,
however, will diverge over time.
(3) Percentage ownership in the Operating Partnership assumes no Limited
Partners elect to receive either Host REIT Common Stock or Notes in
connection with the Partnership Mergers and that the price per share of
Host REIT Common Stock is $ 12.50 for purposes of the Partnership Mergers.
(4) The Operating Partnership will own all or substantially all of the equity
interests in the Partnerships participating in the Partnership Mergers,
certain Private Partnerships and other Host subsidiaries that own Hotels,
both directly and through other direct or indirect, wholly-owned
subsidiaries of the Operating Partnership or Host REIT. Host will
contribute its partial equity interests in the Partnerships that do not
participate in the Partnership Mergers and those Private Partnerships whose
partners have not elected to exchange their interests for OP Units to the
Operating Partnership, and the Operating Partnership will either hold such
partial interests or contribute them to the Non-Controlled Subsidiaries.
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<PAGE>
Ownership Interests in the Operating Partnership Following the Restructuring
Transactions and the Other Transactions Comprising the REIT
Conversion. Following the Restructuring Transactions and the other transactions
comprising the REIT Conversion, the Operating Partnership is expected to be
owned as set forth below:
OWNERSHIP OF THE OPERATING PARTNERSHIP
<TABLE>
<CAPTION>
PERCENTAGE
ENTITY INTEREST(1)
------ -----------
<S> <C>
Host REIT....................................................... 74.5%
Limited Partners of the Partnerships............................ 8.4
Private Partnerships............................................ 1.2
Blackstone Entities............................................. 15.9
-----
TOTAL......................................................... 100.0%
=====
</TABLE>
- --------
(1) Assumes that all Partnerships participate in the Partnership Mergers, that
the Blackstone Acquisition is consummated, that all Limited Partners in the
Partnership Mergers elect to retain OP Units and that the price of an OP
Unit is $12.50 per share for purposes of the Partnership Mergers. The
percentage interest of Host REIT will increase, and the percentage interest
of the Limited Partners will decrease, if Limited Partners elect to receive
Host REIT Common Stock or Notes in exchange for their OP Units in
connection with the Partnership Mergers or if the price per OP Unit in the
Partnership Mergers is greater than $12.50. The percentage interest of Host
REIT will decrease, and the percentage interest of the Limited Partners
will increase, if the price per OP Unit in the Partnership Mergers is less
than $12.50.
FEDERAL INCOME TAX CONSEQUENCES
Federal Income Tax Consequences of the OP Contribution. Section 721 of the
Code provides that no gain or loss is recognized in the case of a contribution
of property to a partnership in exchange for an interest in the partnership.
However, there are a number of potential exceptions to the availability of such
treatment. The application of these exceptions is highly complex and depends
upon a number of factual determinations and other outside events which may or
may not occur, but Host believes that it will not recognize a material amount
of gain in connection with the OP Contribution. See "Federal Income Tax
Consequences--Federal Income Tax Consequences of the OP Contribution." Host is
not obtaining an opinion of outside counsel as to the tax consequences to it of
the OP Contribution.
Federal Income Tax Consequences of the Merger. Host has received an opinion
of counsel to the effect that the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Code, and
accordingly, (i) no gain or loss will be recognized by Host or Host REIT as a
result of the Merger; (ii) no gain or loss will be recognized by holders of
shares of Host Common Stock upon the conversion of such shares into Host REIT
Common Stock (except for certain stockholders who are not considered "U.S.
persons" for purposes of the Code and who own (or have owned) in excess of 5%
of Host); (iii) the tax basis of shares of Host REIT Common Stock received by a
former holder of Host Common Stock pursuant to the Merger in the aggregate will
be the same as the holder's adjusted tax basis in the shares of Host Common
Stock being converted in the Merger (subject to any adjustment resulting from
the Initial E&P Distribution); and (iv) the holding period of shares of Host
REIT Common Stock received by a former holder of Host Common Stock pursuant to
the Merger will include the holder's holding period with respect to the shares
of Host Common Stock being converted in the Merger, assuming that the Host
Common Stock was held as a capital asset at the Effective Time. See "Federal
Income Tax Consequences--Federal Income Tax Consequences of the Merger."
Federal Income Tax Consequences of the Initial E&P Distribution. Generally,
the Initial E&P Distribution will be a taxable dividend to a Host stockholder
to the extent that the Initial E&P Distribution is made out of the Host
stockholder's share of the portion of the current and accumulated E&P of Host
and Host REIT allocable to
27
<PAGE>
the Initial E&P Distribution. Host and Host REIT currently believe that the
substantial majority, if not all, of the Initial E&P Distribution (the fair
market value of which Host currently estimates will range from approximately
$2.10 to $2.50 per share of Host Common Stock) will be considered made out of
such E&P and, therefore, will be taxable as a dividend. See "Federal Income Tax
Consequences--Federal Income Tax Consequences of the Initial E&P Distribution."
Qualification of Host REIT as a REIT. Host REIT expects to qualify as a REIT
for federal income tax purposes effective for its first full taxable year
commencing after the REIT Conversion is completed, which Host currently expects
to be the year beginning January 1, 1999 (but which might not be until the year
beginning January 1, 2000). If it so qualifies, Host REIT will be permitted to
(i) deduct dividends paid to its stockholders, allowing the income represented
by such dividends to avoid taxation at the entity level and to be taxed only at
the stockholder level and (ii) treat retained net capital gains in a manner so
that such gains are taxed at the Host REIT level but effectively avoid taxation
at the stockholder level. Host REIT, however, will be subject to a separate
corporate income tax on any gains recognized during the ten years following the
REIT Conversion that are attributable to "built-in" gain with respect to the
assets that Host owned at the time of the REIT Conversion (which tax would be
paid by the Operating Partnership). Host REIT has substantial deferred tax
liabilities that are likely to be recognized as "built-in" gain (or by a Non-
Controlled Subsidiary) during such period without any corresponding receipt of
cash, and the Operating Partnership will be responsible for paying such taxes.
Host REIT's ability to qualify as a REIT will depend upon its continuing
satisfaction following the REIT Conversion of various requirements related to
the nature of its assets, the sources of its income and the distributions to
its stockholders, including a requirement that Host REIT distribute to its
stockholders at least 95% of its taxable income each year.
RECOMMENDATION OF THE BOARD OF DIRECTORS
FOR THE REASONS STATED HEREIN, THE BOARD OF DIRECTORS OF HOST RECOMMENDS THAT
HOST'S STOCKHOLDERS VOTE "FOR" APPROVAL OF THE AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
DISTRIBUTIONS AND MARKET PRICES OF HOST COMMON STOCK
Host Common Stock has been listed on the NYSE under the symbol "HMT" since
October 8, 1993. Prior thereto, Host and Marriott International were operated
as a single consolidated company. See "Certain Relationships and Related
Transactions--Relationship Between Host and Marriott International."
The table below sets forth, for the periods indicated, the reported high and
low sale prices of Host Common Stock on the NYSE. On April 15, 1998, the last
full trading day prior to the public announcement of the proposed REIT
Conversion, the closing sale price of Host Common Stock on the NYSE was $20.00
per share. On November 6, 1998, the latest practicable date before the printing
of this Proxy Statement/Prospectus, the closing sale price of Host Common Stock
on the NYSE was $14 11/16 per share. Host has not declared any cash dividends
on the Host Common Stock during the two fiscal years ended January 2, 1998 and
through the date hereof.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1997
First Quarter......................................... $18 3/4 $15 3/4
Second Quarter........................................ 18 1/8 15 1/4
Third Quarter......................................... 20 13/16 17 1/2
Fourth Quarter........................................ 23 3/4 18 1/16
1998
First Quarter......................................... $20 7/16 $17 1/2
Second Quarter........................................ 21 3/8 17 1/8
Third Quarter......................................... 18 15/16 12 13/16
Fourth Quarter (through November 6, 1998)............. 15 5/16 9 7/8
</TABLE>
28
<PAGE>
It is expected that, upon consummation of the Merger, the Host REIT Common
Stock will be listed and trade on the NYSE in the same manner as shares of
Host Common Stock currently trade on the NYSE. The historical trading prices
of Host's Common Stock are not necessarily indicative of the future trading
prices of Host REIT Common Stock because, among other things, the current
stock price of Host reflects the current market valuation of Host's current
business and assets (including the Crestline common stock and the cash or
other consideration to be distributed in connection with the Initial E&P
Distribution) and does not necessarily take into account the changes in Host's
business and operations (including the leasing of its Hotels to Crestline)
that will occur in connection with the REIT Conversion. See "Risk Factors--
Current Host Common Stock Price Is Not Necessarily Indicative of the Price of
Host REIT Common Stock Following the REIT Conversion."
DISTRIBUTION AND DIVIDEND POLICY AFTER THE MERGER
The Operating Partnership and Host REIT intend to pay regular quarterly
distributions to holders of OP Units and Host REIT Common Stock, respectively.
Host REIT and the Operating Partnership anticipate that distributions will be
paid during January, April, July and October of each year, except that the
first distribution in 1999 is expected to be paid at the end of February if
the REIT Conversion is completed in 1998.
The Operating Partnership intends to distribute an amount that will enable
Host REIT to distribute to its stockholders an amount equal to 100% of Host
REIT's taxable income (other than capital gains, which will be addressed on a
case-by-case basis) for each year no later than the end of January of the
following year. Host REIT anticipates that distributions generally will be
paid from cash available for distribution (generally equal to cash from
operations less capital expenditures and principal amortization on
indebtedness); however, to the extent that cash available for distribution is
insufficient to make such distributions, the Operating Partnership intends to
borrow funds in order to make distributions consistent with this policy.
Based upon Host's preliminary estimates of Host REIT's taxable income for
the twelve months ending December 31, 1999, Host and the Operating Partnership
currently estimate that this policy will result in an initial annual
distribution by the Operating Partnership of approximately $0.84 per OP Unit
($0.21 per quarter) during the twelve months ending December 31, 1999. If
Host's preliminary estimate of $231 million of cash distributions by the
Operating Partnership during the twelve months ending December 31, 1999 proves
accurate but the Operating Partnership's cash available for distribution were
only equal to its estimated cash available for distribution ($158 million) and
cash from contingent rents ($64 million) during 1999, then the Operating
Partnership would be required to borrow approximately $9 million (or $0.03 per
OP Unit) to make such distributions. While Host does not believe this will be
necessary, it believes that the Operating Partnership would be able to borrow
the necessary amounts under the New Credit Facility or from other sources and
that any such borrowing would not have a material adverse effect on its
financial condition or results of operations. The distributions to
stockholders per share of Host REIT Common Stock are expected to be in an
amount equal to the amount distributed by the Operating Partnership per OP
Unit. However, if the REIT Conversion is not completed prior to January 1,
1999, then Host REIT's distributions to stockholders in 1999 would be lower
than the Operating Partnership's distributions per OP Unit (by the amount of
Host REIT's 1999 corporate income tax payments) until its REIT election
becomes effective, which would be no later than January 1, 2000. The Operating
Partnership intends to make distributions during 1999 at the estimated level
of $0.84 per OP Unit even if the REIT election of Host REIT were not effective
until January 1, 2000, which would result in estimated distributions by Host
REIT (after estimated federal and state income tax payments) of $0.52 per
share of Host REIT Common Stock for the full year 1999.
Distributions will be made in the discretion of the Board of Directors of
Host REIT and will be affected by a number of factors, many of which are
beyond the control of Host REIT and the Operating Partnership. In order to
maintain its qualification as a REIT under the Code, Host REIT is required to
distribute (within a certain period after the end of each year) at least 95%
of its REIT taxable income for such year. See "Distribution and Other
Policies--Distribution Policy." Host REIT intends to establish a dividend
reinvestment plan.
29
<PAGE>
UNAUDITED PER SHARE DATA
The following table sets forth selected historical per share data for Host.
The per share data presented below are based on and derived from, and should be
read in conjunction with the historical consolidated statements and the related
notes thereto of Host, which are included in this Proxy Statement/Prospectus.
Interim data for the thirty-six weeks ended September 11, 1998 ("First Three
Quarters 1998") and September 12, 1997 ("First Three Quarters 1997") and as of
September 11, 1998 and September 12, 1997 are unaudited, but include, in the
opinion of management of Host, all adjustments (which are normal and recurring)
necessary for a fair presentation of such data. Results for the First Three
Quarters 1998 are not necessarily indicative of the results that may be
expected for any other interim periods or for the year as a whole.
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
FISCAL YEAR(1) FIRST THREE QUARTERS
-------------------- ---------------------
1997 1996 1995 1998 1997
----- ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Basic income from continuing
operations....................... $0.23 $(0.07) $(0.39) $ 0.49 $ 0.19
Diluted income from continuing
operations....................... $0.23 $(0.07) $(0.39) $ 0.48 $ 0.19
Cash distributions per share(2)... 0 0 0 0 0
Book value per share.............. $5.89 $ 5.58 $ 4.23 $ 5.63 $ 5.89
</TABLE>
- --------
(1) Host's fiscal year ends on the Friday nearest to December 31. Fiscal years
1997 and 1995 included 52 weeks compared to 53 weeks for fiscal year 1996.
(2) See "--Distributions and Market Prices of Host Common Stock."
SUMMARY FINANCIAL INFORMATION
The following table sets forth unaudited pro forma financial and other
information for the Operating Partnership and Host REIT and combined
consolidated historical financial information for Host. The following summary
financial information should be read in conjunction with the financial
statements and notes thereto and Management's Discussion and Analysis of
Results of Operations and Financial Condition included elsewhere in this
Consent Solicitation.
The unaudited pro forma financial statements as of September 11, 1998 and for
the fiscal year ended January 2, 1998 and the First Three Quarters 1998 for the
100% Participation Presentation are presented as if the REIT Conversion
occurred as of September 11, 1998 for the pro forma balance sheets and at the
beginning of the fiscal year for the pro forma statements of operations. The
unaudited REIT 2000 pro forma information assumes that the REIT Conversion
occurs on January 1, 1999, the Blackstone Acquisition does not occur and Host
does not become a REIT until January 1, 2000. The pro forma information
incorporates certain assumptions that are described in the Notes to the
Unaudited Pro Forma Financial Statements included elsewhere in this Proxy
Statement/Prospectus.
The pro forma information does not purport to represent what the Operating
Partnership's or Host REIT's financial position or results of operations would
actually have been if these transactions had, in fact, occurred on such date or
at the beginning of the period indicated, or to project the Operating
Partnership's or Host REIT's financial position or results of operations at any
future date or for any future period.
In addition, the historical information contained in the following table is
not comparable to the operations of the Operating Partnership or Host REIT on a
going-forward basis because the historical information relates to an operating
entity which owns and operates hotels and senior living communities, while the
Operating Partnership will own the Hotels but will lease them to the Lessees
and receive rental payments in connection therewith.
30
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP OPERATING PARTNERSHIP
PRO FORMA HOST REIT PRO FORMA PRO FORMA HOST REIT PRO FORMA
----------------------- ----------------------- ----------------------- -----------------------
HOST FIRST THREE FIRST THREE
FISCAL YEAR 1997 FISCAL YEAR 1997 HISTORICAL QUARTERS 1998 QUARTERS 1998
----------------------- ----------------------- ---------- ----------------------- -----------------------
100% REIT 2000 100% REIT 2000 100% REIT 2000 100% REIT 2000
PARTICIPATION WITH PARTICIPATION WITH PARTICIPATION WITH PARTICIPATION WITH
WITH NO NO NOTES WITH NO NO NOTES FISCAL WITH NO NO NOTES WITH NO NOTES NO NOTES
NOTES ISSUED ISSUED(1) NOTES ISSUED ISSUED(1) YEAR 1997 NOTES ISSUED ISSUED(1) ISSUED ISSUED(1)
------------- --------- ------------- --------- ---------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Hotel revenues.... $ -- $ -- $ -- $ -- $1,093 $ -- $ -- $ -- $ --
Rental revenues... 1,135 998 1,135 998 -- 540 468 540 468
Other revenues.... (4) (4) (4) (4) 54 2 2 2 2
------ ----- ------ ----- ------ ----- ----- ----- -----
Total revenues.. 1,131 994 1,131 994 1,147 542 470 542 470
------ ----- ------ ----- ------ ----- ----- ----- -----
OPERATING COSTS AND
EXPENSES:
Hotel............. 600 513 600 513 649 376 336 376 336
Other............. 11 11 11 11 49 15 15 15 15
------ ----- ------ ----- ------ ----- ----- ----- -----
Total operating
costs and
expenses........ 611 524 611 524 698 391 351 391 351
------ ----- ------ ----- ------ ----- ----- ----- -----
Operating profit... 520 470 520 470 449 151 119 151 119
Minority interest.. (10) (10) (17) (12) (32) (14) (14) 37 (4)
Corporate
expenses........... (44) (44) (44) (44) (47) (30) (30) (30) (30)
REIT Conversion
expenses........... -- -- -- -- -- -- -- -- --
Interest expense... (468) (420) (430) (382) (302) (339) (303) (313) (277)
Dividends on
Convertible
Preferred
Securities......... -- -- (37) (37) (37) -- -- (26) (26)
Interest income.... 29 36 29 36 52 24 30 24 30
------ ----- ------ ----- ------ ----- ----- ----- -----
Income (loss)
before income
taxes.............. 27 32 21 31 83 (208) (198) (157) (188)
Benefit (provision)
for income taxes... (1) (2) (1) (13) (36) 10 10 8 77
------ ----- ------ ----- ------ ----- ----- ----- -----
Income (loss)
before
extraordinary items
................... $ 26 $ 30 $ 20 $ 18 $ 47 $(198) $(188) $(149) $(111)
====== ===== ====== ===== ====== ===== ===== ===== =====
<CAPTION>
HOST
HISTORICAL
-----------
FIRST THREE
QUARTERS
1998
-----------
<S> <C>
REVENUES:
Hotel revenues.... $ 922
Rental revenues... --
Other revenues.... 118
-----------
Total revenues.. 1,040
-----------
OPERATING COSTS AND
EXPENSES:
Hotel............. 502
Other............. 45
-----------
Total operating
costs and
expenses........ 547
-----------
Operating profit... 493
Minority interest.. (36)
Corporate
expenses........... (33)
REIT Conversion
expenses........... (14)
Interest expense... (245)
Dividends on
Convertible
Preferred
Securities......... (26)
Interest income.... 36
-----------
Income (loss)
before income
taxes.............. 175
Benefit (provision)
for income taxes... (75)
-----------
Income (loss)
before
extraordinary items
................... $ 100
===========
</TABLE>
AS OF SEPTEMBER 11, 1998
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP
PRO FORMA HOST REIT PRO FORMA
---------------------------- ----------------------------
REIT 2000 REIT 2000
100% PARTICIPATION WITH 100% PARTICIPATION WITH
WITH NO NOTES NO NOTES WITH NO NOTES NO NOTES HOST
ISSUED ISSUED(1) ISSUED ISSUED(1) HISTORICAL
------------------ --------- ------------------ --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property and equipment,
net.................... $7,069 $5,619 $7,069 $5,619 $5,937
Total assets........... 7,945 6,689 7,945 6,689 6,969
Debt, excluding
convertible debt....... 4,970 4,370 4,970 4,370 4,224
Convertible debt ...... 567 567 -- -- --
Total liabilities...... 6,582 6,134 6,015 5,561 5,267
Convertible Preferred
Securities............. -- -- 550 550 550
Limited Partner
interests of third
parties at redemption
value.................. 989 333 -- -- --
Equity................. 374 222 1,032 447 1,152
</TABLE>
- ----
(1) Assumes all Partnerships participate in the Partnership Mergers, the REIT
Conversion occurs on January 1, 1999, the Blackstone Acquisition does not
occur and Host does not become a REIT until January 1, 2000.
31
<PAGE>
RISK FACTORS
In considering whether to approve the Agreement and the transactions
contemplated thereby, stockholders of Host should consider carefully, among
other factors, the material risks described below.
RISKS AND EFFECTS OF THE MERGER AND THE REIT CONVERSION
LACK OF CONTROL OVER HOTEL OPERATIONS. Due to current federal income tax law
restrictions on a REIT's ability to derive revenues directly from the
operation of a hotel, Host REIT will lease virtually all of its consolidated
Hotels to the Lessees, which will operate the Hotels by continuing to retain
the Managers pursuant to the Management Agreements. Host REIT will not operate
the Hotels or participate in the decisions affecting the daily operations of
the Hotels. Host REIT will have only limited ability to require the Lessees or
the Managers to operate or manage the Hotels in any particular manner and no
ability to govern any particular aspect of their day-to-day operation or
management. Even if Host REIT's management believes the Lessees or the
Managers are operating or managing the Hotels inefficiently or in a manner
that does not result in the maximization of rental payments to Host REIT under
the Leases, Host REIT has only a limited ability to require the Lessees or the
Managers to change their method of operation or management. Therefore, Host
REIT will be dependent for its revenue upon the ability of the Lessees and the
Managers to operate and manage the Hotels. Host REIT is limited to seeking
redress only if the Lessees violate the terms of the Leases and then only to
the extent of the remedies set forth therein. Remedies under the Leases
include Host REIT's ability to terminate a Lease upon certain events of
default, such as the Lessee's failure to pay rent or failure to maintain
certain net worth requirements and breaches of other specified obligations
under the Leases. See "Business and Properties--The Leases." Termination of a
Lease, however, could impair Host REIT's ability to qualify as a REIT for
federal income tax purposes unless another suitable lessee could be found.
LACK OF CONTROL OVER NON-CONTROLLED SUBSIDIARIES. The Non-Controlled
Subsidiaries will hold various assets (not exceeding in the aggregate 20% by
value of the assets of Host REIT), consisting primarily of interests in hotels
which are not leased, certain FF&E used in the Hotels and certain
international hotels. The direct ownership or control of most of these assets
by Host REIT could jeopardize Host REIT's status as a REIT. Although Host REIT
will own 95% of the total economic interests of the Non-Controlled
Subsidiaries, the Host Employee/Charitable Trust and possibly certain other
investors will own all of the voting common stock of the Non-Controlled
Subsidiaries (which will represent the remaining 5% of the total economic
interest thereof). As the owner of the voting stock of the Non-Controlled
Subsidiaries, the Host Employee/Charitable Trust and possibly certain other
investors will select the directors of the Non-Controlled Subsidiaries, who
will be responsible for overseeing the operations of those entities. As a
result, Host REIT will have no control over the operation or management of the
hotels or other assets owned by the Non-Controlled Subsidiaries even though it
will depend upon the Non-Controlled Subsidiaries for a significant portion of
its revenues (and the activities of the Non-Controlled Subsidiaries could
cause Host REIT to be in default under its principal debt facilities).
DEPENDENCE UPON CRESTLINE. Subsidiaries of Crestline will be the Lessees of
virtually all of the Hotels and their rent payments will be the primary source
of Host REIT's revenues. Upon the REIT Conversion, all fees payable under the
Management Agreements for subsequent periods will become the primary
obligations of the Lessees, to be paid by the Lessees for so long as the
Leases remain in effect. The obligations of the Lessees will be guaranteed by
Crestline, subject to specified liability limitations. Crestline's and each
Lessee's financial condition and ability to meet its obligations under the
Leases and the Management Agreements will determine the Operating
Partnership's ability to make distributions to holders of OP Units, including
Host REIT, and Host REIT's ability, in turn, to make distributions to its
stockholders. As of September 11, 1998, on a pro forma basis, after giving
effect to the REIT Conversion, Crestline would have had approximately $300
million of indebtedness (including approximately $85 million due to Host REIT
to pay for hotel working capital purchased from Host REIT but not including
guarantees of obligations of Crestline's subsidiaries under the Leases and the
Management Agreements) and Crestline can incur additional indebtedness in the
future. There can be no assurance that Crestline or any Lessee will have
sufficient assets, income and access to financing to enable it to
32
<PAGE>
satisfy its obligations under the Leases or to make payments of fees under the
Management Agreements. Host REIT remains obligated to the Managers in case the
Lessee fails to pay these fees (but it would be entitled to reimbursement from
the Lessee under the terms of the Leases). In addition, the credit rating of
Host REIT will be affected by the general creditworthiness of Crestline.
CURRENT HOST COMMON STOCK PRICE IS NOT NECESSARILY INDICATIVE OF THE PRICE
OF HOST REIT COMMON STOCK FOLLOWING THE REIT CONVERSION. Host's current stock
price is not necessarily indicative of how the market will value Host REIT
Common Stock following the REIT Conversion, because of the effect of the
distribution of Crestline common stock and cash or other consideration in
connection with the Initial E&P Distribution, the acquisition of additional
assets in connection with the REIT Conversion, including the Blackstone
Acquisition, and the change in Host's organization from a taxable corporation
to a REIT. The current stock price of Host reflects the current market
valuation of Host's current business and assets (including the Crestline
common stock and the cash or other consideration that may be distributed in
connection with the Initial E&P Distribution) and does not necessarily take
into account the changes in Host's business and operations (including the
leasing of its Hotels to Crestline) that will occur in connection with the
REIT Conversion. Host's current stock price also is affected by general market
conditions.
CASH DISTRIBUTIONS MAY EXCEED CASH AVAILABLE FOR DISTRIBUTION. Distributions
will be made at the discretion of Host REIT's Board of Directors and will be
affected by a number of factors, including the rental payments received by the
Operating Partnership from the Lessees with respect to the Leases of the
Hotels, the operating expenses of the Operating Partnership, the level of
borrowings and interest expense incurred in borrowing, the Operating
Partnership's financial condition and cash available for distribution, the
taxable income of Host REIT and the Operating Partnership, the effects of
acquisitions and dispositions of assets, unanticipated capital expenditures
and distributions required to be made on any preferred units issued by the
Operating Partnership. To the extent that cash available for distribution
(generally cash from operations less capital expenditures and principal
amortization of indebtedness) is insufficient to pay distributions in
accordance with the Operating Partnership's distribution policy or to maintain
the REIT qualification of Host REIT, the Operating Partnership intends to
borrow to make such distributions. The preliminary estimated initial annual
cash distributions of the Operating Partnership during the twelve months
ending December 31, 1999 ($231 million) will exceed its estimated cash
available for distribution ($158 million) and cash from contingent rents ($64
million) during the twelve months ending December 31, 1999, which would
require borrowings by the Operating Partnership of approximately $9 million
(or $0.03 per OP Unit) to make such distributions in accordance with the
Operating Partnership's distribution policy. Moreover, if estimated cash from
contingent rents were less than $64 million, then the Operating Partnership
also would be required to borrow any such shortfall in order to make such
distributions. Actual results may vary substantially from the estimates and no
assurance can be given that the Operating Partnership's estimates will prove
accurate or that any level of distributions will be made or sustained.
TIMING OF THE RESTRUCTURING TRANSACTIONS AND THE REIT CONVERSION. Host
currently expects to complete the Restructuring Transactions and the other
transactions comprising the REIT Conversion during 1998, which would permit
Host REIT to qualify as a REIT for its 1999 taxable year. If the REIT
Conversion does not occur in time for Host REIT to elect REIT status effective
January 1, 1999, the effectiveness of Host REIT's election could be delayed
until January 1, 2000, which would result in Host REIT continuing to pay
substantial corporate-level income taxes in 1999 (which would be expected to
reduce Host REIT's estimated cash distributions during 1999 to $0.52 per share
from $0.84 if its REIT election were not effective on January 1, 1999) and
could cause the Blackstone Acquisition (which is conditioned, among other
things, on consummation of the REIT Conversion by March 31, 1999 and Host REIT
qualifying as a REIT for 1999) not to be consummated. In view of the
complexity of the REIT Conversion and the number of transactions that must
occur to complete the REIT Conversion, Host believes that it is beneficial to
the stockholders of Host to complete the REIT Conversion as soon as
practicable, even if the REIT Conversion cannot be completed prior to January
1, 1999. If Host REIT's election to be taxed as a REIT is not effective on
January 1, 1999, Host REIT intends to operate following the REIT Conversion in
a manner that would permit it to qualify as a REIT at the earliest time
practicable, and it might pursue a merger with another entity or other
transaction that would permit it to commence a new taxable
33
<PAGE>
year and elect REIT status prior to January 1, 2000. Host REIT in any event
would elect to be treated as a REIT for federal income tax purposes no later
than its taxable year commencing January 1, 2000 assuming it so qualified.
CONFLICTS OF INTEREST
RESPONSIBILITIES OF HOST REIT TO OTHER LIMITED PARTNERS IN THE OPERATING
PARTNERSHIP. Maryland law imposes certain duties on the Board of Directors
of Host REIT to its stockholders. In addition, after the REIT Conversion,
Host REIT, as the sole general partner of the Operating Partnership, will
have fiduciary obligations under Delaware law with respect to the other
limited partners in the Operating Partnership (to the extent such duties
have not been modified or eliminated pursuant to the terms of the
Partnership Agreement). Although Delaware law provides that Host REIT, as
general partner, is subject to the duties of care and loyalty with respect
to the limited partners of the Operating Partnership, the Partnership
Agreement imposes certain limitations on Host REIT's fiduciary obligations
with respect to such limited partners. See "Distribution and Other
Policies--Conflicts of Interest Policies." Notwithstanding the contractual
limitations in the Partnership Agreement, the discharge of Host REIT's
obligations to its stockholders and to the limited partners in the
Operating Partnership could result in decisions that may fail to reflect
fully the interests of all holders of Host REIT Common Stock and limited
partners of the Operating Partnership.
RELATIONSHIPS WITH MARRIOTT INTERNATIONAL AND CRESTLINE. Marriott
International currently serves as manager for all but 16 of Host's Hotels,
and will continue to manage those Hotels pursuant to the Management
Agreements that will be assigned to the Lessees. In addition, Marriott
International acts as manager of hotels that will compete with Host REIT's
Hotels. As a result, Marriott International may make decisions regarding
competing lodging facilities which it manages that would not necessarily be
in the best interests of Host REIT or the Lessees. Further, J.W. Marriott,
Jr. and Richard E. Marriott, who are brothers, currently serve as directors
of Host and directors (and, in the case of J.W. Marriott, Jr., also an
officer) of Marriott International. After the REIT Conversion, J.W.
Marriott, Jr. will serve as a director of Host REIT and will continue to
serve as a director of Marriott International, and Richard E. Marriott will
serve as Chairman of the Board of Host REIT and continue to serve as a
director of Marriott International. J.W. Marriott, Jr. and Richard E.
Marriott also beneficially own (as determined for securities law purposes)
approximately 10.6% and 10.2%, respectively, of the outstanding shares of
common stock of Marriott International, and will beneficially own
approximately 5.33% and 5.31%, respectively, of the outstanding shares of
common stock of Crestline (but neither will serve as an officer or director
thereof). As a result, J.W. Marriott, Jr. and Richard E. Marriott may have
a potential conflict of interest with respect to their obligations as
directors of Host REIT in connection with any decisions regarding Marriott
International itself (including decisions relating to the Management
Agreements involving the Hotels), Marriott International's management of
competing lodging properties and Crestline's leasing and other businesses
that would not necessarily be in the best interests of Host REIT.
UNCERTAINTIES AT THE TIME OF VOTING ON THE AGREEMENT. There are several
uncertainties relating to the REIT Conversion, including the uncertainties
described below, that will exist at the time Host stockholders vote on the
Agreement. The results of the Partnership Mergers, including whether all or
less than all of the Partnerships voted to participate in the Partnership
Mergers, will not be known at the time Host stockholders vote on the
Agreement. The benefits to Host of the REIT Conversion will be markedly
reduced if one or more of the Partnerships do not participate in the
Partnership Mergers. In addition, the price of an OP Unit for purposes of the
Partnership Mergers will be equal to the average closing price on the NYSE of
a share of Host REIT Common Stock for the first 20 trading days after the
effective date of the Partnership Mergers (but, subject to adjustment will not
be less than $9.50 or greater than $15.50 per OP Unit). The maximum and
minimum prices per OP Unit will be reduced if the Blackstone Acquisition is
not consummated and, as a result thereof, the Initial E&P Distribution exceeds
$2.50 per share of Host Common Stock or Host REIT Common Stock. Because the
value of the OP Units issued to the Limited Partners in the Partnership
Mergers will not be determined until after the Partnership Mergers,
stockholders cannot know at the time they vote on the Agreement (a) the value
of the OP Units to be issued to the Limited Partners, which value could be
higher or lower than the value of Host REIT Common Stock at the time of the
Merger, and (b) the percentage interest in the Operating Partnership that
34
<PAGE>
such OP Units represent, which affects the allocation of distributions from
the Operating Partnership to Host REIT and the Limited Partners. Moreover,
because the Limited Partners can tender the OP Units they receive in the
Partnership Mergers to Host REIT in exchange for an equal number of shares of
Host REIT Common Stock, which Host REIT Common Stock will be issued promptly
following the 20th trading day after the effective date of the Partnership
Mergers, or to the Operating Partnership for Notes, Host stockholders cannot
know the exact number of Notes or shares of Host REIT Common Stock that may be
issued in connection with the Partnership Mergers or the extent of the
dilutive effect on Host REIT stockholders from the issuance of additional
shares of Host REIT Common Stock to the Limited Partners. In addition, the
assets and liabilities of the Non-Controlled Subsidiaries will not be known at
the time stockholders vote on the Agreement. Although the Restructuring
Transactions may be consummated with the expectation that certain other
transactions comprising the REIT Conversion, such as the Private Partnership
Transactions and the Blackstone Acquisition, will occur, there is no assurance
that such will be the case. There is no assurance as to the outcome of such
matters, and if certain of these transactions or events are not consummated as
expected, either the REIT Conversion may not be consummated or the value of
Host REIT Common Stock and the amount of cash available for distribution to
stockholders could be adversely affected, and Host REIT could fail to qualify
as a REIT for federal income tax purposes.
INABILITY TO OBTAIN THIRD-PARTY CONSENTS MAY HAVE A MATERIAL ADVERSE
EFFECT. There are numerous third-party consents which are required to be
obtained in order to consummate the Restructuring Transactions and the other
transactions comprising the REIT Conversion. These include consents of many
hotel project lenders, ground lessors, joint venture partners, Marriott
International and others. The inability of Host, the Operating Partnership or
Host REIT to obtain one or more such consents could cause a default under
cross-default provisions of the Company's principal credit facilities.
Although Host will not consummate the Restructuring Transactions or the REIT
Conversion unless it believes that the inability of Host, the Operating
Partnership or Host REIT to obtain one or more consents would not reasonably
be expected to have a material adverse effect on the Company's business,
financial condition or results of operations, there can be no assurance that
such a material adverse effect will not occur, which could reduce the value of
Host REIT Common Stock.
EXPIRATION OF THE LEASES AND POSSIBLE INABILITY TO FIND OTHER LESSEES. The
Leases generally will expire seven to ten years after the Effective Date, and
there can be no assurance that the affected Hotels will be relet to the
Lessees (or if relet, will be relet on terms as favorable to Host REIT). If
the Hotels are not relet, Host REIT will be required to find other lessees,
which lessees must meet certain requirements set forth in the Management
Agreements and the Code. There can be no assurance that satisfactory lessees
could be found or as to the terms and conditions on which Host REIT would be
able to relet the Hotels or enter into new leases with such lessees, which
could result in a failure of Host REIT to qualify as a REIT or in reduced cash
available for distribution.
LEASES COULD IMPAIR THE SALE OR OTHER DISPOSITION OF HOST REIT'S
HOTELS. Each Lease generally provides for a termination payment if the Lease
is terminated by Host REIT prior to the expiration of the term of such Lease
(including due to a change in the federal income tax laws that allows Host
REIT to operate the Hotels without jeopardizing Host REIT's status as a REIT),
except following a default by a Lessee and in certain other circumstances
(including in connection with the sale of up to 12 Hotels without a
termination payment) or unless Host REIT leases to the Lessee a comparable
substitute hotel. The termination fee is equal to the fair market value of the
Lessee's leasehold interest in the remaining term of the Lease. The payment of
such termination fee under the Leases could have the effect of impairing the
ability of Host REIT to sell its Hotels if market conditions otherwise warrant
such a sale and would reduce the net proceeds of any such sale. See "Business
and Properties--The Leases--Termination of Leases upon Disposition of Full-
Service Hotels."
LIMITATIONS ON SALE OR REFINANCING OF CERTAIN HOTELS. For reasons relating
to federal income tax considerations, the agreements by which the Operating
Partnership will acquire certain Hotels (or obtain consent to lease certain
Hotels to the Lessees) will also restrict the ability of the Operating
Partnership to dispose of or refinance the debt secured by such Hotels for
varying periods from the Effective Date, depending on the Hotel. Similarly,
upon acquiring the Blackstone Hotels, the Operating Partnership will agree not
to dispose of the
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Blackstone Hotels for ten years (although the Operating Partnership may
dispose of up to 50% of the value of the assets contributed to the Operating
Partnership by the Blackstone Entities commencing after five years). Thus,
even if it were in the best interests of Host REIT to sell such hotels or
refinance the debt secured by any of these Hotels, it may be difficult or
impossible for Host REIT to do so during their respective lock-out periods.
RISKS OF OWNERSHIP OF HOST REIT COMMON STOCK
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF HOST REIT COMMON
STOCK. To maintain its qualification as a REIT for federal income tax
purposes, not more than 50% in value of the outstanding shares of capital
stock of Host REIT may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities). See "Federal
Income Tax Consequences--Federal Income Taxation of Host REIT Following the
Merger--Requirements for Qualification." In addition, a person who owns,
directly or by attribution, 10% or more of an interest in a tenant of Host
REIT (or a tenant of any partnership in which Host REIT is a partner) cannot
own, directly or by attribution, 10% or more of the shares of Host REIT
without jeopardizing Host REIT's qualification as a REIT. Primarily to
facilitate maintenance of its qualification as a REIT for federal income tax
purposes, the Ownership Limit under the Host REIT Charter will prohibit
ownership, directly or by virtue of the attribution provisions of the Code, by
any person or persons acting as a group of more than 9.8% of the lesser of the
number or value of the issued and outstanding shares of Host REIT Common Stock
and will prohibit ownership, directly or by virtue of the attribution
provisions of the Code, by any person or persons acting as a group of more
than 9.8% of the lesser of the number or value of the issued and outstanding
shares of any class or series of Host REIT's preferred stock. The Ownership
Limit will become applicable to all Host REIT stockholders at the Effective
Time (subject to a limited exception for a holder of shares of Host REIT
Common Stock solely by reason of the Merger in excess of the Ownership Limit
so long as the holder thereof would not own, directly or by attribution under
the Code, more than 9.9% in value of the outstanding shares of capital stock
of Host REIT as of the Special Merger Ownership Limit Effective Time, and to a
limitation on the application of the "group" limitation (but not any other
element of the Ownership Limit) to any "group" that otherwise would exceed the
Ownership Limit at the Effective Time solely by reason of its status as a
"group"). The Board of Directors, in its sole and absolute discretion, may
waive or modify the Ownership Limit with respect to one or more persons who
would not be treated as "individuals" for purposes of the Code if it is
satisfied, based upon information required to be provided by the party seeking
the waiver and upon an opinion of counsel satisfactory to the Board of
Directors, that ownership in excess of this limit will not cause a person who
is an individual to be treated as owning shares in excess of the Ownership
Limit, applying the applicable constructive ownership rules, and will not
otherwise jeopardize Host REIT's status as a REIT for federal income tax
purposes (for example, by causing any tenant of Host REIT or any of the
Partnerships or Private Partnerships (including but not limited to Crestline
and the Lessees) to be considered a "related party tenant" for purposes of the
REIT qualification rules). The constructive ownership rules are complex and
may cause Host REIT Common Stock owned directly or constructively by a group
of related individuals or entities to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.8% of the
outstanding shares of Host REIT Common Stock or 9.8% of the outstanding shares
of any class of Host REIT preferred stock (or the acquisition of an interest
in an entity which owns shares of Host REIT's capital stock) by an individual
or entity could cause that individual or entity (or another individual or
entity) to own constructively in excess of 9.8% of the outstanding shares of
Host REIT Common Stock or 9.8% of the outstanding shares of any class of Host
REIT's preferred stock and thus subject such shares to the remedy provisions
under the Ownership Limit.
ANY SHARES OF HOST REIT COMMON STOCK HELD AT THE EFFECTIVE TIME AND NOT
SUBSEQUENTLY TRANSFERRED PRIOR TO THE SPECIAL MERGER OWNERSHIP LIMIT EFFECTIVE
TIME, OR ACQUIRED OR HELD AT ANY TIME AFTER THE EFFECTIVE TIME IN VIOLATION OF
THE OWNERSHIP LIMIT, WILL BE TRANSFERRED AUTOMATICALLY TO A TRUST FOR THE
BENEFIT OF A DESIGNATED CHARITABLE BENEFICIARY, AND THE PERSON WHO ACQUIRED
SUCH EXCESS SHARES OF HOST REIT COMMON STOCK WILL NOT BE ENTITLED TO ANY
DISTRIBUTIONS THEREON OR TO VOTE SUCH EXCESS SHARES OF HOST REIT COMMON STOCK.
THE HOLDER OF ANY SUCH EXCESS SHARES OF HOST REIT COMMON STOCK WILL RECEIVE
THE LESSER OF THE VALUE OF SUCH EXCESS SHARES AS OF THE EFFECTIVE TIME OR THE
CASH PROCEEDS FROM THE SALE OF SUCH EXCESS SHARES OF HOST REIT COMMON STOCK BY
THE TRUSTEE OF THE TRUST. AFTER THE EFFECTIVE TIME, ANY PERSON WHO ACQUIRES
HOST REIT COMMON STOCK IN EXCESS OF THE OWNERSHIP LIMIT WILL NOT RECEIVE ANY
PROCEEDS
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FROM THE SUBSEQUENT SALE THEREOF IN EXCESS OF THE LESSER OF THE PRICE PAID
THEREFOR OR THE AMOUNT REALIZED FROM SUCH SALE. A TRANSFER OF HOST REIT COMMON
STOCK TO A PERSON WHO, AS A RESULT OF THE TRANSFER, VIOLATES THE OWNERSHIP
LIMIT MAY BE VOID UNDER CERTAIN CIRCUMSTANCES, AND, IN ANY EVENT, WOULD DENY
THE TRANSFEREE ANY OF THE ECONOMIC BENEFITS OF OWNING HOST REIT COMMON STOCK
IN EXCESS OF THE OWNERSHIP LIMIT. TO AVOID THE ADVERSE EFFECTS OF THE
OWNERSHIP LIMIT, ANY HOLDER OF HOST COMMON STOCK WHO WOULD OWN SHARES IN
EXCESS OF THE OWNERSHIP LIMIT AT THE EFFECTIVE TIME SHOULD DISPOSE OF ANY SUCH
EXCESS SHARES PRIOR THERETO. See "Description of Host REIT Capital Stock--
Restrictions on Ownership and Transfer." The Ownership Limit may have the
effect of delaying, deferring or preventing a change in control and,
therefore, could adversely affect the stockholders' ability to realize a
premium over the then-prevailing market price for Host REIT Common Stock in
connection with such transaction.
LIMITATIONS ON ACQUISITION OF HOST REIT COMMON STOCK AND CHANGE IN
CONTROL. The Host REIT Charter and Host REIT Bylaws, the Partnership
Agreement, the Host REIT Rights Agreement (to be adopted by Host REIT to
replace the existing stockholder rights plan under the Host Rights Agreement)
and Maryland law contain a number of provisions (as further described under
"Certain Provisions of Maryland Law and the Host REIT Charter and Bylaws" and
"The Restructuring Transactions--Comparison of Rights of Stockholders of Host
and Host REIT") that could delay, defer or prevent a transaction or a change
of control of Host REIT that might involve a premium price for holders of Host
REIT Common Stock or otherwise be in their best interests, including the
following:
OWNERSHIP LIMIT. The 9.8% Ownership Limit described under "--Possible
Adverse Consequences of Limits on Ownership of Host REIT Common Stock"
above may have the effect of precluding a change in control of Host REIT by
a third party without the consent of the Board of Directors, even if such
change in control would be in the interest of the stockholders of Host REIT
(and even if such change in control would not reasonably jeopardize the
REIT status of Host REIT).
STAGGERED BOARD. The Host REIT Charter will provide that the Board of
Directors initially shall consist of eight members and may be thereafter
increased or decreased in accordance with the Host REIT Bylaws, provided
that the total number of directors may not be fewer than three nor more
than thirteen. Pursuant to the Host REIT Bylaws, the number of directors
shall be fixed by the Board of Directors within the limit set forth in the
Host REIT Charter. The Board of Directors of Host REIT will be divided into
three classes of directors. The terms of the first, second and third
classes will expire in 1999, 2000 and 2001, respectively. Directors for
each class will be chosen for a three-year term upon the expiration of the
then current class' term, beginning in 1999. The staggered terms for
directors may affect the stockholders' ability to effect a change in
control of Host REIT even if a change in control would be in the interest
of the stockholders of Host REIT.
REMOVAL OF BOARD OF DIRECTORS. The Host REIT Charter will provide that,
except for any directors who may be elected by holders of a class or series
of shares of capital stock other than Host REIT Common Stock, directors may
be removed only for cause and only by the affirmative vote of stockholders
holding at least two-thirds of the shares then outstanding and entitled to
be cast for the election of directors. Vacancies on the Board of Directors
may be filled by the concurring vote of a majority of the remaining
directors and, in the case of a vacancy resulting from the removal of a
director by the stockholders by at least two-thirds of all the votes
entitled to be cast in the election of directors.
PREFERRED STOCK; CLASSIFICATION OR RECLASSIFICATION OF UNISSUED SHARES OF
CAPITAL STOCK WITHOUT STOCKHOLDER APPROVAL. The Host REIT Charter provides
that the total number of shares of stock of all classes which Host REIT has
authority to issue is 800,000,000 shares of stock, initially consisting of
750,000,000 shares of Host REIT Common Stock, par value $.01 per share, and
50,000,000 shares of preferred stock, par value $.01 per share ("Host REIT
Preferred Stock"). The Board of Directors is authorized, without a vote of
stockholders, to classify or reclassify any unissued shares of stock,
including Host REIT Common Stock into Host REIT Preferred Stock or vice
versa, and to establish the preferences and rights of any preferred or
other class or series of stock to be issued. The issuance of preferred
stock or other stock having special preferences or rights could have the
effect of delaying or preventing a change in control of Host REIT even if a
change in control would be in the interest of the stockholders of Host
REIT. Because the Board of Directors will have the power to establish the
preferences and rights of additional classes or series of stock without a
stockholder vote, the Board of Directors may afford the holders of any
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such class or series preferences, powers and rights, including voting
rights, senior to the rights of holders of Host REIT Common Stock.
CONSENT RIGHTS OF THE LIMITED PARTNERS. Under the Partnership Agreement,
Host REIT generally will be able to merge or consolidate with another
entity with the consent of partners holding percentage interests in the
Operating Partnership ("Percentage Interests") that are more than 50% of
the aggregate Percentage Interests of the outstanding partnership interests
entitled to vote thereon (including any such partnership interests held by
Host REIT) as long as the holders of OP Units either will receive or will
have the right to receive the same consideration as the holders of Host
REIT Common Stock. Host REIT, as holder of a majority of the OP Units,
would be able to control the outcome of such vote. Under the Host REIT
Charter, the approval of the holders of at least two-thirds of the
outstanding shares of Host REIT Common Stock generally is necessary to
effectuate such merger or consolidation.
MARYLAND BUSINESS COMBINATION LAW. Under the MGCL, unless an exemption is
available, certain "business combinations" (including certain issuances of
equity securities) between a Maryland corporation and any person who owns
10% or more of the voting power of the corporation's then outstanding
shares of capital stock (an "Interested Stockholder") or an affiliate of
the Interested Stockholder are prohibited for five years after the most
recent date in which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be approved by
(i) a supermajority (80%) of outstanding voting shares, and (ii) two-thirds
of voting shares (other than voting shares held by an Interested
Stockholder) unless, among other conditions, the corporation's common
stockholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder. A business combination that
is approved by the board of directors of a Maryland corporation at any time
before an Interested Stockholder first becomes an Interested Stockholder is
not subject to the special voting requirements. Host REIT has not "opted-
out" of the business combination provisions of the MGCL and, accordingly,
will be subject to such provisions although Host REIT may elect to opt-out
of these provisions in the future. The Board of Directors of Host REIT has
adopted a resolution exempting from the operation of the "business
combination" statute the acquisition of shares by Marriott International
pursuant to the terms of the Marriott International Purchase Right as well
as any other transactions involving Host REIT and Marriott International or
their respective affiliates or associates, provided that any such other
transaction with Marriott International or its affiliates or associates
that is not in the ordinary course of business must be approved by a
majority of the directors of Host REIT present at a meeting at which a
quorum is present, including a majority of the disinterested directors, in
addition to any vote of stockholders required by other provisions of the
MGCL. See "Certain Provisions of Maryland Law and The Host REIT Charter and
Bylaws--Changes in Control Pursuant to Maryland Law."
MARYLAND CONTROL SHARE ACQUISITION LAW. Under the MGCL, unless a
corporation elects not to be subject thereto, "control shares" acquired in
a "control share acquisition" have no voting rights except to the extent
approved by stockholders by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares owned by the acquiror and by
officers or directors who are employees of the corporation. "Control
shares" are voting shares which, if aggregated with all other such shares
previously acquired by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority or (iii) a majority or more of the voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control
shares, subject to certain exceptions. Host REIT will be subject to these
control share provisions of Maryland law. The Bylaws of Host REIT contain
an exemption from the control share acquisition provisions for any shares
acquired by Marriott International pursuant to the Marriott International
Purchase Right, to the extent it is exercised.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS. The Host REIT
Bylaws impose certain advance notice requirements that must be met for
nominations of persons for election to the Board of
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Directors and the proposal of business to be considered by stockholders.
The advance notice provisions contained in the Host REIT Bylaws generally
require nominations and new business proposals by stockholders to be
delivered to the Secretary of Host REIT not later than the close of
business on the 60th day nor earlier than the close of business on the 90th
day before the date on which Host REIT mailed its proxy materials for the
prior year's annual meeting of stockholders.
MEETINGS OF STOCKHOLDERS; CALL OF SPECIAL MEETINGS; STOCKHOLDER ACTION IN
LIEU OF MEETING BY UNANIMOUS CONSENT. The Host REIT Bylaws provide that
annual meetings of stockholders shall be held on a date and at the time set
by the Board of Directors during the month of May each year (commencing in
May 1999). Special meetings of the stockholders may be called by the
President or the Board of Directors or on the written request of
stockholders entitled to cast a majority of all the votes entitled to be
cast at the meeting. Any action required or permitted to be taken by the
stockholders must be effected at a duly called annual or special meeting of
stockholders or by unanimous written consent.
MERGER, CONSOLIDATION, SHARE EXCHANGE AND TRANSFER OF ASSETS OF HOST
REIT. Pursuant to the Host REIT Charter, subject to the terms of any class
or series of capital stock at the time outstanding, Host REIT may merge
with or into another entity, may consolidate with one or more other
entities, may participate in a share exchange or may transfer its assets
within the meaning of the MGCL if approved (i) by the Board of Directors in
the manner provided in the MGCL and (ii) by stockholders by the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter,
except that any merger of Host REIT with or into a trust organized for the
purpose of changing Host REIT's form of organization from a corporation to
a trust will require the approval of stockholders of Host REIT by the
affirmative vote only of a majority of all the votes entitled to be cast on
the matter. Under the MGCL, certain mergers may be accomplished without a
vote of stockholders and a share exchange need be approved by a Maryland
successor only by its Board of Directors. A voluntary dissolution of Host
REIT also would require the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter.
AMENDMENTS TO THE HOST REIT CHARTER AND BYLAWS. The provisions contained
in the Host REIT Charter relating to restrictions on transferability of
Host REIT Common Stock, the classified Board and fixing the size of the
Board within the range set forth in the Host REIT Charter, as well as the
provisions relating to removal of directors and the filling of Board
vacancies may be amended only by a resolution adopted by the Board of
Directors and approved by stockholders by the affirmative vote of the
holders of not less than two-thirds of the votes entitled to be cast on the
matter. As permitted under the MGCL, the Host REIT Charter and the Host
REIT Bylaws provide that directors have the exclusive right to amend the
Host REIT Bylaws. Amendments to this provision of the Host REIT Charter
also would require Board action and approval by two-thirds of all votes
entitled to be cast on the matter.
HOST REIT RIGHTS AGREEMENT. Host REIT intends to adopt the Host REIT
Rights Agreement to replace the existing stockholder rights plan under the
Host Rights Agreement. The new Host REIT Rights Agreement is expected to
provide, among other things, that upon the occurrence of certain events,
stockholders will be entitled to purchase from Host REIT a newly created
series of junior preferred stock, subject to Host REIT's Ownership Limit.
The preferred stock purchase rights will be triggered by the earlier to
occur of (i) ten days following the date of a public announcement that a
person or group acting in concert has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of the outstanding shares of
Host REIT Common Stock or (ii) ten business days following the commencement
of or announcement of an intention to make a tender or exchange offer, the
consummation of which would result in the acquiring person becoming the
beneficial owner of 20% or more of such outstanding shares of Host REIT
Common Stock. The preferred stock purchase rights would cause substantial
dilution to a person or group that attempts to acquire Host REIT on terms
not approved by the Board of Directors. See "Description of Host REIT
Capital Stock" and "Certain Provisions of Maryland Law and the Host REIT
Charter and Bylaws."
MARRIOTT INTERNATIONAL PURCHASE RIGHT. In connection with Host's spin-off
of Marriott International in 1993, Marriott International obtained the
right to purchase up to 20% of each class of Host's outstanding voting
shares at the then fair market value upon the occurrence of certain change
of control events involving
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Host (the "Marriott International Purchase Right"). The Marriott
International Purchase Right will continue in effect after the Merger
(until June 2017), subject to certain limitations intended to protect the
REIT status of Host REIT. The Marriott International Purchase Right may
have the effect of discouraging a takeover of Host REIT, because any person
considering acquiring a substantial or controlling block of Host REIT
Common Stock will face the possibility that its ability to obtain or
exercise control would be impaired or made more expensive by the exercise
of the Marriott International Purchase Right.
EFFECT ON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE SALE. Sales of a
substantial number of shares of Host REIT Common Stock, or the perception that
such sales could occur, could adversely affect prevailing market prices for
Host REIT Common Stock. Limited Partners who elect to receive shares of Host
REIT Common Stock in connection with the Partnership Mergers will be able to
sell such shares at any time after they are received (unless held by an
affiliate of Host REIT). Beginning July 1, 1999, half of the approximately
43.7 million OP Units expected to be issued in the Blackstone Acquisition will
become redeemable pursuant to the holder's right to redeem them for shares of
Host REIT Common Stock or the cash equivalent thereof (as elected by Host
REIT) ("Unit Redemption Right"), an additional 25% will be redeemable on
October 1, 1999, and the balance will be redeemable on January 1, 2000. In
addition, beginning at least one year after the effective date of the
Partnership Mergers (or after a lesser period in certain circumstances), other
holders of OP Units, including Limited Partners who retain OP Units received
in the Partnership Mergers, may be able to sell shares of Host REIT Common
Stock received upon exercise of their Unit Redemption Right in the public
market pursuant to registration or exemptions from registration. Further, a
substantial number of shares of Host REIT Common Stock would, pursuant to
employee benefit plans, be issued or reserved for issuance from time to time,
including Host REIT Common Stock reserved for issuance pursuant to options
granted prior to the consummation of the REIT Conversion, and these shares of
Host REIT Common Stock would be available for sale in the public markets from
time to time pursuant to exemptions from registration or upon registration.
Moreover, the issuance of additional Host REIT Common Stock by Host REIT in
the future (including any Host REIT Common Stock that may be issued in
connection with the Initial E&P Distribution) would be available for sale in
the public markets. Although not yet certain, it is currently contemplated
that the Initial E&P Distribution will include the Special Dividend entitling
Host stockholders who receive the Initial E&P Distribution and the Blackstone
Entities to elect to receive either a specified dollar amount of cash or a
specified fraction of a share of Host Common Stock (or a share of Host REIT
Common Stock if the Merger has occurred). No prediction can be made about the
effect that future sales of shares of Host REIT Common Stock would have on the
market price of Host REIT Common Stock.
EFFECT ON STOCK PRICE OF MARKET CONDITIONS. As with other publicly traded
equity securities, the value of Host REIT Common Stock will depend upon
various market conditions, which may change from time to time. Among the
market conditions that may affect the value of the Host REIT Common Stock are
the following: (i) the extent of institutional investor interest in Host REIT,
(ii) the general market perception of REITs in general and hotel REITs in
particular and the attractiveness of their equity securities in comparison to
other equity securities (including securities issued by other real estate-
based companies), (iii) Host REIT's financial performance, (iv) changes in the
tax laws affecting REITs (particularly REITs that primarily own hotels) and
(v) general stock and bond market conditions. There can be no assurance that
these market conditions would not have a material adverse effect on the market
price of Host REIT Common Stock or that the Host REIT Common Stock will not
trade at prices below the net asset value of Host REIT's business and assets.
EFFECT ON STOCK PRICE OF EARNINGS AND CASH DISTRIBUTIONS. It is generally
believed that the market value of the equity securities of a REIT is primarily
based upon the market's perception of the REIT's growth potential for its core
portfolio, the value of its real estate portfolio and its prospects for
accretive acquisitions and development. The combination of these factors
creates a market perception of a REIT's current and potential future cash
distributions, whether from operations, sales, acquisitions, development or
refinancings, and is secondarily based upon the value of the underlying
assets. For that reason, Host REIT Common Stock may trade at prices that are
higher or lower than the net asset value per share. To the extent Host REIT
retains operating cash flow for investment purposes, working capital reserves
or other purposes rather than distributing such cash
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flow to stockholders, these retained funds, while increasing the value of Host
REIT's underlying assets, may not correspondingly increase the market price of
Host REIT Common Stock. The failure of Host REIT to meet the market's
expectation with regard to future earnings and cash distributions would likely
adversely affect the market price of Host REIT Common Stock.
EFFECT ON STOCK PRICE OF MARKET INTEREST RATES. One of the factors that will
influence the price of Host REIT Common Stock will be the dividend yield on
Host REIT Common Stock (as a percentage of the price of Host REIT Common
Stock) relative to market interest rates. Thus, an increase in market interest
rates may lead prospective purchasers of Host REIT Common Stock to expect a
higher dividend yield, which would adversely affect the market price of Host
REIT Common Stock.
EFFECT ON STOCK PRICE OF UNRELATED EVENTS. As with other publicly traded
equity securities, the value of Host REIT Common Stock will depend upon
various market conditions, including conditions unrelated to real estate
investments generally. Thus, events which depress equity market prices may not
have any effect on real estate market values, with the result that Host REIT
Common Stock may trade at prices below Host REIT's net asset value.
DEPENDENCE ON EXTERNAL SOURCES OF CAPITAL. As with other REITs, but unlike
corporations generally, Host REIT's ability to reduce its debt and finance its
growth largely must be funded by external sources of capital because Host REIT
generally will have to distribute to its stockholders 95% of its taxable
income in order to qualify as a REIT (including taxable income where Host REIT
does not receive corresponding cash). Host REIT's access to external capital
will depend upon a number of factors, including general market conditions, the
market's perception of Host REIT's growth potential, its current and potential
future earnings, cash distributions and the market price of Host REIT Common
Stock.
FEDERAL INCOME TAX RISKS RELATING TO REIT QUALIFICATION
GENERAL. Host REIT intends to operate so as to qualify as a REIT under the
Code effective for Host REIT's first full taxable year commencing following
the REIT Conversion. A REIT generally is not taxed at the corporate level on
income it currently distributes to its stockholders as long as it distributes
currently at least 95% of its taxable income (excluding net capital gain). No
assurance can be provided, however, that Host REIT will so qualify or be able
to remain so qualified or that new legislation, Treasury Regulations,
administrative interpretations or court decisions will not significantly
change the tax laws with respect to Host REIT's qualification as a REIT or the
federal income tax consequences of such qualification. In this regard, Host
REIT has received an opinion of Hogan & Hartson L.L.P. to the effect that Host
REIT, effective for its first full taxable year commencing after the REIT
Conversion is completed, will be organized in conformity with the requirements
for qualification as a REIT under the Code, and that Host REIT's proposed
method of operation will enable it to satisfy the requirements for
qualification and taxation as a REIT. This opinion is conditioned upon
completion of the REIT Conversion and upon certain factual representations
made by Host REIT and the Operating Partnership as to matters relating to the
organization and operation of Host REIT, the Operating Partnership, the
Partnerships, the Private Partnerships, the Subsidiary Partnerships, the Non-
Controlled Subsidiaries, the Host Employee/Charitable Trust, and Crestline and
the Lessees, and the economic and other terms of the Leases and the
expectations of Host REIT and the Lessees with respect thereto. In addition,
this opinion is based upon the factual representations of Host REIT concerning
its business and properties as set forth in this Proxy Statement/Prospectus
and assumes that the actions described in this Proxy Statement/Prospectus are
completed in a timely fashion. Moreover, an opinion of counsel does not bind
the IRS or the courts, and no assurance can be provided that such opinion will
not be challenged by the IRS or will be sustained by a court if so challenged.
REQUIRED DISTRIBUTIONS AND PAYMENTS. In order to qualify as a REIT, Host
REIT will be required each year to distribute to its stockholders at least 95%
of its net taxable income (excluding any net capital gain). Due to certain
transactions entered into in prior years, Host REIT is expected to recognize
substantial amounts of "phantom" taxable income in future years that is not
matched by cash flow or EBITDA to the Operating Partnership or Host REIT. As
discussed below in "--"Earnings and Profits" Attributable to "C" Corporation
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Taxable Years," to qualify as a REIT, Host REIT also will have to distribute
to its stockholders not later than the end of its first full taxable year as a
REIT an amount equal to the E&P accumulated by Host and its subsidiaries and
not distributed before or at the time of the REIT Conversion (including any
increases thereto resulting from subsequent IRS audits of years prior to Host
REIT's first taxable year as a REIT). In addition, Host REIT will be subject
to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions made by it with respect to the calendar year are less than the
sum of (i) 85% of its ordinary income, (ii) 95% of its capital gain net income
for that year, and (iii) any undistributed taxable income from prior periods.
Host REIT intends to make distributions to its stockholders to comply with the
95% distribution requirement and to avoid the nondeductible excise tax and
will rely for this purpose on distributions from the Operating Partnership.
However, differences in timing between taxable income and cash available for
distribution due to, among other things, the seasonality of the hospitality
industry and the fact that some taxable income will be "phantom" income (i.e.,
taxable income that is not matched by cash flow or EBITDA to the Operating
Partnership) could require the Operating Partnership to borrow funds or to
issue additional equity to enable Host REIT to meet the 95% distribution
requirement (and therefore to maintain its REIT status) and to avoid the
nondeductible excise tax. Host REIT also could be required to pay taxes and
liabilities attributable to periods and events prior to the REIT Conversion
and taxes in the event it were to fail to qualify as a REIT. In addition, the
Operating Partnership's inability to retain earnings (resulting from Host
REIT's 95% and other distribution requirements) will generally require the
Operating Partnership to refinance debt that matures with additional debt or
equity. There can be no assurance that any of these sources of funds, if
available at all, would be available to meet the Operating Partnership's
distribution and tax obligations.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT. If Host REIT fails to qualify
as a REIT, it will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. In
addition, unless entitled to relief under certain statutory provisions, Host
REIT will be disqualified from treatment as a REIT for the four taxable years
following the year during which REIT qualification is lost. The additional tax
would significantly reduce the cash available for distribution by Host REIT to
its stockholders. Failure of Host REIT to qualify as a REIT could reduce
materially the value of the Host REIT Common Stock and would cause all
distributions to stockholders to be taxable as ordinary income to the extent
of Host REIT's current and accumulated E&P (although, subject to certain
limitations under the Code, corporate distributees may be eligible for the
dividends received deduction with respect to these distributions). See
"Federal Income Tax Consequences--Federal Income Taxation of Host REIT
Following the Merger--Failure of Host REIT to Qualify as a REIT." Failure of
Host REIT to qualify as a REIT also would result in a default under the New
Senior Notes and the New Credit Facility.
"EARNINGS AND PROFITS" ATTRIBUTABLE TO "C" CORPORATION TAXABLE YEARS. In
order to qualify as a REIT, Host REIT cannot have at the end of any taxable
year any undistributed E&P that is attributable to a "C" corporation taxable
year. A REIT has until the close of its first full taxable year as a REIT in
which it has non-REIT E&P to distribute such accumulated E&P. Host REIT will
be required to distribute this E&P prior to the end of 1999 (the first full
taxable year for which the REIT election of Host REIT currently is expected to
be effective). Failure to do so would result in disqualification of Host REIT
as a REIT at least for taxable year 1999. Host REIT believes that the Initial
E&P Distribution, together with any additional distributions of non-REIT E&P
made after the REIT Conversion but prior to December 31, 1999, will be
sufficient to distribute all of the non-REIT E&P as of December 31, 1999, but
there are substantial uncertainties relating to the estimate of Host REIT's
non-REIT E&P and the value of noncash consideration to be distributed as part
of the Initial E&P Distribution and, thus, there can be no assurance that this
requirement will be met. Hogan & Hartson L.L.P. will not provide any opinion
as to the amount of Host's undistributed E&P and has relied, for purposes of
its opinion as to the qualification of Host REIT as a REIT, upon a
representation from Host and Host REIT that Host REIT will not have any
undistributed non-REIT E&P as of the end of 1999. See "Federal Income Tax
Consequences--Federal Income Taxation of Host REIT Following the Merger--
Requirements for Qualification."
TREATMENT OF LEASES. To qualify as a REIT, a REIT must satisfy two gross
income tests. Rent paid pursuant to the Leases will constitute substantially
all of the gross income of Host REIT. In order for the rent
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paid pursuant to the Leases to constitute qualifying income for purposes of
the gross income tests (a) the Leases must be respected as true leases for
federal income tax purposes and not be treated as service contracts, joint
ventures or some other type of arrangement and (b) the Lessees must not be
regarded as "related party tenants" (as defined in the Code). The Host REIT
Charter contains the Ownership Limit, which is intended in part to help ensure
that neither the Lessees nor future lessees will be treated as "related party
tenants," but there can be no assurance that the Ownership Limit will be
effective for achieving that result in all circumstances. With regard to the
treatment of the Leases for federal income tax purposes, Hogan & Hartson
L.L.P. has provided to Host REIT an opinion to the effect that, based upon
certain representations of Host REIT regarding the economic and other terms of
the Leases and the expectations of Host REIT and the Lessees with respect
thereto, the Leases will be respected as leases for federal income tax
purposes. An opinion of counsel, however, does not bind the IRS or the courts
and this determination ultimately will depend upon the accuracy of the factual
representations of Host REIT regarding the Leases. In this regard, if the
Leases were not respected as true leases for federal income tax purposes or if
the Lessees were regarded as "related party tenants," Host REIT would not be
able to satisfy either of the two gross income tests applicable to REITs and,
as a result, would lose its REIT status. Accordingly, Host REIT would be
subject to corporate level income taxation, which would significantly reduce
the cash available for distribution to its stockholders. See "Federal Income
Tax Consequences--Federal Income Taxation of Host REIT Following the Merger--
Income Tests Applicable to REITs."
OTHER TAX LIABILITIES; HOST REIT'S SUBSTANTIAL DEFERRED AND CONTINGENT TAX
LIABILITIES. Even if Host REIT qualifies as a REIT, it will be subject,
through the Operating Partnership, the Partnerships and the Private
Partnerships, to certain federal, state and local taxes on its income and
property. See "Federal Income Tax Consequences--Federal Income Taxation of
Host REIT Following the Merger--General." In addition, Host REIT will be
subject to tax at the regular corporate rate (currently 35%) upon its share of
any gain recognized as a result of any sale by the Operating Partnership
(within the 10-year period beginning on the effective date of the OP
Contribution) of assets, including the full-service hotels, contributed to the
Operating Partnership by Host in connection with the OP Contribution, to the
extent that such gain existed as of the first day of Host REIT's first taxable
year as a REIT. Host has substantial deferred tax liabilities that likely will
be recognized by Host REIT in the next ten years as "built-in gain" under
these rules (or by a Non-Controlled Subsidiary), without any corresponding
receipt of cash by Host REIT or the Operating Partnership. In addition, the
IRS may assert liabilities against Host REIT for corporate income taxes for
taxable years of Host prior to the time Host REIT qualifies as a REIT.
Finally, the Non-Controlled Subsidiaries will be taxable "C" corporations and
will pay federal and state income tax on their net income at the full
applicable corporate rates.
FAILURE OF THE OPERATING PARTNERSHIP TO QUALIFY AS A PARTNERSHIP. The
Operating Partnership and Host REIT have received an opinion of Hogan &
Hartson L.L.P. to the effect that the Operating Partnership will be treated as
a partnership for federal income tax purposes. An opinion of counsel, however,
does not bind the IRS or the courts, and no assurance can be provided that
such opinion will not be challenged by the IRS or will be sustained by a court
if so challenged. If the IRS were to treat successfully the Operating
Partnership as an entity that is taxable as a corporation, Host REIT would
cease to qualify as a REIT because the value of Host REIT's ownership interest
in the Operating Partnership would exceed 5% of Host REIT's assets and because
Host REIT would be considered to hold more than 10% of the voting securities
of another corporation. See "Federal Income Tax Consequences--Federal Income
Taxation of Host REIT Following the Merger--Asset Tests Applicable to REITs."
Moreover, the imposition of a corporate tax on the Operating Partnership would
reduce significantly the amount of cash available for distribution to Host
REIT (and thus its stockholders). See "Federal Income Tax Consequences--Tax
Aspects of Host REIT's Ownership of OP Units."
OTHER TAX RISKS
TAX CONSEQUENCES OF THE OP CONTRIBUTION. Host believes that it will not
recognize a material amount of gain in connection with the OP Contribution.
However, the tax treatment of the OP Contribution is highly complex and
depends upon a number of factual determinations and other outside events which
may or may not occur. Thus, no assurance can be provided that Host will not
recognize more gain in connection with the OP Contribution than it currently
anticipates. Host is not obtaining an opinion of outside counsel as to the tax
consequences to it of the OP Contribution.
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EFFECTS OF SUBSEQUENT EVENTS UPON RECOGNITION OF GAIN. In addition to any
gain that might be recognized by Host at the time of the OP Contribution,
there are a variety of subsequent events and transactions including (i) the
sale or other taxable disposition of appreciated assets contributed by Host to
the Operating Partnership in the OP Contribution (including one or more of the
Hotels contributed by Host), (ii) the refinancing or repayment of certain
liabilities secured by one or more of the Hotels contributed to the Operating
Partnership by Host in the OP Contribution, (iii) the issuance of additional
OP Units, including in connection with the acquisition of additional
properties by the Operating Partnership in exchange for OP Units or other
equity interests in the Operating Partnership, (iv) an increase to the basis
of one or more of the Hotels contributed to the Operating Partnership by Host
in the OP Contribution resulting from capital expenditures and (v) the
elimination over time of the disparity between the current tax basis of one or
more of the Hotels contributed to the Operating Partnership by Host in the OP
Contribution and the "book basis" of such assets (based upon their fair market
value at the time of the OP Contribution) that could cause Host REIT to
recognize part or all of the taxable gain that otherwise has been deferred
pursuant to the Merger and the OP Contribution.
RISKS OF OPERATION
COMPETITION IN THE LODGING INDUSTRY. The profitability of the Hotels is
subject to general economic conditions, the management abilities of the
Managers (including primarily Marriott International), competition, the
desirability of particular locations and other factors relating to the
operation of the Hotels. The full-service segment of the lodging industry in
which the Hotels primarily operate is highly competitive and the Hotels
generally operate in geographical markets that contain numerous competitors.
The Hotels' success will be dependent, in large part, upon their ability to
compete in such areas as access, location, quality of accommodations, room
rate structure, the quality and scope of food and beverage facilities and
other services and amenities. Although the competitive position of each of
Host REIT's hotel properties differs from market to market, Host REIT believes
that its properties generally compare favorably to their competitive set in
the markets in which they operate on the basis of these factors. Furthermore,
Host REIT's strategy is to affiliate its properties with managers operating
under the highest quality brand names in the industry which Host REIT believes
will enhance their competitive position. Nonetheless, there can be no
assurance that these managers will maintain the quality of their brand names.
Furthermore, competing properties may be built or existing products enhanced
such that they offer characteristics more favorable than those offered by Host
REIT's properties. See "Business and Properties--Competition." The lodging
industry, including the Hotels (and thus Host REIT), may be adversely affected
in the future by (i) national and regional economic conditions, (ii) changes
in travel patterns, (iii) taxes and government regulations which influence or
determine wages, prices, interest rates, construction procedures and costs,
(iv) the availability of credit and (v) other factors beyond the control of
Host REIT.
SUBSTANTIAL INDEBTEDNESS OF HOST REIT. Host REIT will have substantial
indebtedness. As of September 11, 1998, on a pro forma basis assuming the Full
Participation Scenario, Host REIT had outstanding indebtedness totaling
approximately $5 billion, which represents an approximately 59% debt-to-total
market capitalization ratio on a pro forma basis at such date (based upon a
price per share of Host REIT Common Stock of $12.50 after giving effect to the
REIT Conversion). Host REIT's business is capital intensive and it will have
significant capital requirements in the future. Host REIT's leverage level and
other factors beyond its control (including market conditions) could affect
its ability to (i) obtain financing in the future, (ii) undertake refinancings
on terms and subject to conditions deemed acceptable by Host REIT, (iii) make
distributions, (iv) pursue its acquisition strategy or (v) compete effectively
or operate successfully under adverse economic conditions. In the event that
Host REIT's cash flow and working capital are not sufficient to fund Host
REIT's expenditures or to service its indebtedness, Host REIT would be
required to raise additional funds through capital contributions, the
refinancing of all or part of its indebtedness, the incurrence of additional
permitted indebtedness or the sale of assets. There can be no assurance that
any of these sources of funds would be available, if at all, in amounts
sufficient for Host REIT to meet its obligations. Moreover, even if Host REIT
were able to meet its obligations, its leveraged capital structure could
significantly limit its ability to finance its acquisition program and other
capital expenditures, to compete effectively or to operate successfully,
especially under adverse economic conditions.
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NO LIMITATION ON DEBT. Host REIT will have a policy of incurring debt only
if, immediately following such incurrence, its debt-to-total market
capitalization ratio on a pro forma basis would be 60% or less. However, there
are no limitations in Host REIT's or the Operating Partnership's
organizational documents that limit the amount of indebtedness that either
entity may incur, although the Operating Partnership's and Host REIT's debt
instruments will contain certain restrictions on the amount of indebtedness
that Host REIT may incur. Accordingly, the Board of Directors could alter or
eliminate this policy unilaterally without stockholder approval from time to
time to the extent permitted by its debt agreements. If this policy were
changed, Host REIT could become more highly leveraged, resulting in an
increase in debt service payments that could adversely affect Host REIT's cash
flow and consequently, the cash available for distributions to holders of OP
Units, including Host REIT and, in turn, to stockholders of Host REIT and
could increase the risk of default on Host REIT's indebtedness.
THE BOARD MAY CHANGE INVESTMENT AND OTHER POLICIES WITHOUT STOCKHOLDER
APPROVAL. Host REIT's Board of Directors may change the investment, financing
and other policies of Host REIT without stockholder approval. Such policy
changes may have adverse consequences to Host REIT.
MANAGEMENT AGREEMENTS COULD IMPAIR THE SALE OR OTHER DISPOSITION OF HOST
REIT'S HOTELS. Marriott International serves as the manager for all but 16 of
Host REIT's Hotels and provides various other services to Host and its
subsidiaries. Although the Lessees will have primary liability under the
Management Agreements as long as the Leases are in effect, Host REIT will
remain liable thereunder. The Hotels generally may not be sold, leased or
otherwise transferred unless the transferee assumes the Management Agreements
relating thereto and meets certain other conditions. The possible desire of
Host REIT, from time to time, to finance, refinance or effect a sale of any of
the properties managed by Marriott International or another manager may,
depending upon the structure of such transactions, result in a need to obtain
Marriott International's consent, which could include modification of the
Management Agreements with Marriott International or such other manager with
respect to such property. Any such modification proposed by Host REIT may not
be acceptable to Marriott International or such other manager, and the lack of
any required consent from Marriott International or such other manager would
prohibit Host REIT from consummating such financing, refinancing or sale
without breaching such Management Agreement. In addition, certain situations
could arise where actions taken by Marriott International or another manager
in its capacity as manager of competing lodging properties would not
necessarily be in the best interests of Host REIT. Nevertheless, Host REIT
believes that there is sufficient mutuality of interest between Host REIT and
Marriott International or another manager to result in a mutually productive
relationship.
RENTAL REVENUES FROM HOTELS SUBJECT TO PRIOR RIGHTS OF LENDERS. In
accordance with the mortgage loan agreements with respect to outstanding
indebtedness of certain of the Partnerships or the Private Partnerships, the
rental revenues received by such Partnerships under certain Leases first will
be used to satisfy the debt service on such outstanding indebtedness with only
the cash flow remaining after debt service being available to satisfy other
obligations of such Partnership or Private Partnership (including paying
property taxes and insurance, funding the required FF&E reserves for the
Hotels and capital improvements and paying debt service with respect to
unsecured debt) and to make distributions to holders of OP Units (including
Host REIT), which affects Host REIT's ability, in turn, to make distributions
to stockholders of Host REIT.
HOTELS SUBJECT TO GROUND LEASES MAY AFFECT HOST REIT'S REVENUES. Of the
approximately 125 Hotels in which Host REIT initially is expected to hold an
interest, approximately 45 are subject to ground leases. Such ground leases
generally require increases in ground rent payments every five years. To the
extent that the rents payable under the Leases do not increase at the same
rate as the increases under the ground leases, it could affect the Operating
Partnership's cash available for distributions to holders of OP Units,
including Host REIT, and Host REIT's ability, in turn, to make cash available
for distributions to its stockholders. In addition, any sale of a Hotel
encumbered by a ground lease would be made subject to such ground lease and
the value realized by
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Host REIT in such sale might not be as high if such Hotel were not sold
subject to such ground lease or were sold subject thereto.
GENERAL REAL ESTATE INVESTMENT RISKS. Host REIT stockholders will continue
to bear risks associated with real estate investments. The yields available
from equity investments in real estate and Host REIT's ability to service debt
depend, in large part, upon the amount of rental revenues generated, expenses
incurred and capital expenditures required in the operation of its business.
Host REIT's income and ability to make distributions will be dependent upon
the rent payable by the Lessees exceeding the amounts required for debt
service, property taxes and other expenses payable by Host REIT (including
required FF&E reserves and capital expenditures). The rental payments payable
by the Lessees will be affected in part by the sales generated by the Managers
from operation of the Hotels. The Lessees' ability to pay rent accrued under
the Leases will depend in significant part upon the ability of the Managers to
generate gross sales in excess of its requirements to meet operating expenses.
Host REIT's rental income from the Hotels may, therefore, directly or
indirectly, be adversely affected by a number of factors, including the
general economic climate, local real estate conditions, such as an oversupply
of, or a reduction in demand for, hotel space, the attractiveness of the
Hotels to consumers, the quality, philosophy and performance of management,
the ability of the Lessees to maximize rental payments to the Operating
Partnership, the ability of the Manager to effectively operate the Hotels,
competition from comparable hotels, changes in room rates and increases in
operating costs due to inflation and other factors, which increases may not
necessarily be passed through fully to guests. In addition, Host REIT's rental
income from the Hotels and real estate values also are affected by such
factors as the cost of compliance with government regulation, including zoning
and tax laws, the potential for liability under applicable laws, interest rate
levels and the availability of financing. Certain significant expenditures
associated with each equity investment in a Hotel (such as mortgage payments,
if any, real estate taxes and maintenance costs) also may not decrease even
though circumstances cause a reduction in Host REIT's rental income from the
Hotel. If any of the above occurs, the Operating Partnership's ability to make
distributions to holders of OP Units, including Host REIT, and Host REIT's
ability, in turn, to make distributions to its stockholders, could be
adversely affected.
POSSIBLE UNDERPERFORMANCE OF NEW ACQUISITIONS. In the future, Host REIT
expects to pursue acquisitions of additional full-service hotels and other
types of real estate. Acquisitions entail the risk that such investments will
fail to perform in accordance with expectations. Host REIT anticipates that,
in certain circumstances, it may use OP Units in the Operating Partnership as
consideration to acquire hotels from tax-sensitive sellers and, in connection
with such acquisitions, it may agree to certain restrictions on the Operating
Partnership's ability to sell, or reduce the amount of mortgage indebtedness
on, such acquired hotels, which may increase Host REIT's leverage and which
may impair Host REIT's ability to take actions that would otherwise be in the
best interests of Host REIT.
SEASONALITY. The hotel industry is seasonal in nature. The seasonality of
the industry may, from time to time, affect either the amount of rent that
accrues under the Leases or the ability of the Lessees to make timely rent
payments under the Leases. An inability of the Lessees to make timely rent
payments to Host REIT could adversely affect the ability of the Operating
Partnership to make distributions to holders of OP Units, including Host REIT,
and Host REIT's ability, in turn, to make distributions to its stockholders.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively illiquid
and, therefore, will tend to limit the ability of Host REIT to sell and
purchase hotels promptly in response to changes in economic or other
conditions. This could make it difficult for Host REIT to sell any of its
Hotels, even if a sale were in the interest of Host REIT.
MISCELLANEOUS RISKS
CHANGES IN LAWS. Increases in real estate or business improvement district
taxes will not result in increased rental payments to Host REIT under the
Leases, with the result that they may adversely affect the Operating
Partnership's cash flow from operations and its ability to maintain the
expected level of distributions
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to holders of OP Units, including Host REIT, and, in turn, to Host REIT's
stockholders. Similarly, changes in laws increasing the potential liability
for environmental conditions existing at Hotels or increasing the restrictions
on discharges or other conditions, as well as changes in laws affecting
construction and safety requirements, may result in significant unanticipated
capital expenditures, which, to the extent such expenditures must be borne by
Host REIT as the lessor of the Hotels, would adversely affect the Operating
Partnership's cash flow from operations and its ability to make distributions
to holders of OP Units, including Host REIT and Host REIT's ability, in turn,
to make distributions to its stockholders.
DEPENDENCE UPON KEY PERSONNEL. Host REIT is dependent upon the efforts of
its executive officers. While Host REIT believes that it could find
replacements for these key personnel, the loss of their services could have a
significant adverse effect on the operations of Host REIT. Host REIT does not
intend to obtain key-man life insurance with respect to any of its executive
officers.
POTENTIAL LITIGATION RELATED TO THE REIT CONVERSION. Over the last several
years, business reorganizations involving the combination of several
partnerships into a single entity occasionally have given rise to investor
lawsuits. These lawsuits have involved claims against the general partners of
the participating partnerships, the partnerships themselves and related
persons involved in the structuring of, or benefiting from, the conversion or
reorganization, as well as claims against the surviving entity and its
directors and officers. For example, limited partners of five of the six
limited partnerships controlled by Host that own limited service and extended-
stay hotels have filed a lawsuit against Host and the general partners (which
are subsidiaries of Host) of such limited partnerships alleging, among other
things, breaches of their fiduciary duties in connection with a potential
consolidation transaction. Certain other lawsuits are pending against Host and
its affiliates by limited partners in certain Partnerships. If any lawsuits
are filed in connection with the Partnership Mergers or other transactions
comprising the REIT Conversion, such lawsuits could delay the closing of the
REIT Conversion or result in substantial damage claims against Host REIT or
the general partners of the Partnerships, each of which is a wholly-owned,
direct or indirect subsidiary of Host. The Partnerships are each obligated to
indemnify their general partner for claims against them arising from their
role as general partner other than to the extent they are guilty of
negligence, fraud, misconduct or breach of fiduciary duty. Because Host REIT
will be acquiring the Partnerships or Private Partnerships through the
Partnership Mergers, the Operating Partnership and Host REIT indirectly will
be subject to the indemnification obligations of the Partnerships and the
Private Partnerships to their general partners and any obligations of the
Partnerships and the Private Partnerships to pay damages to the extent not
covered by any available insurance. See "Business and Properties--Legal
Proceedings."
RISK INVOLVED IN INVESTMENTS THROUGH PARTNERSHIPS OR JOINT VENTURES. Instead
of purchasing hotel properties directly, Host REIT may invest as a co-
venturer. Joint venturers often have shared control over the operation of the
joint venture assets. Therefore, such investments may, under certain
circumstances, involve risks such as the possibility that the co-venturer in
an investment might become bankrupt, or have economic or business interests or
goals that are inconsistent with the business interests or goals of Host REIT,
or be in a position to take action contrary to the instructions or the
requests of Host REIT or contrary to Host REIT's policies or objectives.
Consequently, actions by a co-venturer might result in subjecting hotel
properties owned by the joint venture to additional risk. Although Host REIT
generally will seek to maintain sufficient control of any joint venture to
permit Host REIT's objectives to be achieved, it may be unable to take action
without the approval of its joint venture partners or its joint venture
partners could take actions binding on the joint venture without Host REIT's
consent. Additionally, should a joint venture partner become bankrupt, Host
REIT could become liable for such partner's share of joint venture
liabilities.
YEAR 2000 PROBLEM. Year 2000 issues have arisen because many existing
computer programs and chip-based embedded technology systems use only the last
two digits to refer to a year, and therefore do not properly recognize a year
that begins with "20" instead of the familiar "19". If not corrected, many
computer applications could fail or create erroneous results. Although Host
has adopted a compliance program in recognition of the possible interruptions
that may occur as a result of Year 2000 issues and taken certain steps toward
Year 2000 remediation, there can be no assurances that the steps taken toward
Year 2000 remediation by
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Host or third parties will be properly and timely completed, and failure to do
so could have a material adverse effect on Host, its business and its
financial condition. Host cannot predict the actual effects on its business of
Year 2000 issues, which depend on uncertainties such as whether significant
third parties properly and timely address Year 2000 issues and whether broad-
based or systematic economic failures may occur. Host is also unable to
predict the severity and duration of any such failures, which could include
disruptions in passenger transportation or transportation systems generally,
loss of utility and/or telecommunications services, the loss or disruption of
hotel reservations made on centralized reservation systems and errors or
failures in financial transactions or payment processing systems such as
credit cards. Moreover, following the REIT Conversion, Host REIT will be
dependent upon Crestline to interface with third parties in addressing Year
2000 issues at the Hotels leased to Crestline. Due to the general uncertainty
inherent with respect to Year 2000 issues and Host's dependence on third
parties (including Crestline following the REIT Conversion), Host is unable to
determine at this time whether the consequences of Year 2000 failures will
have a material impact on Host or Host REIT. Although Host's Year 2000
compliance program and Crestline's adoption thereof following the REIT
Conversion are expected to significantly reduce the level of uncertainty
concerning Year 2000 issues and management believes that the possibility of
significant interruptions of normal operations should be reduced, there is no
assurance that this will be the case.
UNINSURED LOSS. Host REIT will carry comprehensive liability, fire, flood,
extended coverage and rental loss (for rental losses extending up to 12
months) with respect to its Hotels with policy specification and insured
limits customarily carried for similar hotels. Certain types of losses (such
as from earthquakes and environmental hazards), however, may be either
uninsurable or not economically insurable. Should an uninsured loss occur,
Host REIT could lose both its capital invested in, and anticipated profits
from, one or more of its Hotels.
AMERICANS WITH DISABILITIES ACT. The Hotels must comply with Title III of
the Americans with Disabilities Act (the "ADA") to the extent that such Hotels
are "public accommodations" or "commercial facilities" as defined by the ADA.
The ADA may require removal of structural barriers to access by persons with
disabilities in certain public areas of Host REIT's Hotels where such removal
is readily achievable. Host REIT believes that the Hotels will not be required
to make substantial non-budgeted capital expenditures to address the
requirements of the ADA. However, noncompliance with the ADA could result in
substantial capital expenditures to remove structural barriers, as well as the
imposition of fines or an award of damages to private litigants which might
adversely affect the Operating Partnership's ability to make expected
distributions to holders of OP Units, including Host REIT and Host REIT's
ability, in turn, to make distributions to its stockholders. Under the Leases,
Host REIT would be required to fund all such expenditures.
OTHER REGULATORY ISSUES. Host REIT's Hotels will be subject to various forms
of regulation in addition to the ADA, including building codes, regulations
pertaining to fire safety and other regulations which may from time to time be
enacted. Host REIT may be required to incur significant costs to comply with
any future changes in such regulations.
POSSIBLE ENVIRONMENTAL LIABILITIES. Under various federal, state and local
laws, ordinances and regulations, owners or operators of real estate may be
required to investigate and clean up certain hazardous substances released at
a property, and may be held liable to a governmental entity or to third
parties for property damage or personal injuries and for investigation and
clean-up costs incurred by the parties in connection with any contamination.
In addition, some environmental laws create a lien on a contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. The presence of contamination or the failure to remediate
contamination may adversely affect the owner's ability to sell or lease real
estate or to borrow using the real estate as collateral. No assurances can be
given that (i) a prior owner, operator or occupant, such as a tenant, did not
create a material environmental condition not known to Host REIT, (ii) a
material environmental condition with respect to any Hotel does not exist or
(iii) future uses or conditions (including, without limitation, changes in
applicable environmental laws and regulations) will not result in the
imposition of environmental liability.
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In addition, no assurances can be given that all potential environmental
liabilities have been identified or properly quantified or that no prior
owner, operator or past or current guest has created an environmental
condition not known to Host REIT. Moreover, no assurances can be given that
(i) future laws, ordinances, or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Hotels will not be affected by the condition of land or operations in the
vicinity of the Hotels (such as the presence of underground storage tanks) or
by third parties unrelated to Host REIT.
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CONFLICTS OF INTEREST
As discussed below, the operation of Host REIT involves various potential
conflicts of interest.
RESPONSIBILITIES OF HOST REIT TO OTHER LIMITED PARTNERS IN THE OPERATING
PARTNERSHIP
Maryland law imposes certain duties on the Board of Directors of Host REIT
to its stockholders. In addition, after the REIT Conversion, Host REIT, as the
sole general partner of the Operating Partnership, will have fiduciary
obligations under Delaware law with respect to the other limited partners in
the Operating Partnership (to the extent such duties have not been modified or
eliminated pursuant to the terms of the Partnership Agreement). Although
Delaware law provides that Host REIT, as general partner, is subject to the
duties of care and loyalty with respect to the limited partners of the
Operating Partnership, the Partnership Agreement imposes certain limitations
on Host REIT's fiduciary obligations with respect to such limited partners.
See "Distribution and Other Policies--Conflicts of Interest Policies."
Notwithstanding the contractual limitations in the Partnership Agreement, the
discharge of Host REIT's obligations to its stockholders and to the limited
partners in the Operating Partnership could result in decisions that may fail
to reflect fully the interests of all holders of Host REIT Common Stock and
limited partners of the Operating Partnership.
POTENTIAL CONFLICTS INVOLVING MARRIOTT INTERNATIONAL AND CRESTLINE
Marriott International currently serves as manager for all but 16 of Host's
Hotels, and will continue to manage those Hotels pursuant to the Management
Agreements that will be assigned to the Lessees. In addition, Marriott
International acts as manager of hotels that will compete with Host REIT's
Hotels. As a result, Marriott International may make decisions regarding
competing lodging facilities which it manages that would not necessarily be in
the best interests of Host REIT or the Lessees. Further, J.W. Marriott, Jr.
and Richard E. Marriott, who are brothers, currently serve as directors of
Host and directors (and, in the case of J.W. Marriott, Jr., also an officer)
of Marriott International. After the REIT Conversion, J.W. Marriott, Jr. will
serve as a director of Host REIT and will continue to serve as a director of
Marriott International, and Richard E. Marriott will serve as Chairman of the
Board of Host REIT and continue to serve as a director of Marriott
International. J.W. Marriott, Jr. and Richard E. Marriott also beneficially
own (as determined for securities law purposes) approximately 10.6% and 10.2%,
respectively, of the outstanding shares of common stock of Marriott
International, and will beneficially own approximately 5.33% and 5.31%,
respectively, of the outstanding shares of common stock of Crestline (but
neither will serve as an officer or director thereof). As a result, J.W.
Marriott, Jr. and Richard E. Marriott may have a potential conflict of
interest with respect to their obligations as directors of Host REIT in
connection with any decisions regarding Marriott International itself
(including decisions relating to the Management Agreements involving the
Hotels), Marriott International's management of competing lodging properties
and Crestline's leasing and other businesses that would not necessarily be in
the best interests of Host REIT.
POLICIES WITH RESPECT TO CONFLICTS OF INTEREST
Host REIT has adopted certain policies and will enter into agreements with
the Operating Partnership and others designed to minimize the adverse effects
of these potential conflicts of interest. See "Distribution and Other
Policies--Conflicts of Interest Policies" and "Business and Properties--
Noncompetition Agreement." There can be no assurance, however, that the
policies and agreements will be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made at the
Host REIT level that might not fully reflect fully the interests of the
stockholders of Host REIT.
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VOTING AND PROXIES
This Proxy Statement/Prospectus is being furnished to holders of Host Common
Stock on the Record Date in connection with the solicitation of proxies by
Host's Board of Directors for use at the Special Meeting to be held at the
Ritz-Carlton Hotel, 1700 Tysons Boulevard, McLean, Virginia, 22102, on
December 15, 1998 at 10:00 a.m., local time, or at any adjournments or
postponements thereof, for the purposes set forth herein and in the
accompanying Notice of Special Meeting of Stockholders of Host.
This Proxy Statement/Prospectus and the accompanying proxy cards are being
first mailed to Host's stockholders on or about November 13, 1998.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, stockholders of record as of the close of business
on the Record Date will be asked to (i) consider and vote upon the Agreement
which contemplates (a) the OP Contribution and (b) the Merger, and (ii)
transact such other business as may properly come before the Special Meeting
or any adjournments or postponements thereof.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Host Common Stock at the close of business on the
Record Date are entitled to notice of and to vote at the Special Meeting. As
of the Record Date, there were shares of Host Common Stock and no shares of
preferred stock of Host issued and outstanding and holders of record. Each
stockholder of Host is entitled to one vote for each share of Host Common
Stock held as of the close of business on the Record Date.
VOTING OF PROXIES
General Information. The proxy accompanying this Proxy Statement/Prospectus
is solicited on behalf of Host's Board of Directors for use at the Special
Meeting. All properly executed written proxy cards, and all properly completed
proxies voted by telephone or the internet, which are delivered pursuant to
this solicitation (and not later revoked) will be voted at the Special Meeting
in accordance with the instructions given in the proxy. If no instructions are
indicated, such proxies will be voted FOR approval of the Agreement at the
Special Meeting. Host's Board of Directors currently is not aware of any
matters other than the Agreement referred to herein which will come before the
Special Meeting. If any other matter should be properly presented at the
Special Meeting for action, the persons named in the accompanying proxy card
will vote the proxy in their own discretion.
Voting by Written Proxy Card. Stockholders intending to vote by written
proxy card are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope or otherwise mail it to Host.
Voting by Telephone or the Internet. Instructions for voting by telephone or
the internet are set forth on the enclosed admission ticket attached to the
proxy card. The telephone and internet voting procedures are designed to
authenticate votes cast by use of a personal identification number. The
procedures, which comply with Delaware law, allow stockholders to appoint a
proxy to vote their shares and to confirm that their instructions have been
properly recorded.
VOTE REQUIRED
Under the DGCL, the affirmative vote of a majority of the outstanding
capital stock of the corporation entitled to vote thereon is needed to adopt a
merger agreement. Similarly, if the OP Contribution were deemed to constitute
a sale, lease or exchange of all or substantially all of the assets of Host
under the DGCL, the affirmative vote of a majority of the outstanding capital
stock of the corporation entitled to vote thereon would be needed to approve
the OP Contribution. Pursuant to the Host Certificate, the affirmative vote of
the holders of
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two-thirds (66 2/3%) of the outstanding shares of Host Common Stock is
necessary for approval of the Merger, as well as the OP Contribution if it
were deemed to constitute a sale, lease or exchange of all or substantially
all of the assets of Host.
On the Record Date, directors and executive officers of Host, together with
their affiliates, as a group, beneficially owned approximately % of the
issued and outstanding shares of Host Common Stock. It is currently expected
that each director and executive officer of Host will vote the shares of Host
Common Stock beneficially owned by such director or executive officer for
approval of the Agreement and the transactions contemplated thereby. See
"Principal Stockholders."
Under the DGCL, the stockholders of Host will not be entitled to dissenters'
rights of appraisal as a result of the Merger or other Restructuring
Transactions. See "The Restructuring Transactions--Absence of Dissenters'
Rights."
QUORUM; ABSTENTIONS AND TREATMENT OF BROKER NON-VOTES; ADJOURNMENT; REVOCATION
The holders of a majority of the shares of Host Common Stock issued and
outstanding and entitled to vote at the Special Meeting, present in person or
by proxy, will constitute a quorum at the Special Meeting. Abstentions and
broker non-votes will be counted for purposes of determining the presence of a
quorum at the Special Meeting.
Votes cast in person or by proxy at the Special Meeting will be tabulated by
the inspectors of election appointed for the Special Meeting, who will
determine whether or not a quorum is present. Votes may be cast for, against
or as abstentions. Broker/dealers who hold their customers' shares in street
name may, under the applicable rules of the exchange and other self-regulatory
organizations of which the broker/dealers are members, submit proxies for such
shares and may vote such shares on routine matters, which, under such rules,
typically include the election of directors. However, broker/dealers may not
vote such shares on certain other matters, which typically include
transactions related to mergers, without specific instructions from the
customer who owns such shares. Properly executed proxies submitted by
broker/dealers which have not been voted on certain matters as described in
the previous sentence are referred to as broker non-votes. Because approval of
the Agreement requires the affirmative vote of not less than two-thirds
percent (66 2/3%) of the shares of Host Common Stock outstanding, abstentions
and broker non-votes will have the same effect as votes AGAINST the Agreement.
In the event that a quorum is not present at the time the Special Meeting is
convened, or if for any other reason Host believes that additional time should
be allowed for the solicitation of proxies, Host may adjourn the Special
Meeting with or without a vote of the stockholders. If Host proposes to
adjourn the Special Meeting by a vote of the stockholders, the persons named
in the enclosed proxy card will vote all shares of Host Common Stock for which
they have voting authority in favor of such adjournment.
Each stockholder who signs and returns a proxy in the form enclosed with
this Proxy Statement/Prospectus or properly submits their proxy by telephone
or the internet may revoke it at any time prior to its exercise by giving
notice of such revocation in writing to the Secretary of Host, by a later
dated proxy either signed and returned by mail or by using the telephone or
internet voting procedures or by voting in person at the Special Meeting.
Unless so revoked, the shares of Host Common Stock represented by each such
proxy will be voted at the meeting and any adjournment thereof. Presence at
the meeting of a stockholder who has properly submitted a proxy but does not
duly revoke it or request to vote in person does not revoke that proxy.
IF THE RESTRUCTURING TRANSACTIONS AND THE OTHER TRANSACTIONS COMPRISING THE
REIT CONVERSION DO NOT OCCUR IN TIME FOR HOST REIT TO ELECT REIT STATUS
EFFECTIVE JANUARY 1, 1999, THE EFFECTIVENESS OF HOST REIT'S ELECTION COULD BE
DELAYED TO JANUARY 1, 2000, WHICH WOULD RESULT IN HOST OR HOST REIT CONTINUING
TO PAY SUBSTANTIAL CORPORATE-LEVEL INCOME TAXES IN 1999 AND COULD CAUSE THE
BLACKSTONE ACQUISITION (WHICH IS CONDITIONED, AMONG OTHER THINGS, ON
CONSUMMATION OF THE REIT CONVERSION BY MARCH 31, 1999 AND HOST REIT QUALIFYING
AS A REIT FOR 1999) NOT TO BE CONSUMMATED. THEREFORE, IT IS EXTREMELY
IMPORTANT THAT
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STOCKHOLDERS RETURN THE PROXY CARDS AS SOON AS POSSIBLE OR PROPERLY SUBMIT
THEIR PROXIES BY TELEPHONE OR THE INTERNET IN ACCORDANCE WITH THE INSTRUCTIONS
ON THE ADMISSION TICKET ATTACHED TO THE ENCLOSED PROXY CARD. ANY DELAY IN
RETURNING PROXIES COULD CAUSE THE SPECIAL MEETING TO BE DELAYED, WHICH COULD
PREVENT THE RESTRUCTURING TRANSACTIONS AND THE OTHER TRANSACTIONS COMPRISING
THE REIT CONVERSION FROM BEING EFFECTIVE JANUARY 1, 1999.
SOLICITATION OF PROXIES AND EXPENSES
The solicitation of proxies for the Special Meeting is being made by the
Board of Directors of Host and will be done principally by mail. Host will
bear the entire cost of solicitation of proxies from Host's stockholders and
of preparing, assembling, printing and mailing this Proxy
Statement/Prospectus, the proxy and any additional information furnished to
Host's stockholders. Copies of solicitation materials will be furnished to
brokerage houses, banks, fiduciaries and other custodians or nominees holding
in their names shares of Host Common Stock beneficially owned by others to
forward to such beneficial owners. Host may reimburse persons representing
owners of shares of Host Common Stock for their expenses in forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of Host. In
addition, Host has engaged MacKenzie Partners, Inc. to furnish solicitation
services on its behalf. No additional compensation will be paid to directors,
officers or other regular employees for such services, but MacKenzie Partners,
Inc. will be paid a fee for its services, estimated to be approximately $ ,
plus reimbursement of its expenses.
HOST'S STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
THE BOARD OF DIRECTORS OF HOST HAS DETERMINED THE AGREEMENT, WHICH
CONTEMPLATES THE RESTRUCTURING TRANSACTIONS, TO BE ADVISABLE FOR HOST AND ITS
STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS HAS APPROVED THE AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT ALL STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
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THE RESTRUCTURING TRANSACTIONS
The following summary of the terms of the Restructuring Transactions is
qualified in its entirety by reference to the Agreement, a copy of which is
attached as Appendix A to this Proxy Statement/Prospectus and is incorporated
by reference into this Proxy Statement/Prospectus. Stockholders of Host are
urged to review the Agreement in its entirety.
BACKGROUND AND REASONS FOR THE RESTRUCTURING TRANSACTIONS AND THE REIT
CONVERSION
Host is proposing the Restructuring Transactions in connection with a plan
adopted by Host to restructure its business operations so that it will qualify
as a REIT under the Code. If the Agreement is approved by Host stockholders at
the Special Meeting and the Restructuring Transactions are consummated, Host
REIT expects to qualify as a REIT beginning with its first full taxable year
commencing after the REIT Conversion is completed, which currently is expected
to be the year commencing January 1, 1999 (but which might not be until the
year beginning January 1, 2000). The Host Board of Directors is proposing the
Restructuring Transactions primarily for the following reasons:
. The Restructuring Transactions are essential components of Host's
conversion to REIT status for federal income tax purposes. In particular,
the OP Contribution will enable Host REIT, following the Merger, to
operate, together with the Operating Partnership, in an UPREIT structure,
through which Host REIT would continue the full-service hotel ownership
business currently conducted by Host. Host believes that the UPREIT
structure will improve its ability to acquire additional properties in
the future on favorable terms. Specifically, under certain circumstances,
OP Units could be issued to acquire properties in transactions that would
not trigger immediate tax obligations for certain sellers. Accordingly,
converting to an UPREIT structure could enable Host REIT to acquire
hotels and other properties in the future at lower prices because of the
tax advantages to some sellers of receiving OP Units as consideration.
OP Units would subsequently be redeemable for cash or common stock of
Host REIT (at the option of Host REIT) at such time as the recipient
desires liquidity.
. The provisions of Maryland law have generally been viewed as favorable to
REITs organized in corporate or trust form. As discussed below, Maryland
law facilitates qualification as a REIT by authorizing the charter of a
Maryland corporation to provide for restrictions on ownership and
transferability designed to permit a corporation to qualify as a REIT
under the Code or for any other purpose. In addition, unlike Delaware,
Maryland does not impose a franchise tax on corporations, which will
result in cost savings to Host in annual franchise tax payments and
related fees of approximately $150,000. Maryland's status as a
jurisdiction favorable to REITs is evidenced by the large number of
publicly-traded REITs that have chosen to operate as a regular Maryland
corporation or as a special statutory Maryland real estate investment
trust. According to NAREIT, as of September 1998, there were over 100
publicly-traded REITs organized under Maryland law.
. In order to satisfy certain requirements that are applicable to REITs in
general, many REITs impose ownership limits and transfer restrictions,
similar to the Ownership Limit under the Host REIT Charter, by inclusion
of such provisions in their charters. Under Delaware law, such
restrictions would not be binding with respect to securities issued prior
to adoption of the restriction unless holders of such securities agree to
or vote in favor of such restriction. However, under Maryland law and by
reason of the Merger, all shares of Host REIT Common Stock issued in the
Merger and thereafter would be subject to the Ownership Limit, for which
authority exists under Maryland law.
. Host's principal executive offices and a substantial number of Host's
employees are employed in Maryland.
The Board of Directors of Host believes that the Restructuring Transactions
and the other transactions comprising the REIT Conversion are advisable for
Host and its stockholders based on the belief that:
. The REIT structure, as a more tax efficient structure, will provide
improved operating results through changing economic conditions and all
phases of the hotel economic cycle.
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. The REIT Conversion, which will reduce corporate-level taxes and the need
to incur debt to reduce corporate-level taxes through interest
deductions, will improve its financial flexibility and allow it to
continue to strengthen its balance sheet by reducing its overall debt to
equity ratio over time.
. As a REIT, Host will be able to compete more effectively with other
public lodging real estate companies that already are organized as REITs
and to make performance comparisons with its peers more meaningful.
. By becoming a dividend paying company, Host's stockholder base will
expand to include investors attracted by yield as well as asset quality,
which is expected to facilitate Host REIT's capital-raising efforts and
provide a less volatile stockholder base.
. The adoption of the UPREIT structure will facilitate tax-deferred
acquisition of additional hotels (such as in the case of the Blackstone
Acquisition and the Partnership Mergers).
Host believes that these benefits justify the REIT Conversion even if the REIT
Conversion does not occur in time for Host REIT to elect REIT status effective
January 1, 1999 (in which event the effectiveness of Host's REIT election
could be delayed until January 1, 2000).
Host explored the possibility of engaging in a business combination with a
so-called "paired share" REIT, Santa Anita, in December 1996 and January 1997.
Based upon an analysis of potential costs, the pricing of the transaction, the
time requirement to complete such a transaction and the possible legislative
risks associated with the "paired share" structure, Host decided not to pursue
such a transaction.
During the fourth quarter of 1997, Host began to explore internally the
possibility of reorganizing as a REIT on a stand-alone basis. Host analyzed
the various consents that would need to be obtained and other requirements
that would need to be met in order to restructure its assets and operations
(including its indirect interests in the Partnerships and the Private
Partnerships) in order to qualify as a REIT. In light of the importance of its
relationship with Marriott International as the manager of substantially all
of Host's Hotels, Host began preliminary discussions with Marriott
International during January 1998 in order to ascertain whether or not
Marriott International would cooperate in Host's potential conversion to a
REIT. In February 1998, Host tentatively concluded that it would be desirable
for the Operating Partnership to use OP Units to acquire the Partnerships and
the Private Partnerships, subject to determination of satisfactory terms and
conditions for such acquisitions. In order to determine the feasibility of
this approach, Host commenced preliminary discussions in February and March
1998 with the outside partners of certain Private Partnerships to determine
whether or not they would have an interest in such a transaction. In March
1998, Host also entered into discussions with the Blackstone Group regarding
the potential acquisition of the twelve full-service hotels and certain other
assets owned by the Blackstone Entities because Host believed that these
hotels represented the premier hotel portfolio on the market and an
acquisition would be consistent with its desire to pursue a strategy of owning
both Marriott and other upscale and luxury hotel brands. In April 1998, Host
and the Operating Partnership entered into agreements with the Blackstone
Entities for the Blackstone Acquisition and concurrently reached a decision
and publicly announced that it would be advantageous if Host were to convert
to a REIT. In May and June 1998, Host and the Operating Partnership entered
into agreements to acquire the interests of certain outside partners in four
Private Partnerships. Each of these transactions is contingent upon the REIT
Conversion. On June 2, 1998, the Operating Partnership filed a registration
statement for the OP Units to be issued to the Limited Partners of the
Partnerships in the Partnership Mergers. On October 9, 1998, the Operating
Partnership commenced the offering of such OP Units if the Partnership Mergers
are approved and Host REIT commenced its offer to exchange Host REIT Common
Stock for OP Units to be issued in the Partnership Mergers.
The Host Board believes that Host's conversion to a REIT and the
distribution of Crestline shares as part of the Initial E&P Distribution will
benefit Host's stockholders by providing them with a tax advantaged REIT
security that is expected to provide both the opportunity for regular cash
dividends and capital appreciation as Host REIT acquires additional
properties, as well as a continuing interest in Crestline, Host's senior
living company and the initial lessee of substantially all of Host REIT's
Hotels, if a Host stockholder continues to hold the Crestline common stock. If
Host REIT qualifies for taxation as a REIT, it generally will not be subject
to
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federal corporate income taxes on that portion of its ordinary income or
capital gain that is distributed to stockholders. As a REIT, Host REIT would
be able to benefit from the tax advantages that apply to REIT's, and
stockholders will receive quarterly distributions that are at least sufficient
to satisfy the annual distribution requirements applicable to REITs under the
Code. The Host Board believes that this will highlight the value of Host
REIT's hotel properties and permit stockholders to realize a regular cash
return on that value. Upon completion of the REIT Conversion, Crestline is
expected to own Host's 31 senior living communities, which will continue to be
managed by Marriott International, and a 25% interest in the Swissotel
management company expected to be acquired in the Blackstone Acquisition, and
will lease substantially all of the Hotels owned by Host REIT and its
affiliates. At such time, Crestline will operate independently of Host, will
be publicly traded and separately listed on the NYSE, and will pursue its own
growth opportunities.
Host's Board of Directors has received an opinion dated November , 1998
from BT Wolfensohn, which acted as financial advisor to Host in connection
with the REIT Conversion, to the effect that the REIT Transactions (as defined
in such opinion), taken together, are fair from a financial point of view to
the holders of Host Common Stock. See "Opinion of Financial Advisor." The Host
Board of Directors considered such opinion as well as other matters it deemed
relevant in determining the advisability of the Agreement.
Following the Restructuring Transactions and the other transactions
comprising the REIT Conversion (including the Blackstone Acquisition), Host
REIT and its subsidiaries are expected initially to own outright, or have
controlling interests in, approximately 125 full-service hotels operated
primarily under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt
brand names. Upon completion of the REIT Conversion, Host REIT will be the
sole general partner of the Operating Partnership and is expected to own
approximately 74% of the OP Units in the Operating Partnership, and the
remaining OP Units, which are intended to be substantially equivalent on an
economic basis to shares of Host REIT Common Stock, will be owned by the
Limited Partners, unaffiliated partners of the four Private Partnerships
participating in the Private Partnership Transactions and the Blackstone
Entities. Host REIT and its subsidiaries will own a number of OP Units equal
to the number of shares of Host REIT Common Stock outstanding. Host REIT will
be managed by its Board of Directors and will have no employees who are not
also employees of the Operating Partnership.
THE BOARD OF DIRECTORS OF HOST BELIEVES THAT THE AGREEMENT, WHICH
CONTEMPLATES THE RESTRUCTURING TRANSACTIONS, IS ADVISABLE FOR HOST AND ITS
STOCKHOLDERS AND RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. In the event the
Agreement is not approved by Host stockholders at the Special Meeting, Host
will continue to operate as a Delaware corporation, and the other transactions
comprising the REIT Conversion (including the Initial E&P Distribution) will
not be completed at this time.
THE OP CONTRIBUTION
Subject to approval of the Agreement at the Special Meeting, after the
Special Meeting Host will contribute, as the OP Contribution, its wholly-owned
full-service hotels, interests in the Partnerships and the Private
Partnerships (other than their interests in the general partners, each of
which is Host or a wholly-owned direct or indirect subsidiary of Host, and
certain other subsidiaries of Host who will remain in existence as
subsidiaries of Host REIT and will receive OP Units in the Partnership
Mergers) and certain other assets (excluding Host's senior living assets and
the cash or other consideration to be distributed in connection with the
Initial E&P Distribution and certain de minimis assets that cannot be
contributed to the Operating Partnership) to the Operating Partnership. As a
preliminary step in the REIT Conversion, during 1998, various subsidiaries of
Host also have contributed or will contribute the wholly-owned full-service
hotels held by such entities, their interests in certain of the Partnerships
and Private Partnerships and certain other assets to the Operating Partnership
(including its subsidiaries). In exchange for these contributions, the
Operating Partnership (i) will issue to Host in the aggregate a number of OP
Units equal to the number of outstanding shares of Host Common Stock at the
time of the REIT Conversion, reduced by the number of OP Units to be received
by the general partners of the Partnerships and other subsidiaries of Host in
the Partnership Mergers (together with preferred partnership interests in the
Operating Partnership corresponding to any shares of Host preferred stock
outstanding at the time
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of the REIT Conversion) and (ii) will assume all liabilities of Host
(including past and future contingent liabilities and liabilities for the
Plans in accordance with the 1998 Employee Benefits Allocation Agreement),
other than liabilities of Crestline. A portion of Host REIT's OP Units
represents a 0.1% general partnership interest in the Operating Partnership.
Following these contributions, the Operating Partnership and its subsidiaries
will directly or indirectly own all of Host's and its subsidiaries' wholly-
owned hotels, substantially all of Host's direct and indirect interests in the
Partnerships and the Private Partnerships and all of Host's other assets
(excluding its senior living assets and the cash or other consideration to be
distributed in connection with the Initial E&P Distribution, and certain de
minimis assets that cannot be contributed to the Operating Partnership).
The above-described contributions, which include the OP Contribution, will
enable Host REIT, following the Reincorporation by means of the Merger, to
operate together with the Operating Partnership in an UPREIT structure, which
is expected to improve Host REIT's ability to acquire additional hotels and
other properties in the future on favorable terms.
TERMS OF THE MERGER
The Reincorporation will be effected through the merger of Host with and
into Host REIT. As a result of the Merger, Host REIT will be the surviving
entity and the separate existence of Host will terminate. At the Effective
Time, each outstanding share of Host Common Stock, together with the
associated Host Right, will be converted into one share of Host REIT Common
Stock, together with the associated Host REIT Right, and holders thereof will
become subject to the Ownership Limit under the Host REIT Charter. In
addition, rights and obligations of Host under the Plans and related and other
agreements will be assumed by Host REIT, and all rights of the participants
therein to acquire shares of Host Common Stock on the terms and conditions of
the Plans and such agreements will be converted into rights to acquire shares
of Host REIT Common Stock in accordance with the 1998 Employee Benefits
Allocation Agreement (other than with respect to individuals who will be
employed by Crestline following the Initial E&P Distribution). Any outstanding
shares of preferred stock of Host would be converted into an equal number of
shares of preferred stock of Host REIT having substantially the same rights
and preferences. Certain rights and obligations of Host under the Plans and
related agreements to acquire shares of Host Common Stock, to the extent held
by participants who will be employed by Crestline following the Initial E&P
Distribution, will be assumed by Crestline and converted into rights to
acquire shares of Crestline common stock in accordance with the 1998 Employee
Benefits Allocation Agreement. See "Description of Host REIT Capital Stock"
and "Management--1998 Employee Benefits Allocation Agreement."
As a consequence of the Merger, among other things, the assets of Host will
become assets of Host REIT without further action, and Host REIT will become
liable for all the debts and obligations of Host. As soon as practicable
following the Merger, Host REIT will complete any other transactions
comprising the REIT Conversion that have not already been completed. See "The
REIT Conversion."
Following the Merger, each person who was a director of Host will continue
as a director of Host REIT and certain of the officers of Host will remain
officers of Host REIT (others will have become officers of Crestline in
connection with the distribution of Crestline shares as part of the Initial
E&P Distribution). Certain information about each person who currently is a
member of the Board of Directors and an executive officer of Host is set forth
herein under the caption "Management--Directors and Executive Officers of Host
REIT." In addition, upon consummation of the Merger, Host REIT and its
stockholders will be governed by the MGCL and by the Host REIT Charter and
Host REIT Bylaws, copies of which are attached as Exhibits B and C,
respectively, to the Agreement, which is attached to this Proxy
Statement/Prospectus as Appendix A. See "--Comparison of Rights of
Stockholders of Host and Host REIT."
PRIMARILY TO SATISFY CERTAIN REQUIREMENTS UNDER THE CODE THAT ARE APPLICABLE
TO REITS IN GENERAL, THE OWNERSHIP LIMIT WILL PROVIDE THAT NO PERSON OR
PERSONS ACTING AS A GROUP MAY OWN, OR BE DEEMED TO OWN BY VIRTUE OF THE
ATTRIBUTION PROVISIONS OF THE CODE, MORE THAN (I) 9.8% OF THE LESSER OF THE
NUMBER OR VALUE OF SHARES OF HOST REIT COMMON STOCK OUTSTANDING OR (II) 9.8%
OF THE LESSER OF THE NUMBER OR VALUE OF
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THE ISSUED AND OUTSTANDING SHARES OF ANY CLASS OR SERIES OF HOST REIT
PREFERRED STOCK, SUBJECT TO WAIVER OR MODIFICATION BY HOST REIT IN CERTAIN
LIMITED CIRCUMSTANCES AND SUBJECT TO (A) AN EXCEPTION FOR A HOLDER OF SHARES
OF HOST REIT COMMON STOCK SOLELY BY REASON OF THE MERGER IN EXCESS OF THE
OWNERSHIP LIMIT SO LONG AS SUCH HOLDER WOULD NOT OWN, DIRECTLY OR BY
ATTRIBUTION UNDER THE CODE, MORE THAN 9.9% BY VALUE OF THE OUTSTANDING CAPITAL
STOCK OF HOST REIT AS OF THE SPECIAL MERGER OWNERSHIP LIMIT EFFECTIVE TIME,
AND (B) A LIMITATION ON THE APPLICATION OF THE "GROUP" LIMITATION (BUT NO
OTHER ELEMENT OF THE OWNERSHIP LIMIT) TO ANY "GROUP" THAT OTHERWISE WOULD
EXCEED THE OWNERSHIP LIMIT AT THE EFFECTIVE TIME SOLELY BY REASON OF ITS
STATUS AS A "GROUP." THE OWNERSHIP LIMIT WILL BECOME APPLICABLE TO ALL HOST
REIT STOCKHOLDERS AS OF THE EFFECTIVE TIME. ANY SHARES OF HOST REIT COMMON
STOCK HELD AT THE EFFECTIVE TIME AND NOT SUBSEQUENTLY TRANSFERRED PRIOR TO THE
SPECIAL MERGER OWNERSHIP LIMIT EFFECTIVE TIME, OR ACQUIRED OR OTHERWISE HELD
AT ANY TIME AFTER THE EFFECTIVE TIME IN VIOLATION OF THE OWNERSHIP LIMIT WILL
BE TRANSFERRED AUTOMATICALLY TO A TRUST FOR THE BENEFIT OF A DESIGNATED
CHARITABLE BENEFICIARY, AND THE PERSON WHO ACQUIRED (OR HELD) SUCH EXCESS
SHARES OF HOST REIT COMMON STOCK WILL NOT BE ENTITLED TO ANY DISTRIBUTIONS
THEREON OR TO VOTE SUCH EXCESS SHARES OF HOST REIT COMMON STOCK. THE HOLDER OF
ANY SUCH EXCESS SHARES OF HOST REIT COMMON STOCK WILL RECEIVE THE LESSER OF
THE VALUE OF SUCH EXCESS SHARES AS OF THE EFFECTIVE TIME OR THE CASH PROCEEDS
FROM THE SALE OF SUCH EXCESS SHARES OF HOST REIT COMMON STOCK BY THE TRUSTEE
OF THE TRUST. AFTER THE EFFECTIVE TIME, ANY PERSON WHO ACQUIRES HOST REIT
COMMON STOCK IN EXCESS OF THE OWNERSHIP LIMIT WILL NOT RECEIVE ANY PROCEEDS
FROM THE SUBSEQUENT SALE THEREOF IN EXCESS OF THE LESSER OF THE PRICE PAID
THEREFOR OR THE AMOUNT REALIZED FROM SUCH SALE. A TRANSFER OF HOST REIT COMMON
STOCK TO A PERSON WHO, AS A RESULT OF THE TRANSFER, VIOLATES THE OWNERSHIP
LIMIT MAY BE VOID UNDER CERTAIN CIRCUMSTANCES, AND, IN ANY EVENT, WOULD DENY
THE TRANSFEREE ANY OF THE ECONOMIC BENEFITS OF OWNING SHARES OF HOST REIT
COMMON STOCK IN EXCESS OF THE OWNERSHIP LIMIT. TO AVOID THE ADVERSE EFFECTS OF
THE OWNERSHIP LIMIT, ANY HOLDER OF HOST COMMON STOCK WHO WOULD OWN SHARES IN
EXCESS OF THE OWNERSHIP LIMIT AT THE EFFECTIVE TIME SHOULD DISPOSE OF ANY SUCH
EXCESS SHARES PRIOR THERETO.
Host anticipates that the Merger will become effective as promptly as
practicable following stockholder approval of the Agreement at the Special
Meeting and satisfaction or waiver of the other conditions to the Merger. The
Agreement provides that the Merger may be abandoned by Host or Host REIT at
any time prior to its effectiveness. Host has no current intention of
abandoning or causing Host REIT to abandon the Merger subsequent to the
Special Meeting if stockholder approval is obtained and the other conditions
to the Merger are satisfied or waived. See "--Conditions to the Merger."
The Board of Directors of Host has approved the Agreement, and the
transactions contemplated thereby, subject to stockholder approval. Assuming
the stockholders of Host approve the Agreement at the Special Meeting and the
other conditions to the Merger are satisfied or waived, the Merger will become
effective upon the later of the time the Articles of Merger are accepted for
filing by the SDAT in accordance with the MGCL and the time the Certificate of
Merger is accepted for filing by the Secretary of State of Delaware in
accordance with the DGCL, or later if so specified in such Articles and
Certificate. It is expected that the listing of Host REIT Common Stock on the
NYSE will occur at or prior to the Effective Time and that the listing of Host
Common Stock on the NYSE will be terminated at the Effective Time.
At the Effective Time, each certificate representing shares of Host Common
Stock will be deemed for all purposes to evidence the same number of shares of
Host REIT Common Stock. As soon as reasonably practicable after the Effective
Time, Host REIT will instruct First Chicago Trust Company of New York, the
transfer agent and registrar for Host REIT Common Stock and the exchange agent
for purposes of the Merger (the "Transfer and Exchange Agent"), to mail a
letter of transmittal and instructions to each holder of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Host Common Stock ("Certificates"), advising the
securityholder of the procedure for surrendering the Certificates in exchange
for certificates representing shares of Host REIT Common Stock. Upon surrender
of the Certificates for cancellation to the Transfer and Exchange Agent,
together with a duly executed letter of transmittal and such other documents
as may be reasonably required by the Transfer and Exchange Agent or the
Agreement, the holder of the Certificates will be entitled to receive in
exchange therefor a certificate evidencing that number of shares of Host
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REIT Common Stock which such holder has the right to receive in respect of the
rights formerly evidenced by such Certificates. CERTIFICATES SHOULD NOT BE
SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED.
Neither Host nor Host REIT is aware of any federal, state or local
regulatory requirements that must be complied with or approvals that must be
obtained prior to consummation of the Merger pursuant to the Agreement, other
than compliance with applicable federal and state securities laws, the filing
and acceptance for record of the Articles of Merger by the SDAT as required
under the MGCL and the filing of a Certificate of Merger as required under the
DGCL and the receipt of various state and local governmental authorizations.
ABSENCE OF DISSENTERS' RIGHTS
Pursuant to Section 262(b)(1) of the DGCL, the stockholders of Host will not
be entitled to appraisal rights as a result of the Merger or other
Restructuring Transactions.
ACCOUNTING TREATMENT
The OP Contribution and the Merger will be accounted for as a transfer or
exchange between enterprises under common control. Therefore, the assets and
liabilities so transferred will be accounted for at historical cost in a
manner similar to that in pooling-of-interests accounting.
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to the satisfaction or waiver of
various conditions, including satisfaction of the following:
. Host Stockholder Approval. The affirmative vote of the holders of Host
Common Stock representing not less than two-thirds (66 2/3%) of the
outstanding shares of Host Common Stock shall have approved the
Agreement, which shall be deemed to be approval of the Merger for
purposes of Section 251 of the DGCL (applicable to mergers), as well as
approval of the OP Contribution for purposes of Section 271 of the DGCL
(applicable to the sale, lease or exchange of all or substantially all of
the assets of a corporation) if such OP Contribution were deemed to
constitute a sale, lease or exchange of all or substantially all of the
assets of Host.
. REIT Qualification. Host's Board of Directors shall have determined, (i)
that the transactions constituting the REIT Conversion which impact Host
REIT's status as a REIT for federal income tax purposes have occurred or
are reasonably likely to occur, and (ii) based upon the advice of
counsel, that Host REIT can elect to be treated as a REIT for federal
income tax purposes effective no later than the first full taxable year
commencing after the REIT Conversion is completed (which might not be
until the year commencing January 1, 2000 if the REIT Conversion is not
completed prior to January 1, 1999).
. NYSE Listing. The Host REIT Common Stock shall have been approved for
listing on the NYSE.
. Governmental and Third-Party Consents. Host shall have received all
governmental and third-party consents to the Restructuring Transactions,
including consents of lenders and Marriott International, except for
consents as would not reasonably be expected to have a material adverse
effect on the business, financial condition or results of operations of
Host REIT, the Operating Partnership and their subsidiaries taken as a
whole.
. No Adverse Tax Legislation. The United States Congress shall not have
enacted legislation, or proposed legislation with a reasonable
possibility of being enacted, that would have the effect of (i)
substantially impairing the ability of Host REIT to qualify as a REIT or
the Operating Partnership to qualify as a partnership, (ii) substantially
increasing the federal tax liabilities of Host REIT resulting from the
REIT Conversion or (iii) substantially reducing the expected benefits to
Host REIT resulting from the REIT Conversion. The determination that this
condition has been satisfied will be made by Host, in its discretion.
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In addition, Host will amend the Host Rights Agreement to provide that each
Host Right issuable pursuant to the Host Rights Agreement will be converted
into a Host REIT Right issuable under the Host REIT Rights Agreement. Host
REIT intends to adopt the Host REIT Rights Agreement prior to the completion
of the Merger and each share of Host REIT Common Stock issued in the Merger
will have a Host REIT Right attached to it. See "Certain Provisions of
Maryland Law and the Host REIT Charter and Bylaws--Stockholder Rights Plan."
COMPARISON OF RIGHTS OF STOCKHOLDERS OF HOST AND HOST REIT
The rights of stockholders of Host are currently governed by the DGCL, the
Host Certificate, the Host Bylaws and the Host Rights Agreement. If the
Agreement is approved by Host's stockholders and the Merger is consummated,
Host REIT will be the surviving entity in the Merger and the rights of the
stockholders of Host REIT will be governed by the MGCL, the Host REIT Charter,
the Host REIT Bylaws and Host REIT's Stockholder Rights Plan. The following
discussion compares certain of the existing rights of stockholders of Host
with those of stockholders of Host REIT.
FORM OF ORGANIZATION AND PURPOSE
Host. Host is a Delaware corporation. Pursuant to the Host Certificate, Host
is authorized to engage in any lawful acts or activities for which
corporations may be organized under the DGCL, including conducting a general
hotel business.
Host REIT. Host REIT is a Maryland corporation and will be the sole general
partner of the Operating Partnership. Host REIT will make an election to be
taxed as a REIT under the Code and intends to maintain its qualification as a
REIT. Host REIT's only significant asset will be its interest in the Operating
Partnership and consequently an indirect investment in the hotels owned by the
Operating Partnership and its subsidiaries.
CAPITALIZATION
Host. The Host Certificate authorizes a total of 601,000,000 shares of stock
consisting of 600,000,000 shares of Host Common Stock, par value $1.00 per
share, and 1,000,000 shares of Host preferred stock without par value ("Host
Preferred Stock"). Of the Host Preferred Stock, 300,000 shares are designated
as Series A Junior Participating Preferred Stock without par value, and 4,000
shares are designated as Series A Cumulative Convertible Preferred Stock
without par value. At November 5, 1998, Host had 205,162,442 shares of Host
Common Stock issued and outstanding and no shares of Host Preferred Stock
issued and outstanding.
Host REIT. The Host REIT Charter provides that the total number of shares of
stock of all classes which Host REIT has authority to issue is 800,000,000
shares of stock, initially consisting of 750,000,000 shares of Host REIT
Common Stock, par value $.01 per share, and 50,000,000 shares of Host REIT
Preferred Stock, par value $.01 per share. The Board of Directors is
authorized, without a vote of stockholders, to classify or reclassify any
unissued shares of stock and to establish the preferences and rights of any
preferred or other class or series of stock to be issued. At November 5, 1998,
100 shares of Host REIT Common Stock were issued and outstanding.
PREEMPTIVE RIGHTS
DGCL. Under the DGCL, stockholders of a corporation have only such
preemptive rights as may be provided in the corporation's certificate of
incorporation.
Host. The Host Certificate does not provide for preemptive rights.
MGCL. Under the MGCL, stockholders of a Maryland corporation have only such
preemptive rights as may be provided in the Maryland corporation's charter.
Host REIT. The Host REIT Charter does not provide for preemptive rights.
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RESTRICTIONS ON OWNERSHIP AND TRANSFER OF STOCK
DGCL. Under the DGCL, a written restriction on the transfer of a security,
if permitted by the DGCL and noted conspicuously on the certificate
representing the security or, in the case of uncertificated shares, contained
in the notice required to be sent to the security holder pursuant to the DGCL,
may be enforced against the holder or any successor or transferee of the
holder. A restriction on the transfer of securities of a corporation may be
imposed either by the certificate of incorporation or by the by-laws or by an
agreement among any number of security holders or among such holders and the
corporation. No restriction so imposed is binding with respect to securities
issued prior to adoption of the restriction unless the holders of the
securities are parties to an agreement or voted in favor of the restriction. A
restriction on the transfer of securities of a corporation is permitted under
the DGCL if, among other things, it prohibits the transfer of the restricted
securities to designated persons or classes of persons, and such designation
is not manifestly unreasonable. Any other lawful restriction on the transfer
of securities also is permitted under the DGCL. The DGCL expressly provides
that any restriction on the transfer of shares imposed for the purpose of
maintaining a tax advantage to the corporation is conclusively presumed to be
for a reasonable purpose.
Host. Neither the Host Certificate nor the Host Bylaws provides for
restrictions on the transfer of Host securities.
MGCL. Under the MGCL, a Maryland corporation may impose a restriction on the
transfer of its stock in the corporation's charter, articles of incorporation
or bylaws. If a Maryland corporation which issues stock imposes a restriction
on its transferability, the stock certificate must (i) contain a full
statement of the restriction, or (ii) state that the corporation will furnish
information about the restriction to the stockholder on request and without
charge. The MGCL expressly authorizes the charter of a Maryland corporation to
provide for restrictions on transferability designed to permit a corporation
to qualify as a REIT under the Code or for any other purpose.
Host REIT. The Ownership Limit under the Host REIT Charter, subject to
certain exceptions, provides that no person or persons acting as a group may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than (i) 9.8% of the lesser of the number or value of shares of Host REIT
Common Stock outstanding or (ii) 9.8% of the lesser of the number or value of
the issued and outstanding preferred or other stock of any class or series of
Host REIT (subject to a limited exception for a holder of shares of Host REIT
Common Stock solely by reason of the Merger in excess of the Ownership Limit
so long as the holder thereof would not own, directly or by attribution under
the Code, more than 9.9% in value of the outstanding shares of capital stock
of Host REIT as of the Special Merger Ownership Limit Effective Time, and to a
limitation on the application of the "group" limitation). The Host REIT
Charter further prohibits (a) any person from actually or constructively
owning shares of the capital stock of Host REIT that would result in Host REIT
being "closely held" under Section 856(h) of the Code or otherwise cause Host
REIT to fail to qualify as a REIT and (b) any person from transferring shares
of Host REIT Common Stock or Host REIT Preferred Stock if such transfer would
result in all classes and series of the capital stock of Host REIT being owned
by fewer than 100 persons. See "Description of Host REIT Capital Stock--
Restrictions on Ownership and Transfer."
AMENDMENT OF HOST CERTIFICATE/HOST REIT CHARTER
DGCL. Under the DGCL, an amendment to a corporation's certificate of
incorporation generally requires the approval of the board of directors and
the approval of a majority of the outstanding stock entitled to vote thereon
and a majority of the outstanding stock of each class entitled to vote
thereon. Under the DGCL, the holders of the outstanding shares of a class are
entitled to vote as a separate class on a proposed amendment that would
increase or decrease the aggregate number of authorized shares of such class,
increase or decrease the par value of the shares of such class or alter or
change the powers, preferences or special rights of the shares of such class
so as to affect them adversely. If any proposed amendment would alter or
change the powers, preferences or special rights of one or more series of any
class so as to affect them adversely, but would not so affect the entire
class, then only the shares of the series so affected by the amendment will be
considered a separate class for purposes of voting by classes.
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Host. The Host Certificate provides that, unless otherwise specified by the
Host Certificate, Host reserves the right to amend, alter, change or repeal
any provision contained in the Host Certificate in the manner prescribed by
the DGCL.
The Host Certificate provides further that the affirmative vote of at least
66 2/3% of the voting power of all the shares of the corporation entitled to
vote generally in the election of directors ("Voting Stock") is required to
alter, amend or repeal, or to adopt any provisions inconsistent with certain
provisions in the Host Certificate relating to, among other things: the number
and election of Host Directors, the removal of Host Directors, vacancies on
the Host Board, the voting requirements for specified business combinations,
stockholder action by written consent, special stockholder meetings, the
amendment of the Host Bylaws, and the voting requirements for certain
"interested stockholder" transactions. See "--Number and Election of
Directors," "--Removal of Directors," "--Vacancies on the Board of Directors,"
"--Changes in Control Pursuant to Delaware/Maryland Law," "--Transactions
Involving Directors or Officers," "--Stockholder Action by Written Consent,"
"--Special Stockholder Meetings," and "--Amendment of Bylaws."
MGCL. Under the MGCL, in order to amend the charter, the board of directors
first must adopt a resolution setting forth the proposed amendment and
declaring its advisability and direct that the proposed amendment be submitted
to stockholders for their consideration either at an annual or special meeting
of stockholders. Thereafter, the proposed amendment must be approved by
stockholders by the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter, unless a greater or lesser proportion of votes (but
not less than a majority of all votes entitled to be cast) is specified in the
charter.
Host REIT. The provisions contained in the Host REIT Charter relating to
restrictions on transferability of Host REIT Common Stock, preemptive rights,
the classified Board and fixing the size of the Board within the range set
forth in the Host REIT Charter, as well as the provisions relating to removal
of directors, the filling of Board vacancies, liability and indemnification of
directors and officers, the calling of special stockholder meetings, the
authority of the Board of Directors to issue stock, amendment of the Host REIT
Charter and the exclusive authority of the Board to amend the Bylaws may be
amended only by a resolution adopted by the Board of Directors and approved at
an annual or special meeting of the stockholders by the affirmative vote of
the holders of not less than two-thirds of the votes entitled to be cast on
the matter. Other amendments to the Host REIT Charter generally may be
effected by requisite action of the Board of Directors and approval by
stockholders by the affirmative vote of not less than a majority of the votes
entitled to be cast on the matter.
AMENDMENT OF BYLAWS
DGCL. Under the DGCL, the adoption of, amendment to, or repeal of, a
corporation's bylaws requires the approval of the stockholders, unless the
certificate of incorporation confers the power to amend the bylaws upon the
board of directors. Even if the power to adopt, amend or repeal the bylaws is
conferred upon the board of directors, the stockholders may not be divested of
the power to adopt, amend or repeal the bylaws.
Host. Subject to the exceptions described below, the Host Certificate
provides that the Host Board of Directors is authorized to make, alter, amend
and repeal the Host Bylaws (except insofar as the Host Bylaws adopted by the
shareholders shall otherwise provide). Any bylaws made by the Board of
Directors may be altered, amended or repealed by the directors or by the
stockholders. The Host Bylaws provide that, subject to the exceptions
described below, the Host Bylaws may be altered, amended or repealed (a) by a
majority vote of the shares represented and entitled to vote at any regular
meeting of the stockholders (or at any special meeting called for that
purpose), or (b) subject to Delaware law, by a majority vote of those
directors present at any meeting at which a quorum of the Board of Directors
is present.
The Host Certificate and/or the Host Bylaws provides that certain provisions
in the Host Bylaws may not be altered, amended or repealed, and no provision
inconsistent therewith adopted, without the affirmative vote of the holders of
at least 66 2/3% of the Voting Stock, including provisions relating to, among
other things: the number and election of Host directors; vacancies on the
Board of Directors and the removal of directors from
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the Host Board; director nominations; notice to directors and stockholders;
bylaw amendments; and the prohibition on stockholder action by written
consent. See "--Number and Election of Directors," "--Vacancies on the Board
of Directors," "--Removal of Directors" and "--Stockholder Action by Written
Consent."
MGCL. Under the MGCL, the adoption of, an amendment to, or the repeal of, a
Maryland corporation's bylaws requires the approval of the stockholders,
unless the charter or bylaws confer the power to amend the bylaws upon the
board of directors.
Host REIT. As permitted under the MGCL, the Host REIT Charter and Bylaws
provide that directors have the exclusive right to adopt, amend or repeal the
Host REIT Bylaws.
STOCKHOLDER VOTING RIGHTS GENERALLY
DGCL. Under the DGCL, unless otherwise provided in the certificate of
incorporation and subject to certain provisions of the DGCL, each stockholder
is entitled to one vote for each share of capital stock held by such
stockholder. Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy, but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. The DGCL further provides that in all
matters other than the election of directors, the affirmative vote of the
majority of shares present in person or represented by proxy at a duly held
meeting at which a quorum is present and entitled to vote on the subject
matter is deemed to be the act of the stockholders, unless the DGCL, the
certificate of incorporation or the bylaws specify a different voting
requirement. Where a separate vote by a class or classes is required, a
majority of the outstanding shares of such class or classes, present in person
or represented by proxy, shall constitute a quorum entitled to take action
with respect to that vote on that matter and the affirmative vote of the
majority of shares of such class or classes present in person or represented
by proxy at the meeting shall be the act of such class.
Host. The Host Bylaws provide that in all matters, when a quorum is present
at any meeting, the vote of the holders of a majority of the stock having
voting power present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one upon which by
express provision of the statutes or of the Host Certificate, a different vote
is required in which case such express provision shall govern and control the
decision of such question. The Host Bylaws also provide that each stockholder
shall at every meeting of the stockholders be entitled to one vote in person
or by proxy for each share of the capital stock having voting power held by
such stockholder, but no proxy shall be voted on after three years from its
date, unless the proxy provides for a longer period. Each share of Host Common
Stock has one vote and Host's Certificate of Incorporation permits the Board
of Directors to classify and issue shares of capital stock in one or more
series having voting power which may differ from that of the Common Stock.
MGCL. Under the MGCL, unless the charter provides for a greater or lesser
number of votes per share or limits or denies voting rights, each outstanding
share of stock, regardless of class, is entitled to one vote on each matter
submitted to a vote at a meeting of stockholders. A stockholder may vote the
stock the stockholder owns either in person or by proxy, which proxy is not
valid more than eleven months after its date, unless such proxy provides
otherwise. Unless the MGCL or charter specify a different voting requirement,
a majority of all the votes cast at a duly held meeting at which a quorum is
present and entitled to vote on the subject matter is deemed to be the act of
the stockholders. Additionally, unless the MGCL or charter provide otherwise,
if two or more classes of stock are entitled to vote separately on any matter
for which the MGCL requires approval by two-thirds of all the votes entitled
to be cast, the matter must be approved by two-thirds of all the votes of each
class.
Host REIT. Each share of Host REIT Common Stock will have one vote and Host
REIT's Charter permits the Board of Directors to classify and issue shares of
capital stock in one or more classes or series having voting power which may
differ from that of the shares of Host REIT Common Stock. The Host REIT Bylaws
provide that, except with respect to the election of directors, and unless
otherwise provided in the Host REIT Charter, a
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majority of the votes cast at a meeting of stockholders duly called and at
which a quorum is present is sufficient to approve any matter properly before
the meeting, unless more than a majority is required by statute or the Host
REIT Charter. Each stockholder is entitled to cast the votes owned of record
by him either in person or by proxy, but no proxy shall be valid after 11
months from the date of its execution, unless otherwise provided in the proxy.
STOCKHOLDER ACTION BY WRITTEN CONSENT
DGCL. Under the DGCL, unless otherwise provided in a corporation's
certificate of incorporation, any action that may be taken at any annual or
special meeting of stockholders may be taken without a meeting, without prior
notice and without a vote, if a consent (or consents) in writing, setting
forth the action so taken, shall be signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the corporation.
Host. The Host Certificate and Host Bylaws provide that any action required
or permitted to be taken by the stockholders of the corporation must be
effected at a duly called annual or special meeting of such holders and may
not be effected by any consent in writing by such holders.
MGCL. Under the MGCL, any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting if the following are
filed with the records of stockholder meetings: (i) an unanimous written
consent which sets forth the action and is signed by each stockholder entitled
to vote on the matter; and (ii) a written waiver of any right to dissent
signed by each stockholder entitled to notice of the meeting but not entitled
to vote at it.
Host REIT. Pursuant to the MGCL and Host REIT Bylaws, subject to the rights
of the holders of any class or series of stock (other than Host REIT Common
Stock) to elect additional directors under specific circumstances, any action
required or permitted to be taken by the stockholders must be effected at a
duly called annual or special meeting of stockholders and may not be effected
by any consent in writing by stockholders, unless such consent is unanimous.
SPECIAL STOCKHOLDER MEETINGS
DGCL. Under the DGCL, special meetings of the stockholders may be called by
the board of directors or by such person or persons as may be authorized by
the certificate of incorporation or by the bylaws.
Host. The Host Certificate and Host Bylaws provide that, subject to the
rights of holders of any series of preferred stock, special meetings of
stockholders of the corporation may be called only by the Board of Directors
pursuant to a resolution approved by a majority of the entire Board of
Directors. Stockholders are not permitted to call a special meeting or to
require that the Host Board call a special meeting of stockholders. Moreover,
the business permitted to be conducted at any special meeting of stockholders
is limited to the business brought before the meeting by or at the direction
of the Host Board.
MGCL. Under the MGCL, a special meeting of a Maryland corporation's
stockholders may be called by (i) the president, (ii) the board of directors,
or (iii) any other person specified in the charter or the by-laws. The MGCL
further provides that the secretary of a Maryland corporation shall call a
special meeting of the stockholders on the written request of stockholders
entitled to cast at least 25% of all the votes entitled to be cast at the
meeting, unless a Maryland corporation includes in its charter or bylaws a
provision that requires the written request of stockholders entitled to cast a
greater or lesser percentage of all votes entitled to be cast at the meeting,
except that in no event shall the percentage provided for in the charter or
bylaws be greater than a majority of all the votes entitled to be cast at the
meeting. Notwithstanding the foregoing, the MGCL provides that unless
requested by stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted on at
any special meeting of the stockholders held during the preceding 12 months.
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Host REIT. The Host REIT Charter provides that special meetings of the
stockholders may be called by the President, the Board of Directors of Host
REIT or any other person specified in the Host REIT Bylaws. The Host REIT
Charter further provides that the Secretary of Host REIT also is required to
call a special meeting of the stockholders on the written request of
stockholders entitled to cast a majority of all the votes entitled to be cast
at the meeting. The Host REIT Bylaws contain similar provisions to the Host
REIT Charter regarding the calling of special stockholder meetings. In
addition, the Host REIT Bylaws provide that special stockholder meetings may
be called by the holders of any class or series of stock having a preference
over the Host REIT Common Stock as to dividends or upon liquidation in the
manner (if any) specified in articles supplementary filed as part of the Host
REIT Charter.
NUMBER AND ELECTION OF DIRECTORS
DGCL. Under the DGCL, the minimum number of directors is one. The DGCL
provides that the number of directors shall be fixed by, or in the manner
provided in, the bylaws, unless the certificate of incorporation fixes the
number of directors, in which case a change in the number of directors may be
made only upon amendment of the certificate of incorporation. In addition, the
DGCL permits, but does not require, a classified board of directors, with
staggered terms under which one-half or one-third of the directors are elected
for terms of two or three years, respectively. The DGCL provides that
directors shall be elected by a plurality of the votes of the shares present
in person or represented by proxy at a stockholder meeting and entitled to
vote on the election of directors. The DGCL further provides that the vote of
the majority of the directors present at a meeting at which a quorum is
present shall be the act of the board of directors unless the certificate of
incorporation or the bylaws shall require a vote of greater number.
Host. The Host Certificate provides that the number of directors shall be
fixed from time to time by or pursuant to the Host Bylaws. The Host Bylaws
provide that the Host Board shall be fixed from time to time by the Board of
Directors but shall not be less than three. The Host Certificate and Host
Bylaws provide that the Board of Directors is divided into three classes, each
consisting of approximately one-third of the total number of directors. The
term of office for each director is three years and such terms expire in
successive years at the time of the annual meeting of stockholders. The
current number of directors is eight. There are no cumulative voting rights in
the election of directors under the Host Certificate.
MGCL. Under the MGCL, the minimum number of directors is three. The MGCL
provides that the number of directors shall be provided by the charter until
changed by the by-laws. The bylaws may both (i) alter the number of directors
set by the charter, and (ii) authorize a majority of the entire board of
directors to alter within specified limits the number of directors set by the
charter or the bylaws, but the action may not affect the tenure of office of
any director. In addition, the MGCL permits, but does not require, a
classified board of directors. If the directors are divided into classes, the
term of office may be provided in the by-laws, except that (i) the term of
office of a director may not be longer than five years or, except in the case
of an initial or substitute director, shorter than the period between annual
meetings, and (ii) the term of office of at least one class must expire each
year. Each share of stock may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted. Unless the charter or bylaws provide otherwise, a plurality of all the
votes cast at a meeting at which a quorum is present is sufficient to elect a
director.
Host REIT. The Host REIT Charter will provide that, effective upon
completion of the Merger, the Board of Directors will consist of eight members
and may thereafter be increased or decreased in accordance with the Host REIT
Bylaws, provided that the total number of directors may not be fewer than
three nor more than thirteen. Pursuant to the Host REIT Bylaws, the number of
directors shall be fixed by the Board of Directors within the limits set forth
in the Host REIT Charter. Further, the Host REIT Charter will provide that the
Board of Directors, other than those who may be elected by the holders of any
class or series of stock having a preference over the Host REIT Common Stock
as to dividends or upon liquidation, will be divided into three classes of
directors, with each class to consist as nearly as possible of an equal number
of directors. The term of office of the first class of directors will expire
at the 1999 annual meeting of stockholders; the term of the second class of
directors will expire at the 2000 annual meeting of stockholders; and the term
of the third class of
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directors will expire at the 2001 annual meeting of stockholders. The Host
REIT Charter further provides that in the event of any increase or decrease in
the number of directors, other than resulting from the rights of the holders
of any class or series of stock having a preference over the Host REIT Common
Stock as to dividends or upon liquidation to elect additional directors
pursuant to the specified provisions of the Host REIT Charter, the newly
created or eliminated directorship resulting from such increase or decrease
shall be apportioned by the Board of Directors among the three classes of
directors so as to maintain such classes as nearly equal in number as
possible. At each annual meeting of stockholders, the class of directors to be
elected at such meeting will be elected for a three-year term, and the
directors in the other two classes will continue in office. Because
stockholders of Host REIT will have no right to cumulative voting for the
election of directors, at each annual meeting of stockholders the holders of a
majority of the outstanding shares of Host REIT Common Stock will be able to
elect all of the successors to the class of directors whose term expires at
that meeting.
REMOVAL OF DIRECTORS
DGCL. The DGCL provides that a director of a corporation may be removed with
or without cause by the holders of a majority of shares then entitled to vote
at an election of directors, provided, that, when a corporation has a
classified board of directors, a director may be removed only for cause,
unless the certificate of incorporation provides otherwise.
Host. The Host Certificate and Host Bylaws provide that directors may be
removed from office, with or without cause, only by the affirmative vote of
the holders of at least 66 2/3% of the Voting Stock.
MGCL. Under the MGCL, unless the charter provides otherwise, the
stockholders of a Maryland corporation may remove any director, with or
without cause, by the affirmative vote of a majority of all the votes entitled
to be cast for the election of directors, except that, unless the charter
provides otherwise, (i) if the stockholders of any class or series are
entitled separately to elect one or more directors, a director elected by a
class or series may not be removed without cause except by the affirmative
vote of a majority of all the votes of that class or series, (ii) if a
corporation has cumulative voting for the election of directors and less than
the entire board is to be removed, a director may not be removed without cause
if the votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire board of directors, or, if
there is more than one class of directors, at an election of the class of
directors of which he is a member, and (iii) if the directors have been
divided into classes, a director may not be removed without cause.
Host REIT. The Host REIT Charter and Host REIT Bylaws will provide that,
except for any directors who may be elected by holders of a class or series of
shares other than Host REIT Common Stock, directors may be removed only for
cause and only by the affirmative vote of stockholders holding at least two-
thirds of all the votes entitled to be cast for the election of directors.
VACANCIES ON THE BOARD OF DIRECTORS
DGCL. Under the DGCL, vacancies and newly created directorships resulting
from any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, unless
otherwise provided in the certificate of incorporation or the bylaws. However,
if the certificate of incorporation directs that a particular class is to
elect such director, such vacancy may be filled only by the other directors
elected by such class. If, at the time of filling any vacancy or newly created
directorship, the directors then in office constitute less than a majority of
the whole board as constituted immediately prior to such increase, the
Delaware Court of Chancery may, upon application of stockholders holding at
least ten percent of the total number of shares outstanding having the right
to vote for such directors, order an election to be held to fill any such
vacancies or newly created directorships or to replace the directors chosen by
the directors then in office. Under the DGCL, unless otherwise provided in the
certificate of incorporation or bylaws, when one or more directors resigns
from the board, effective at a future date, a majority of the directors then
in office, including those who have so resigned, shall have the power to fill
such vacancy or vacancies, the vote thereon to take effect when such
resignation or
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resignations shall become effective, and each director so chosen shall hold
office as provided in the DGCL in the filling of other vacancies.
Host. The Host Certificate provides that, subject to any rights of the
holders of preferred stock, newly created directorships resulting from any
increase in the number of directors and any vacancies on the board of
directors resulting from death, resignation, disqualification, removal or
other cause shall be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the
board of directors. Any director elected in this manner shall hold office for
the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified. No decrease in the number of
directors may shorten the term of any incumbent director.
MGCL. Under the MGCL, the stockholders may fill vacancies on the board of
directors caused by the removal of a director, except that if the stockholders
of any class or series are entitled separately to elect one or more directors,
the stockholders of that class or series may elect a successor to fill a
vacancy which results from the removal of a director elected by that class or
series. The MGCL further provides that unless the charter or bylaws provide
otherwise, a majority of the remaining directors, whether or not sufficient to
constitute a quorum, may fill a vacancy on the board of directors which
results from any cause except that (i) a vacancy caused by an increase in the
number of directors may be filled by a majority of the entire board, and (ii)
if the stockholders of any class or series are entitled separately to elect
one or more directors, a majority of the remaining directors elected by that
class or series or the sole remaining director elected by that class or series
may fill any vacancy among the number of directors elected by that class or
series.
Under the MGCL, a director elected by the board of directors to fill a
vacancy serves until the next annual meeting of stockholders and until his
successor is elected and qualifies. A director elected by the stockholders to
fill a vacancy which results from the removal of a director serves for the
balance of the term of the removed director.
Host REIT. The Host REIT Charter and Host REIT Bylaws provide that except in
the case of a vacancy on the Board of Directors among the directors elected by
a class or series of stock other than Host REIT Common Stock, any vacancy on
the Board of Directors may be filled by the affirmative vote of a majority of
the remaining directors (except that a vacancy which results from an increase
in the number of directors may be filled by a majority of the entire Board of
Directors). In addition, the Host REIT Charter provides that in the case of a
vacancy resulting from the removal of a director, by the stockholders by the
affirmative vote of two-thirds of the votes entitled to be cast for the
election of directors. The Host REIT Charter further provides that any vacancy
on the Board of Directors among the directors elected by a class or series of
stock other than Host REIT Common Stock may be filled by a majority of the
remaining directors elected by that class or series, or by the stockholders of
that class or series unless otherwise provided in the articles supplementary
for that class or series.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND OF NEW BUSINESS PROPOSALS
Host. The Host Bylaws provide that (i) nominations for persons for election
to the Board of Directors may be made (A) with respect to an annual meeting of
the stockholders, by the Board of Directors or a proxy committee appointed by
the Board of Directors, or by any stockholder entitled to vote in the election
of directors if written notice of such stockholder's intent to make such
nomination or nominations is given to the Secretary of Host not later than
ninety days in advance of the date established by the Host Bylaws for the
holding of such meeting, or (B) with respect to special meetings of the
stockholders, by the Board of Directors or a proxy committee appointed by the
Board of Directors, or by any stockholder entitled to vote in the election of
directors if written notice of such stockholder's intent to make such
nomination or nominations is given to the Secretary of Host not later than the
close of business on the seventh day following the date on which notice of
such meeting is first given to stockholders, and (ii) stockholder proposals
may be made by any stockholder entitled to vote in the election of directors
and who satisfies the requirements of the proxy rules under the Exchange Act
by notice in writing, such notice to be received by the Secretary of Host not
less than (X) with respect to an annual meeting
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of the stockholders, one hundred and twenty days in advance of the date
established for the holding of such meeting, or (Y) with respect to special
meeting of the stockholders, the close of business on the seventh day
following the date on which notice of such meeting is first given to
stockholders.
Host REIT. The Host REIT Bylaws provide that (i) with respect to an annual
meeting of stockholders, subject to the rights of holders of any class or
series of stock having a preference over the Host REIT Common Stock as to
dividends or upon liquidation to elect directors under specified
circumstances, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(A) pursuant to Host REIT's notice of meeting, (B) by or at the direction of
the Board of Directors or (C) by a stockholder who was a stockholder of record
both at the time of giving notice provided for in the Host REIT Bylaws and at
the time of the annual meeting, and who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Host REIT
Bylaws and (ii) with respect to special meetings of the stockholders, only the
business specified in Host REIT's notice of meeting may be brought before the
meeting of stockholders and except as otherwise provided for or fixed by or
pursuant to the provisions of the Host REIT Charter relating to the rights of
the holders of any class or series of stock having a preference over the Host
REIT Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, nominations of persons for election to the Board of
Directors may be made only (X) pursuant to Host REIT's notice of the meeting,
(Y) by or at the direction of the Board of Directors or (Z) provided that the
Board of Directors has determined that directors shall be elected at such
meeting, by a stockholder who was a stockholder of record both at the time of
giving notice provided for in the Host REIT Bylaws and at the time of the
special meeting, and who is entitled to vote at the meeting and has complied
with the advance notice provisions set forth in the Host REIT Bylaws. The
advance notice provisions contained in the Host REIT Bylaws generally require
nominations and new business proposals by stockholders to be delivered to the
Secretary of Host REIT not later than the close of business on the 60th day
nor earlier than the close of business on the 90th day before the date on
which Host REIT first mailed its proxy materials for the prior year's annual
meeting of stockholders.
TRANSACTIONS INVOLVING DIRECTORS OR OFFICERS
DGCL. Under the DGCL, no contract or transaction between a corporation and
one or more of its directors or officers, or between a corporation and any
other corporation, partnership, association, or other organization in which
one or more of its directors or officers, are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the board or committee which authorizes the contract or
transaction, or solely because such director's votes are counted for such
purpose, if (i) the material facts as to such director's relationship or
interest and as to the contract or transaction are disclosed or are known to
the board of directors or the committee, and the board or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; (ii) the material facts as to such director's
relationship or interest and as to the contract or transaction are disclosed
or are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair to the corporation
as of the time it is authorized, approved or ratified by the board of
directors, a committee or the stockholders.
A corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer who is a director of the corporation or its
subsidiary, whenever, in the judgment of the directors, such loan, guaranty or
assistance may reasonably be expected to benefit the corporation.
Host. The Host Certificate provides that the corporation may enter into
contracts or transact business with one or more of its officers or directors,
or with any firms of which one or more of its officers or directors is a
member, or may invest its funds in the securities of and may enter into
contracts, or transact business with any corporation or association in which
any one or more of its officers or directors is a stockholder, officer or
director, and in the absence of bad faith, or unfair dealing, such contract or
transaction or investment shall not be
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invalidated or to any extent affected by the fact that any such officer or
officers or any such director or directors has or may have interests therein
which are or might be adverse to the interests of the corporation, provided
that the remaining directors are sufficient in number to ratify and approve
the transaction.
MGCL. Under the MGCL, a contract or transaction between a Maryland
corporation and any of its directors or between a Maryland corporation and any
other corporation, firm, or other entity in which any of its directors is a
director, or has a material financial interest, is not void or voidable solely
for this reason, or solely because the director is present at the meeting of
the board or committee of the board which authorizes, approves, or ratifies
the contract or transaction, or solely because such director's or directors'
votes are counted for such purpose, if (i) the fact of common directorship or
interest is disclosed or known to the board of directors or the committee, and
the board or committee authorizes, approves, or ratifies the contract or
transaction by the affirmative vote of a majority of disinterested directors,
even if the disinterested directors constitute less than a quorum, (ii) the
fact of common directorship or interest is disclosed or known to the
stockholders entitled to vote, and the contract or transaction is authorized,
approved, or ratified by a majority of the votes cast by the stockholders
entitled to vote other than the votes of shares owned of record or
beneficially by the interested corporation, firm or other entity, or (iii) the
contract or transaction is fair and reasonable to the corporation. Common or
interested directors or the stock owned by them or by an interested
corporation, firm, or other entity may be counted in determining the presence
of a quorum at a meeting of the board of directors or a committee of the board
or at a meeting of the stockholders, as the case may be, at which the contract
or transaction is authorized, approved or ratified.
Host REIT. As a Maryland corporation, Host REIT will be subject to the
foregoing provisions with respect to transactions between Host REIT and its
directors. Host REIT's Board of Directors also intends to adopt a policy which
would require that all material contracts and transactions between Host REIT,
the Operating Partnership or any of its subsidiaries, on the one hand, and a
director or executive officer of Host REIT or any entity in which such
director or executive officer is a director or has a material financial
interest, on the other hand, must be approved by the affirmative vote of a
majority of the disinterested directors. Where appropriate in the judgment of
the disinterested directors, the Board of Directors may obtain a fairness
opinion or engage independent counsel to represent the interests of
nonaffiliated security holders, although the Board of Directors will have no
obligation to do so. See "Distribution and Other Policies--Conflicts of
Interest Policies."
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
DGCL. Under the DGCL, directors may be indemnified for liabilities incurred
in connection with specified actions (other than any action brought by or in
the right of the corporation), if they acted in good faith and in a manner
they reasonably believed to be in and not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. The same standard of
conduct is applicable for indemnification in the case of derivative actions
brought by or in the right of the corporation, except that in such cases the
DGCL authorizes indemnification only for expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such cases. Moreover,
the DGCL requires court approval before there can be any such indemnification
where the person seeking indemnification has been found liable to the
corporation in a derivative action. To the extent that a present or former
director or officer has been successful in defense of any action, suit or
proceeding, the DGCL provides for indemnification of such person for expenses
(including attorneys' fees). The DGCL states expressly that the
indemnification provided by or granted pursuant to the DGCL is not deemed
exclusive of any non-statutory indemnification rights existing under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
Host. Host's Certificate of Incorporation and Bylaws provide that every
director, officer and employee of Host shall be indemnified against all
expenses and liabilities, including counsel fees, reasonably incurred by or
imposed upon him by reason of his being or having been a director, officer or
employee of Host. Under Host's Certificate, no director shall be liable to
Host or its shareholders for monetary damages, for breach of fiduciary duty as
a director, except for liability (a) for any breach of the director's duty of
loyalty to the corporation or its
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shareholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (c) under section 174 of
the DGCL (concerning unlawful payment of dividend or unlawful stock purchase
or redemption), or (d) for any transaction from which the directors derived an
improper personal benefit.
MGCL. The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its shareholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) acts committed in bad faith or active and
deliberate dishonesty established by a final judgment as being material to the
cause of action; or (iii) in the case of any criminal proceeding, the director
having reasonable cause to believe that an act or omission was unlawful. The
MGCL further provides that a Maryland corporation may not indemnify for an
adverse judgment in a suit by or in the right of the corporation. The MGCL
expressly states that the indemnification or advancement of expenses
authorized by the MGCL shall not be deemed exclusive of any other rights, by
indemnification or otherwise, to which a director or officer may be entitled
under the charter, the bylaws, a resolution of the stockholders or directors,
an agreement or otherwise.
Host REIT. The Host REIT Charter provides that to the fullest extent
permitted by Maryland statutory or decisional law, as amended or interpreted,
no director or officer of Host REIT shall be personally liable to Host REIT or
its stockholders for money damages. No amendment of the Host REIT Charter or
repeal of its provisions will limit the benefits provided to directors and
officers under this provision with respect to any act or omission which
occurred prior to such amendment or repeal.
The Host REIT Charter and Host REIT Bylaws provide broad indemnification to
directors and officers, whether serving Host REIT, or at its request, any
other entity, to the fullest extent permitted under Maryland law. Host REIT
will indemnify any present or former director and officer, (A) who has been
successful, on the merits or otherwise, in defense of a proceeding to which he
or she was made a party by reason of service in such capacity against
reasonable expenses incurred by such officer or director in connection with
the proceeding, and (B) against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (i) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and (a) was committed in bad faith or (b) was the result of
active and deliberate dishonesty, (ii) the director or officer actually
received an improper personal benefit in money, property or services or (iii)
in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful.
The Bylaws of Host REIT require Host REIT, as a condition to advancing
expenses, to obtain (i) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by Host REIT as authorized by the Bylaws and (ii) a written
statement by or on his behalf to repay the amount paid or reimbursed by Host
REIT if it shall ultimately be determined that the standard of conduct was not
met.
Host REIT also intends to enter into indemnification agreements indemnifying
each of its directors and officers to the fullest extent permitted by Maryland
law and to advance to its directors and officers all related expenses subject
to reimbursement if it is subsequently determined that indemnification is not
permitted. See "--Limitation of Liability and Indemnification of Directors and
Officers" for a description of the limitations on liability of directors and
officers of Host REIT and the provisions for indemnification of directors and
officers provided for under applicable Maryland law and the Host REIT Charter.
DECLARATION OF DIVIDENDS
DGCL. Under the DGCL, a corporation is permitted to declare and pay
dividends out of surplus (as defined in the DGCL) or, if there is no surplus,
out of net profits for the fiscal year in which the dividend is declared
and/or for the preceding fiscal year as long as the amount of capital of the
corporation following the declaration and payment of the dividend is not less
than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets. Dividends may be
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paid in cash, property or shares of a corporation's capital stock. In
addition, the DGCL generally provides that a corporation may redeem or
repurchase its shares only if such redemption or repurchase would not impair
the capital of the corporation.
Host. The Host Bylaws provide that dividends upon the capital stock of Host,
subject to the provisions of the Host Certificate, if any, may be declared by
the Host Board at any regular or special meeting, pursuant to law. Dividends
may be paid in cash, in property, or in shares of the capital stock, subject
to the provisions of the Host Certificate.
MGCL. Under the MGCL, if authorized by its board of directors, a Maryland
corporation may declare and pay dividends subject to any restriction in its
charter unless, after giving effect to the dividend, (i) the corporation would
not be able to pay indebtedness of the corporation as the indebtedness becomes
due in the
usual course of business, or (ii) the corporation's total assets would be less
than the sum of the corporation's total liabilities plus, unless the charter
permits otherwise, the amount that would be needed, if the corporation were to
be dissolved at the time of the distribution, to satisfy the preferential
rights upon dissolution of the stockholders whose preferential rights on
dissolution are superior to those receiving the dividend.
Host REIT. Under the Host REIT Bylaws, dividends upon the shares of stock of
Host REIT may be authorized and declared by the directors, subject to the
provisions of law and the Host REIT Charter. Under the Host REIT Charter,
subject to the provisions of law and any preferences of any class of the
capital stock of Host REIT, classified or reclassified, dividends (including
dividends payable in shares of another class of Host REIT stock) may be paid
on Host REIT Common Stock at such time and in such amounts as the Board of
Directors may deem advisable and the holders of Host REIT Common Stock shall
share ratably in any such dividends, in proportion to the number of shares of
Host REIT Common Stock held by them respectively, on a share for share basis.
The Host REIT Bylaws provide that dividends and other distributions may be
paid in cash, property, or shares of the Corporation, subject to Maryland law
and the Charter. Host REIT and the Operating Partnership currently intend to
pay regular quarterly distributions to holders of shares of Host REIT Common
Stock and OP Units. For a discussion of Host REIT's distribution policy, see
"Distribution and Other Policies--Distribution Policy."
APPRAISAL RIGHTS
DGCL. Under the DGCL, the right to receive the fair value of dissenting
shares is made available to stockholders of a constituent corporation in a
merger or consolidation effected under the DGCL. Dissenters' rights of
appraisal are not available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record date
fixed to determine stockholders entitled to receive notice and vote on such
transaction, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Security Dealers, Inc. or (ii) held of
record by more than 2,000 holders. Further, no appraisal rights are available
for any shares of stock of the constituent corporation surviving a merger if
the merger did not require for its approval the vote of the stockholders of
the surviving corporation as provided by the DGCL.
Notwithstanding the foregoing, appraisal rights under the DGCL are available
for the shares of any class or series of stock of a constituent corporation if
the holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to the DGCL to accept for such stock anything except
(i) shares of stock of the corporation surviving or resulting from such merger
or consolidation, or depository receipts in respect thereof, (ii) shares of
stock of any other corporation, or depository receipts in respect thereof,
which shares of stock (or depository receipts in respect thereof) will be
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., or held of record by more than 2,000
holders, (iii) cash in lieu of fractional shares, or (iv) any combination of
the shares of stock, depository receipts and cash in lieu of such fractional
shares.
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MGCL. Under the MGCL, a stockholder of a Maryland corporation has the right
to demand and receive payment of the fair value of the stockholder's stock
from the corporation if, among other things, the corporation consolidates or
merges with another corporation. However, unless the transaction is governed
by certain provisions specified by the MGCL, a stockholder may not demand the
fair value of his stock and is bound by the terms of the transaction if (i)
the stock is listed on a national securities exchange or is designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc.; (ii) the stock is that of
the successor in a merger, unless (a) the merger alters the contract rights of
the stock as expressly set forth in the charter, and the charter does not
reserve the right to do so, or (b) the stock is to be changed or converted in
whole or in part in the merger into something other than either stock in the
successor or cash, scrip, or other rights or interests arising out of the
provisions for the treatment of fractional shares of stock in the successor;
or (iii) the stock is that of an open-end investment company registered with
the SEC under the Investment Company Act of 1940 and the value placed on the
stock in the transaction is its net asset value.
MERGER, CONSOLIDATION, SHARE EXCHANGE AND TRANSFER OF ALL OR SUBSTANTIALLY
ALL ASSETS
DGCL. Under the DGCL, the principal terms of a merger or consolidation
generally require the approval of the stockholders of each of the constituent
corporations. Unless otherwise required in a corporation's certificate of
incorporation, the DGCL does not require a stockholder vote of the surviving
corporation in a merger if (i) the agreement of merger does not amend in any
respect the certificate of incorporation of such constituent corporation, (ii)
each share of stock of such constituent corporation outstanding immediately
prior to the effective date of the merger is to be an identical outstanding or
treasury share of the surviving corporation after the effective date of the
merger, and (iii) either no shares of common stock of the surviving
corporation and no shares, securities or obligations convertible into such
stock are to be issued or delivered under the plan of merger, or the
authorized unissued shares or the treasury shares of common stock of the
surviving corporation to be issued or delivered under the plan of merger plus
those initially issuable upon conversion of any other shares, securities or
obligations to be issued or delivered under such plan do not exceed 20% of the
shares of common stock of such constituent corporation outstanding immediately
prior to the effective date of the merger.
When a stockholder vote is required under the DGCL to approve a merger or
consolidation, unless the certificate of incorporation provides otherwise, the
affirmative vote of a majority of shares present in person or represented by
proxy for each class of shares entitled to vote on the merger or consolidation
shall be required to approve the merger or consolidation. If multiple classes
of stock are entitled to vote on the merger or consolidation as separate
classes, then a majority of each class entitled to vote to approve the merger
or consolidation, voting separately as a class, shall be required to approve
the merger or consolidation.
Under the DGCL, a corporation may at any meeting of its board of directors
or governing body, sell, lease or exchange all or substantially all of its
property and assets, including its goodwill and its corporate franchises, upon
such terms and conditions and for such consideration, which may consist in
whole or in part of money or other property, including shares of stock in,
and/or other securities of, and other corporation or corporations, as its
board of directors or governing body deems expedient and for the best
interests of the corporation, when and as authorized by a resolution adopted
by the holders of a majority of the outstanding stock of the corporation
entitled to vote thereon.
Host. The Host Certificate provides that the affirmative vote of the holders
of shares representing not less than 66 2/3% of the voting power of the
corporation shall be required for the approval of any proposal for the
corporation to reorganize, merge, or consolidate with any other corporation,
or to sell, lease, or exchange substantially all of its assets or business.
MGCL. The MGCL generally provides that mergers, consolidations, share
exchanges or transfers of assets must first be approved by a majority of the
board of directors and thereafter approved by stockholders by the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter (unless
the charter provides for a greater or lesser stockholder vote but not less
than a majority of the number of votes entitled to be cast on the matter).
However, under the MGCL, certain mergers may be accomplished without a vote of
stockholders. For
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example, no stockholder vote is required for a merger of a subsidiary of a
Maryland corporation into its parent, provided the parent owns at least 90
percent of the subsidiary. In addition, a merger need not be approved by
stockholders of a Maryland successor corporation if the merger does not
reclassify or change the outstanding shares or otherwise amend the charter,
and the number of shares to be issued or delivered in the merger is not more
than 20 percent of the number of its shares of the same class or series
outstanding immediately before the merger becomes effective. A share exchange
need be approved by a Maryland successor only by its board of directors and by
any other action required by its charter. Under the MGCL, a "transfer of
assets" is defined to mean any sale, lease, exchange or other transfer of all
or substantially all of the assets of the corporation but does not include (i)
a transfer of assets by a corporation in the ordinary course of business
actually conducted by it, (ii) a mortgage, pledge or creation of any other
security interest in any or all of the assets of the corporation, whether or
not in the ordinary course of its business, (iii) an exchange of shares of
stock through voluntary action under any agreement with the stockholders, or
(iv) a transfer of assets to one or more persons if all the equity interests
of the person or persons are owned, directly or indirectly, by the
corporation.
Host REIT. Pursuant to the Host REIT Charter, subject to the terms of any
class or series of capital stock at the time outstanding, Host REIT may merge
with or into another entity, consolidate with one or more other entities,
participate in a share exchange or transfer its assets within the meaning of
the MGCL, but any such merger consolidation, share exchange or transfer of
assets must be approved by the Board of Directors in the manner provided in
the MGCL. The Host REIT Charter generally provides for stockholder approval of
such transactions by a two-thirds vote of all votes entitled to be cast
(subject to the above enumerated statutory exceptions to a stockholder vote),
except that any merger of Host REIT with or into a trust organized for the
purpose of changing Host REIT's form of organization from a corporation to a
trust will require the approval of stockholders of Host REIT by the
affirmative vote only of a majority of all the votes entitled to be cast on
the matter, provided that (i) the stockholders of the trust immediately
following the merger are the same as the stockholders of Host REIT immediately
prior to the merger and (ii) the trust's declaration of trust contains
amendment provisions substantially equivalent to those contained in specified
provisions of the Host REIT Bylaws.
CHANGES IN CONTROL PURSUANT TO DELAWARE/MARYLAND LAW
DGCL. Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation will not engage in any business combination
with any "interested stockholder" for a three-year period following the time
that such stockholder becomes an interested stockholder unless (i) prior to
such time the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding for
purposes of determining the number of shares outstanding those shares owned by
persons who are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer), or (iii) at or subsequent to such time the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. Except as specified in Section 203 of
the DGCL, an interested stockholder is defined to include any person that (a)
is the owner of 15% or more of the outstanding voting stock of the
corporation, or (b) is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the 3-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder; and
the affiliates and associates of such person. Section 203(b)(4) exempts from
the restrictions in Section 203 a corporation that does not have a class of
voting stock that is (i) listed on a national securities exchange, (ii)
authorized for quotation on The NASDAQ Stock Market, or (iii) held of record
by more than 2,000 stockholders, unless any of the foregoing results from
action taken, directly or indirectly, by an interested stockholder or from a
transaction in which a person becomes an interested stockholder.
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Host. The Host Certificate provides that in addition to any affirmative vote
required by law or by the Host Certificate, certain Business Combinations (as
defined in the Host Certificate) involving "interested shareholders" (as
defined below) require the affirmative vote of the holders of at least 66 2/3%
of the Voting Stock, voting together as a single class unless the Business
Combination is approved by a majority of the Disinterested Directors (as
defined in the Host Certificate) or certain other conditions are satisfied. An
"interested shareholder" is defined by the Host Certificate as any person
(other than Host or any subsidiary of Host) who or which (i) is the beneficial
owner, directly or indirectly, of more than 25% of the voting power of the
outstanding Voting Stock, (ii) is an affiliate of Host (as defined in the Host
Certificate) and at any time within the two-year period immediately prior to
the date in question was the beneficial owner, directly or indirectly, of 25%
or more of the voting power of the then outstanding Voting Stock, or (iii) is
an assignee of or has otherwise succeeded to any shares of Voting Stock which
were at any time within the two-year period immediately prior to the date in
question beneficially owned by any "interested shareholder," if such
assignment or succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering within the meaning of
the Securities Act.
MGCL. Under the MGCL, certain "business combinations" (including certain
issuances of equity securities) between a Maryland corporation and any
Interested Stockholder or an affiliate of the Interested Stockholder are
prohibited for five years after the most recent date on which the Interested
Stockholder becomes an Interested Stockholder. Thereafter, any such business
combination must be approved by a supermajority (80%) of outstanding voting
shares, and by two-thirds of voting shares other than those held by an
Interested Stockholder unless, among other conditions, the corporation's
common stockholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder. A business combination that is
approved by the board of directors of a Maryland corporation at any time
before an Interested Stockholder first becomes an Interested Stockholder is
not subject to the special voting requirements. Host REIT has not "opted-out"
of the business combination provisions of the MGCL and, accordingly, will be
subject to such provisions although Host REIT may elect to opt-out of these
provisions in the future. The Board of Directors of Host REIT has adopted a
resolution exempting from the operation of the "business combination" statute
the acquisition of shares by Marriott International pursuant to the terms of
the Marriott International Purchase Right as well as any other transactions
involving Host REIT and Marriott International or their respective affiliates
or associates, provided that any such transaction with Marriott International
or its affiliates or associates that is not in the ordinary course of business
must be approved by a majority of the directors of the Company present at a
meeting at which a quorum is present, including a majority of the
disinterested directors, in addition to any vote of stockholders required by
other provisions of the MGCL.
The MGCL further provides that "control shares" acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares
owned by the acquiror, by officers or by directors who are employees of the
corporation. "Control shares" are voting shares which, if aggregated with all
other such shares previously acquired by the acquiror or in respect of which
the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority, (iii) a majority or more of the voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control
shares, subject to certain exceptions. The Bylaws of Host REIT contain an
exemption from the control share acquisition provisions for any shares
acquired by Marriott International pursuant to the Marriott International
Purchase Right, to the extent it is exercisable.
Host REIT. The Host REIT Charter does not contain a Fair Price Provision
similar to the provision in the Host Certificate. Host REIT has not "opted-
out" of the business combination or "control share" acquisition provisions of
the MGCL, and, accordingly will be subject to such provisions. However, as
permitted by the MGCL, Host REIT's Board of Directors may elect to opt out of
these provisions in the future.
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STOCKHOLDER RIGHTS PLAN
Host. Host currently has in effect a stockholder rights plan pursuant to the
Host Rights Agreement and it has preferred stock purchase rights attached to
the Host Common Stock pursuant to such rights plan.
Host REIT. Host REIT intends to adopt the Stockholder Rights Plan to replace
the existing stockholder rights plan of Host. All shares of Host REIT Common
Stock issued by Host REIT between the date of adoption of the Stockholder
Rights Plan and the rights distribution date, or the date, if any, on which
the preferred stock purchase rights are redeemed would have preferred stock
purchase rights attached to them. See "Description of Host REIT Capital
Stock--Certain Provisions of Maryland Law and the Host REIT Charter and Host
REIT Bylaws--Stockholder Rights Plan." The Stockholder Rights Plan is expected
to provide, among other things, that upon the occurrence of certain events,
stockholders will be entitled to purchase from Host REIT a newly created
series of junior preferred stock, subject to Host REIT's Ownership Limit. See
"Description of Host REIT Capital Stock" and "Certain Provisions of Maryland
Law and the Host REIT Charter and Bylaws."
The discussion of the comparative rights of stockholders of Host and
shareholders of Host REIT set forth above is not complete and is subject to
and qualified in its entirety by reference to the DGCL and the MGCL and to the
Host Certificate, Host Bylaws and the Host Rights Agreement and the Host REIT
Charter, Host REIT Bylaws and the Shareholder Rights Plan. Copies of the Host
REIT Charter and Host REIT Bylaws are attached as Exhibits B and C,
respectively, to the Agreement, which is attached to this Proxy
Statement/Prospectus as Appendix A.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) acts committed in bad faith or active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The Host REIT Charter contains such a provision which limits
such liability to the maximum extent permitted by Maryland law.
The Host REIT Charter authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (i) any
present or former director or officer or (ii) any individual who, while a
director of Host REIT and at the request of Host REIT, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise from and against any
claim or liability to which such person may become subject or which such
person may incur by reason of his or her status as a present or former
Director or officer of Host REIT. The Host REIT Bylaws obligate it, to the
maximum extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer who is made party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director or officer of Host REIT and at the request of Host REIT, serves or
has served another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, trustee, officer or partner of such corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise and who is made a party to the proceeding by reason of his
service in that capacity, against any claim or liability to which he may
become subject by reason of such status. The Host REIT Charter and Host REIT
Bylaws also permit Host REIT to indemnify and advance expenses to any person
who served as a predecessor of Host REIT in any of the capacities described
above and to any employee or agent of Host REIT or a predecessor of Host REIT.
The Host REIT Bylaws require Host REIT to indemnify a director or officer who
has been successful on the merits or otherwise in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity.
The MGCL permits a Maryland corporation to indemnify and advance expenses to
its directors, officers, employees and agents, and permits a corporation to
indemnify its present and former directors and officers,
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among others, against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to the proceeding
and (i) was committed in bad faith or (ii) was the result of active and
deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. However, under the MGCL, a
Maryland corporation may not indemnify a director or officer in a suit by or
in the right of the corporation if such director or officer has been adjudged
to be liable to the corporation. In accordance with the MGCL, the Host REIT
Bylaws require it, as a condition to advancing expenses, to obtain (1) a
written affirmation by the director or officer of his good faith belief that
he has met the standard of conduct necessary for indemnification by Host REIT
as authorized by the Host REIT Bylaws and (2) a written statement by or on his
behalf to repay the amount paid or reimbursed by Host REIT if it shall
ultimately be determined that the standard of conduct was not met.
Host REIT intends to enter into indemnification agreements with each of its
directors and officers. The indemnification agreements will require, among
other things, that Host REIT indemnify its directors and officers to the
fullest extent permitted by law and advance to its directors or officers all
related expenses, subject to reimbursement if it is subsequently determined
that indemnification is not permitted.
The Partnership Agreement also provides for indemnification of Host REIT and
its officers and directors to the same extent that indemnification is provided
to officers and directors of Host REIT in the Host REIT Charter, and limits
the liability of Host REIT and its officers and directors to the Operating
Partnership and its respective partners to the same extent that the liability
of the officers and directors of Host REIT to Host REIT and its stockholders
is limited under the Host REIT Charter. See "Description of the Partnership
Agreement and OP Units--Exculpation and Indemnification of Host REIT."
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, Host REIT has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
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THE REIT CONVERSION
The transactions summarized below, together with the Restructuring
Transactions, collectively constitute the transactions pursuant to which Host
will restructure its business so that it will qualify as a REIT. If the
required corporate (Board and stockholder) and partnership approvals for the
various transactions are obtained and other conditions to the different steps
in the REIT Conversion are satisfied or waived, these transactions are
expected to occur at various times prior to the end of 1998 (or as soon
thereafter as practicable). The Restructuring Transactions are expected to
occur at the final stage of the REIT Conversion, although certain of the
transactions comprising the REIT Conversion (such as the Partnership Mergers,
the Private Partnership Transactions and the Blackstone Acquisition) may occur
after the Restructuring Transactions to the extent they are consummated.
Although a number of the transactions comprising the REIT Conversion are
expected to be consummated immediately prior to, or in certain instances
immediately following, the Merger, the Merger will not be consummated unless
the other conditions to the Merger have been satisfied or waived. In
particular, Host's Board of Directors will have determined, among other
things, that the transactions constituting the REIT Conversion which impact
Host REIT's status as a REIT for federal income tax purposes have occurred or
are reasonably likely to occur, and based on advice of counsel, that Host REIT
can elect to be treated as a REIT for federal income tax purposes effective no
later than the first full taxable year commencing after the REIT Conversion is
completed (which might not be until the year commencing January 1, 2000 if the
REIT Conversion is not completed prior to January 1, 1999). Consistent with
the foregoing, Host intends to pursue the transactions constituting the REIT
Conversion at least through the date of the Special Meeting of Host
stockholders. If the Agreement is approved by Host stockholders at the Special
Meeting, Host intends to continue pursuing those transactions constituting the
REIT Conversion which have not yet been completed, including the Blackstone
Acquisition (which is not expected to be consummated any earlier than December
29, 1998), and, if the Board of Directors has determined that the conditions
to the Merger have been or likely will be satisfied or waived (and, in
particular, that the transactions constituting the REIT Conversion which
impact Host REIT's status as a REIT for federal income tax purposes have
occurred or are reasonably likely to occur), declare the Initial E&P
Distribution and enter into the Leases with the Lessees (which will be
indirect, wholly-owned subsidiaries of Crestline), even though there is no
assurance that the Merger and other transactions comprising the REIT
Conversion might not be delayed or possibly might never be consummated.
Assuming the Agreement is approved by Host stockholders at the Special Meeting
and the Host Board of Directors makes the determination described above, it is
currently contemplated that the Merger would be consummated on or about
December 29, 1998, subject to satisfaction or waiver of the remaining
conditions. If, however, the Agreement is not approved by the Host
stockholders at the Special Meeting or the Host Board of Directors does not
make the requisite determinations, Host will continue to operate as a Delaware
corporation, the REIT Conversion will not be completed at this time and the
Initial E&P Distribution will not be made.
If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the effectiveness of Host REIT's election
could be delayed until January 1, 2000, which would result in Host REIT
continuing to pay substantial corporate-level income taxes in 1999 (which
would reduce Host REIT's estimated cash distributions) and could cause the
Blackstone Acquisition (which is conditioned, among other things, on
consummation of the REIT Conversion by March 31, 1999 and Host REIT qualifying
as a REIT for 1999) not to be consummated. In view of the complexity of the
REIT Conversion, the number of transactions that must occur to complete the
REIT Conversion and the time and expense involved, Host believes that it is
advisable to complete the REIT Conversion, or as many of the transactions
comprising the REIT Conversion as possible, as soon as practicable even if
such completion is after January 1, 1999 (and, thus, a REIT election would not
be effective until January 1, 2000). Moreover, completion of the REIT
Conversion (or a significant number of the transactions comprising the REIT
Conversion) could possibly facilitate another transaction (such as a merger
into another entity) that would enable Host (or its successor) to elect to be
treated as a REIT prior to January 1, 2000. If Host REIT's election to be
taxed as a REIT is not effective on January 1, 1999, Host REIT intends to
operate following the REIT Conversion in a manner that would permit it to
qualify as a REIT at the earliest time practicable, and it might pursue a
merger with another entity or another transaction that would
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permit it to commence a new taxable year and elect REIT status prior to
January 1, 2000, although no assurance can be given that the Company will
enter into or consummate such other transaction or otherwise qualify as a REIT
prior to January 1, 2000. Host REIT in any event would elect to be treated as
a REIT for federal income tax purposes no later than its taxable year
commencing January 1, 2000, assuming it so qualified.
THE INITIAL E&P DISTRIBUTION
In order to qualify as a REIT for federal income tax purposes, among other
things, Host REIT and/or Host, as its predecessor, must have distributed all
of the accumulated E&P of Host to its stockholders in one or more taxable
dividends prior to the end of the first full taxable year for which the REIT
election of Host is effective, which currently is expected to be the taxable
year commencing January 1, 1999 (but which might not be until the year
beginning January 1, 2000).
In an effort to help accomplish the requisite distributions of the
accumulated E&P of Host, Host or Host REIT will make the Initial E&P
Distribution, consisting of one or more taxable distributions, to its
stockholders in connection with the REIT Conversion. Such taxable
distributions would consist of shares of common stock of Crestline and cash or
other consideration in an amount to be determined. Although there is no
assurance as to what form such other consideration comprising the Initial E&P
Distribution will take, it is currently contemplated that it will include the
Special Dividend, payable, at each stockholder's election, in cash or Host
Common Stock (or Host REIT Common Stock if the Merger has occurred). If the
Special Dividend is declared, stockholders of record on the Special Dividend
record date will be given approximately 20 days to decide whether to take
cash, Host Common Stock (or Host REIT Common Stock if the Merger has
occurred), or a combination of cash and stock in payment of the Special
Dividend. It is anticipated that the cash/stock election are expected to be
available on a per-share basis and that, once made, stockholders' elections
will be irrevocable. Stockholders entitled to the Special Dividend who fail to
make a timely election will receive shares of Host Common Stock (or Host REIT
Common Stock if the Merger has occurred), subject to the Ownership Limit, in
payment of the Special Dividend. In any event, cash would be paid in lieu of
fractional shares, and the Special Dividend payment would be made promptly
following expiration of the election period.
The aggregate value of the Crestline common stock and the cash or other
consideration to be distributed to Host stockholders (and the Blackstone
Entities) in connection with the Initial E&P Distribution is currently
estimated to be approximately $525 million to $625 million (approximately
$2.10 to $2.50 per share to the Host stockholders), of which approximately
$200 to $300 million (or approximately $.80 to $1.20 per share) is expected to
be represented by the Special Dividend. The actual amount of the Initial E&P
Distribution will be based in part upon the estimated amount of accumulated
E&P of Host as of the last day of its taxable year ending on or immediately
following completion of the REIT Conversion. To the extent that the Initial
E&P Distribution is not sufficient to eliminate Host's accumulated E&P, Host
REIT will make one or more additional taxable distributions to its
stockholders (in the form of cash or securities) prior to the last day of Host
REIT's first full taxable year as a REIT (currently expected to be December
31, 1999 but which instead might be December 31, 2000) in an amount intended
to be sufficient to eliminate such E&P, and the Operating Partnership will
make corresponding distributions to all holders of OP Units (including Host
REIT) in an amount sufficient to permit Host REIT to make such additional
distributions.
Limited Partners who elect to receive Host REIT Common Stock in exchange for
OP Units in connection with the Partnership Mergers will not receive the
Crestline common stock or any other portion of the Initial E&P Distribution,
which will have been distributed before they become stockholders of Host REIT
(approximately 25 trading days after the effective date of the Partnership
Mergers). However, following receipt of such shares of Host REIT Common Stock,
such Limited Partners would participate as stockholders of Host REIT in other
dividends or distributions by Host REIT to holders of Host REIT Common Stock,
including any additional taxable distributions necessary to eliminate Host's
accumulated E&P to the extent the Initial E&P Distribution is not sufficient
to eliminate such accumulated E&P. The Limited Partners who elect to retain OP
Units also will participate in such additional distributions because
distributions by the Operating Partnership to its partners (including Host
REIT) would be the source of such additional distributions.
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No holder of Host Common Stock will be required to pay any cash or other
consideration to Host or Host REIT for shares of Crestline common stock
received in the Initial E&P Distribution or to surrender or exchange their
Host Common Stock or Host REIT Common Stock in order to receive shares of
Crestline common stock or other cash or securities as part of the Initial E&P
Distribution. See "The REIT Conversion--The Initial E&P Distribution."
In addition, following the Restructuring Transactions, the Blackstone
Entities are entitled to receive a pro rata portion of the same consideration
received by Host REIT's stockholders in connection with the Initial E&P
Distribution, except to the extent the Blackstone Entities elected to receive
additional OP Units in lieu thereof pursuant to the terms of the Blackstone
Acquisition. The payment to the Blackstone Entities of Crestline common stock
shares and other consideration is expected to be approximately $90 to $110
million of the aggregate Initial E&P Distribution of approximately $525 to
$625 million if the REIT Conversion and the Blackstone Acquisition are
consummated. See "Business and Properties--Blackstone Acquisition."
Following the Initial E&P Distribution, Crestline's principal assets will
include the senior living assets of Host, which are expected to consist of 31
senior living communities, a 25% interest in the Swissotel management company
acquired from the Blackstone Entities and the Lessees. Certain REITs have
spun-off public operating companies to conduct certain activities which REITs
are prohibited from conducting and have described such structure as a "paper-
clip" structure. There is no established definition of a "paper-clip"
structure. While Host REIT and Crestline clearly expect to have a mutually
beneficial, long-term relationship, they do not believe that their
relationship should be characterized as a "paper-clip" structure because they
will operate as separate public companies with independent business plans,
there will be no overlap between officers and directors of the two companies
(other than one officer of Host who will be a director but not an officer of
Crestline), there are no rights of first refusal or other similar arrangements
(other than the non-competition arrangements) with respect to future
acquisitions between Host REIT and Crestline and they expect stockholders of
the two companies to diverge over time. Crestline also will be engaged in the
businesses of owning senior living communities and asset management of hotels,
neither of which will be conducted by Host REIT. Crestline further intends to
pursue leasing opportunities for both full-service and limited-service hotels
with majority owners other than Host REIT.
The Host Board believes that the distribution of Crestline common stock to
Host stockholders as part of the Initial E&P Distribution will provide those
Host stockholders who continue to hold Crestline common stock with a separate
identifiable interest in a diversified company that generates revenue from
both its senior living business and its leasing business. Even under
circumstances where the Crestline common stock is distributed to Host
stockholders as part of the Initial E&P Distribution but the Merger or other
transactions comprising the REIT Conversion are delayed or possibly never
consummated, the Host Board believes that having existing leasing arrangements
in place with Crestline could facilitate any subsequent efforts by Host to
qualify as a REIT for federal income tax purposes (including efforts to pursue
a merger with another entity or another transaction that would permit it to
commence a new taxable year and elect REIT status prior to January 1, 2000).
OTHER TRANSACTIONS COMPRISING THE REIT CONVERSION
In addition to the Restructuring Transactions and the Initial E&P
Distribution, the REIT Conversion includes the following additional
transactions:
. Debt Refinancing. In August 1998, Host refinanced $1.55 billion of
outstanding senior notes through offers to purchase such debt securities
for cash and a concurrent solicitation of consents to amend the terms of
the debt securities to facilitate the transactions constituting the REIT
Conversion. Host obtained the funds for this Senior Note Refinancing
primarily from the issuance of new debt securities and the New Credit
Facility. See "Business and Properties--Indebtedness."
. Treatment of Convertible Preferred Securities. In the REIT Conversion,
the Operating Partnership will assume primary liability for repayment of
the $567 million of convertible subordinated debentures of Host
underlying the $550 million of Convertible Preferred Securities. As the
successor to Host, Host REIT also will be liable on the debentures and
the debentures will become convertible into Host REIT
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Common Stock, but the Operating Partnership will have primary
responsibility for payment of the debentures, including all costs of
conversion. Upon conversion by a Convertible Preferred Securities holder,
Host REIT will issue shares of Host REIT Common Stock, which will be
delivered to such holder. Upon the issuance of such shares by Host REIT,
the Operating Partnership will issue to Host REIT a number of OP Units
equal to the number of shares of Host REIT Common Stock issued in exchange
for the debentures. As a result of the distribution of Crestline common
stock and any cash and other consideration to Host or Host REIT
stockholders in connection with the Initial E&P Distribution, the
conversion ratio of the Convertible Preferred Securities will be adjusted
to take into account certain effects of the REIT Conversion. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
. The Partnership Mergers. Immediately following the Effective Date, each
Partnership participating in the Partnership Mergers will merge with a
subsidiary of the Operating Partnership. Such participating Partnerships
will be the surviving entities of the Partnership Mergers and will
continue in existence as indirect subsidiaries of the Operating
Partnership. In the Partnership Mergers, each Limited Partner will
receive a number of OP Units with a deemed value equal to the stated
exchange value of his respective partnership interest. If a Limited
Partner elects to receive Host REIT Common Stock or a Note in exchange
for OP Units in connection with the Partnership Mergers, such Limited
Partner will, upon receipt of his OP Units, tender (or be deemed to
tender) all of such OP Units to Host REIT in exchange for an equal number
of shares of Host REIT Common Stock or to the Operating Partnership in
exchange for a Note with a specified principal amount. The general
partners of the Partnerships, each of which is a wholly-owned, direct or
indirect subsidiary of Host, and other subsidiaries of Host also will
receive OP Units in exchange for their interests in the Partnerships, and
the general partners will continue as wholly-owned direct or indirect
subsidiaries of Host REIT. Any Partnership that does not participate in a
Partnership Merger will continue as a separate partnership with its own
assets and liabilities and with its current Limited Partners. There will
be no change in its investment objectives, policies or restrictions or
the fees or distributions payable to the applicable general partner or
Manager. Each Partnership that does not participate in a Partnership
Merger will remain subject to the terms of its current partnership
agreement. The Operating Partnership would contribute some or all of the
interests in certain of these Partnerships that it receives from Host and
its subsidiaries to a Non-Controlled Subsidiary. In addition, the
Operating Partnership has reserved the right to exclude any Partnership
from participation in the REIT Conversion (even if the requisite
percentage of Limited Partners has voted to approve the Partnership
Merger and each of the other conditions to such Partnership Merger has
been satisfied or waived) if the Operating Partnership determines, in its
sole discretion, that such exclusion is in the best interests of the
Operating Partnership. Any such Partnership that is so excluded shall be
treated as a Partnership that does not participate in a Partnership
Merger, as described above, and its Limited Partners will continue to
hold their respective interests in the Partnerships.
. Restructuring of the Private Partnerships. The Operating Partnership will
acquire the partnership interests from unaffiliated partners of four
Private Partnerships in exchange for OP Units and, accordingly, will own
all of the interests in those Private Partnerships. For the remaining
Private Partnerships, (i) the Operating Partnership will be a partner in
the partnership if the unaffiliated partners consent to a lease of the
partnership's Hotel(s) to a Lessee or (ii) if the requisite consents to
enter into a lease are not obtained, the Operating Partnership may
transfer its interest in such partnership to a Non-Controlled Subsidiary.
The determination of the action to be taken with respect to the Operating
Partnership's interest in these Private Partnerships will be based
primarily upon the character of the income therefrom under the REIT tax
rules.
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The partners in the following Private Partnerships will receive the
estimated number of OP Units set forth below in connection with the REIT
Conversion (assuming a price of $12.50 per OP Unit):
<TABLE>
<CAPTION>
NEGOTIATED VALUE OF NUMBER OF
PARTNERSHIP OP UNITS OP UNITS
- ----------- ------------------- ---------
<S> <C> <C>
HMC BN Limited Partnership..................... $20,600,000 1,648,000
Ivy Street Hotel Limited Partnership........... 4,050,000 324,000
Times Square Marquis Hotel, L.P................ 7,499,000 599,920
HMC/RGI Hartford Limited Partnership........... 10,500,000 840,000
</TABLE>
. The Blackstone Acquisition. Subject to various terms and conditions, the
Operating Partnership expects to acquire from the Blackstone Entities
ownership of, or controlling interests in, the Blackstone Hotels. In
addition, Host REIT will acquire a 25% interest in the Swissotel
management company from the Blackstone Entities, which Host REIT will
transfer to Crestline. If the Blackstone Acquisition is consummated, the
Operating Partnership expects to issue approximately 43.7 million OP
Units (based upon a negotiated value of $20.00 per OP Unit), assume debt
and make cash payments totaling approximately $862 million and distribute
up to 18% of the shares of Crestline common stock and other consideration
to the Blackstone Entities. Fifty percent of the OP Units issued in the
Blackstone Acquisition will become redeemable pursuant to a Unit
Redemption Right on July 1, 1999, an additional 25% will become
redeemable on October 1, 1999 and the balance will become redeemable on
January 1, 2000. Holders of OP Units issued in the Blackstone Acquisition
will have registration rights under a shelf registration statement with
respect to Host REIT Common Stock received in connection with the
exercise of their redemption rights.
In connection with the Blackstone Acquisition, Host agreed to cause a
person designated by Blackstone Real Estate Acquisitions L.L.C.
("Blackstone") to be appointed to serve as a director of Host (or a
director of Host REIT following the Merger) and to continue to include a
person designated by Blackstone in the slate of directors nominated by
the Board of Directors for so long as Blackstone and its affiliates own
at least 5% of the outstanding OP Units. Mr. Schreiber has been appointed
to be the initial Blackstone designee. If the Blackstone Acquisition does
not close, the Blackstone designee will resign.
Host also agreed to certain limitations on sales of the properties
acquired in the Blackstone Acquisition lasting for five years after the
REIT Conversion for 50% of the properties and for an additional five
years for the remaining properties.
Each Blackstone Entity has agreed that, until the earlier of the fifth
anniversary of the closing of the Blackstone Acquisition and the date on
which the Blackstone Entities do not own, in the aggregate, more than 5%
of the outstanding OP Units and Host REIT Common Stock, such Blackstone
Entity will not, and will use its best efforts to cause its affiliates to
not, directly or indirectly (i) subject to certain exceptions, acquire or
agree to acquire beneficial ownership of any securities or partnership
interests of Host REIT, the Operating Partnership or Crestline, if after
giving effect thereto, such Blackstone Entity and its affiliates
(together with the other members of any group (as defined in Section 13d-
1 of the Exchange Act) of which any of them is part) would (A) directly
or indirectly own more than 9.8% of any class of voting securities of
such entity or more than 19.9% of the aggregate value of all outstanding
voting securities of Host REIT and OP Units or (B) violate the ownership
limitations or transfer restrictions set forth in the Host REIT Charter,
the Partnership Agreement of the Operating Partnership or the Articles of
Incorporation of Crestline, (ii) sell, transfer, pledge or otherwise
dispose of any OP Units or any voting securities of Host REIT or
Crestline in violation of such ownership limitations or transfer
restrictions, (iii) participate in any proxy contest in opposition to the
position taken by the directors or general partner, as applicable, of
Host REIT, the Operating Partnership or Crestline, (iv) seek to cause a
disposition (by way of merger, business combination, sale or otherwise)
of a material portion of the assets or securities or partnership
interests, or a change in the composition of the directors or management,
of Host REIT, the Operating Partnership or Crestline or (v) initiate or
propose to the holders of securities or partnership interests, as
applicable, of Host REIT, the Operating Partnership or Crestline, or
otherwise solicit their approval of, any proposal to be voted by such
holders.
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. Contribution of Assets to Non-Controlled Subsidiaries. The Operating
Partnership will organize the Non-Controlled Subsidiaries to hold various
assets (not exceeding, in the aggregate, 20% by value of the assets of
the Operating Partnership) contributed by Host and its subsidiaries to
the Operating Partnership. The direct ownership of most of these assets
by the Operating Partnership could jeopardize Host REIT's status as a
REIT. These assets primarily will consist of partnership or other
interests in hotels which are not leased, certain FF&E used in the Hotels
and certain international hotels in which Host owns interests. In
exchange for the contribution of these assets to the Non-Controlled
Subsidiaries, the Operating Partnership will receive nonvoting common
stock representing 95% of the total economic interests of the Non-
Controlled Subsidiaries. In addition, the Operating Partnership and,
prior to the Partnership Mergers, certain of the Partnerships (assuming
they participate in the Partnership Mergers) will sell to a Non-
Controlled Subsidiary an estimated $180 million in value of personal
property associated with certain Hotels for notes or cash that has been
contributed or loaned to the Non-Controlled Subsidiary by the Operating
Partnership, or a combination thereof. The Operating Partnership could
not lease this personal property to the Lessees without potentially
jeopardizing Host REIT's qualification as a REIT. The Non-Controlled
Subsidiary will lease such personal property to the applicable Lessees.
The Host Employee/Charitable Trust, a Delaware statutory business trust,
and possibly certain other investors, will acquire all of the voting
common stock representing the remaining 5% of the total economic
interests, and 100% of the control, of each Non-Controlled Subsidiary.
The indirect income beneficiaries of the Host Employee/Charitable Trust
will be employees of Host REIT eligible to participate in Host's
Comprehensive Stock Incentive Plan (excluding Directors of Host REIT and
certain other highly compensated employees). Upon termination of the Host
Employee/Charitable Trust, the residual assets, if any, are to be
distributed to a charitable organization designated in its charter.
. Leases of Hotels. The Operating Partnership, its subsidiaries and its
controlled partnerships, including the Partnerships participating in the
Partnership Mergers, will lease virtually all of their Hotels to the
Lessees pursuant to the Leases. See "Business and Properties--The
Leases." The leased Hotels will be operated by the Lessees under their
existing brand names pursuant to their existing long-term Management
Agreements, which will be assigned to the Lessees for the terms of the
applicable Leases but under which the Operating Partnership will remain
obligated. See "Business and Properties--The Management Agreements."
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Following the REIT Conversion, assuming the Full Participation Scenario, the
organizational structure of Host REIT is expected to be as follows:
[FLOW CHART APPEARS HERE]
(1) Represents Limited Partners and others who retain OP Units and do not elect
to receive shares of Host REIT Common Stock or Notes; excludes Host and its
subsidiaries.
(2) Also will include Limited Partners in the Partnership Mergers who elect to
receive shares of Host REIT Common Stock in exchange for the OP Units
received in the Partnership Mergers. Immediately following the
Restructuring Transactions and the distribution by Host or Host REIT of
Crestline common stock to its stockholders and receipt of Crestline common
stock by the Blackstone Entities, the stockholders of Crestline will
consist of the stockholders (other than Limited Partners who elect to
receive Host REIT Common Stock in connection with the Partnership Mergers)
and the Blackstone Entities. The common ownership of the two public
companies, however, will diverge over time.
(3) Percentage ownership in the Operating Partnership assumes no Limited
Partners elect to receive either Host REIT Common Stock or Notes in
connection with the Partnership Mergers and that the price per share of
Host REIT Common Stock is $12.50 for purposes of the Partnership Mergers.
(4) The Operating Partnership will own all or substantially all of the equity
interests in the Partnerships participating in the Partnership Mergers,
certain Private Partnerships and other Host subsidiaries that own Hotels,
both directly and through other direct or indirect, wholly-owned
subsidiaries of the Operating Partnership or Host REIT. Host will
contribute its partial equity interests in the Partnerships that do not
participate in the Partnership Mergers and those Private Partnerships whose
partners have not elected to exchange their interests for OP Units to the
Operating Partnership, and the Operating Partnership will either hold such
partial interests or contribute them to the Non-Controlled Subsidiaries.
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Ownership Interests in the Operating Partnership Following the Restructuring
Transactions and the other transactions comprising the REIT
Conversion. Following the Restructuring Transactions and the other
transactions comprising the REIT Conversion, the Operating Partnership is
expected to be owned as set forth below:
OWNERSHIP OF THE OPERATING PARTNERSHIP
<TABLE>
<CAPTION>
ENTITY PERCENTAGE INTEREST(1)
------ ----------------------
<S> <C>
Host REIT............................................. 74.5%
Limited Partners of the Partnerships.................. 8.4
Private Partnerships.................................. 1.2
Blackstone Entities................................... 15.9
-----
TOTAL............................................... 100.0%
=====
</TABLE>
- --------
(1) Assumes that all Partnerships participate in the Partnership Mergers, that
the Blackstone Acquisition is consummated, that all Limited Partners in
the Partnership Mergers elect to retain OP Units and that the price of an
OP Unit is $12.50 per share for purposes of the Partnership Mergers. The
percentage interest of Host REIT will increase, and the percentage
interest of the Limited Partners will decrease, if Limited Partners elect
to receive Host REIT Common Stock or Notes in exchange for their OP Units
in connection with the Partnership Mergers or if the price per OP Unit in
the Partnership Mergers is greater than $12.50. The percentage interest of
Host REIT will decrease, and the percentage interest of the Limited
Partners will increase, if the price per OP Unit in the Partnership
Mergers is less than $12.50.
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OPINION OF FINANCIAL ADVISOR
OPINION OF BT WOLFENSOHN, FINANCIAL ADVISOR TO HOST
BT Wolfensohn has acted as financial advisor to Host in connection with the
REIT Conversion. On November , 1998, BT Wolfensohn delivered its written
opinion to the Host Board of Directors to the effect that, as of the date of
such opinion, based upon and subject to the assumptions made, matters
considered and limits of the review undertaken by BT Wolfensohn, certain
transactions to be effected by Host in connection with the conversion to a
REIT described below, taken together, (the "REIT Transactions") were fair,
from a financial point of view, to Host stockholders.
For the purposes of BT Wolfensohn's opinion, the REIT Transactions mean (i)
the contribution by Host of its wholly-owned full-service hotels, certain
interests in hotel partnerships and certain other assets to the Operating
Partnership in exchange for units of limited and general partnership interest
in the Operating Partnership and the assumption of liabilities, (ii) the
reincorporation of Host from the State of Delaware to the State of Maryland by
merging Host into Host REIT, (iii) the taxable Initial E&P Distribution by
Host to its stockholders which Host has advised BT Wolfensohn will consist of
shares of common stock of Crestline and a special dividend of approximately
$250 million in cash or, at the election of Host common stockholders, in Host
REIT Common Stock, (iv) the assumption by the Operating Partnership of the
debentures underlying the Convertible Preferred Securities and other
indebtedness of Host and the related conversion price adjustment of such
debentures, (v) the acquisition by merger of the Partnerships pursuant to the
Partnership Mergers, (vi) the acquisition of partnership interests from
unaffiliated partners of four limited partnerships that own one or more full-
service hotels and that are partially but not wholly-owned by Host or one of
its subsidiaries in exchange for OP Units, (vii) the Blackstone Acquisition,
(viii) the creation and capitalization of the taxable Non-Controlled
Subsidiaries, and (ix) the leasing of virtually all of the full-service hotels
owned or controlled by the Operating Partnership for initial terms ranging
generally from seven to ten years to the Lessees, whereby the Lessees will
operate the hotels under the existing brand names and pursuant to their
existing management agreements.
The terms and conditions of the transactions comprising the REIT
Transactions are more fully described in this Proxy Statement/Prospectus.
THE FULL TEXT OF BT WOLFENSOHN'S WRITTEN OPINION, DATED NOVEMBER , 1998
(THE "BT WOLFENSOHN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY BT
WOLFENSOHN IN CONNECTION WITH THE OPINION, IS ATTACHED AS APPENDIX B TO THIS
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. HOST
STOCKHOLDERS ARE URGED TO READ THE BT WOLFENSOHN OPINION IN ITS ENTIRETY. THE
SUMMARY OF THE BT WOLFENSOHN OPINION SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE BT WOLFENSOHN OPINION.
In connection with BT Wolfensohn's role as financial advisor to Host, and in
arriving at its opinion, BT Wolfensohn has, among other things, reviewed
certain publicly available financial information and other information
concerning Host and certain internal analyses and other information furnished
to it by Host and Crestline. BT Wolfensohn also held discussions with the
members of the senior management of Host and Crestline regarding the
businesses and prospects of Host and Crestline. In addition, BT Wolfensohn (i)
reviewed the reported prices and trading activity for the common stock of
Host, (ii) compared certain financial and stock market information for Host
with similar information for certain companies whose securities are publicly
traded, (iii) reviewed certain public information of certain companies it
deemed appropriate in analyzing Host and Crestline, and (iv) performed such
other studies and analyses and considered such other factors as it deemed
appropriate.
In preparing its opinion, BT Wolfensohn did not assume responsibility for
the independent verification of, and did not independently verify, any
information, whether publicly available or furnished to it, concerning Host
and Crestline, including, without limitation, any financial information,
forecasts or projections, considered in connection with the rendering of its
opinion. Accordingly, for purposes of its opinion, BT Wolfensohn assumed
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and relied upon the accuracy and completeness in all material respects of all
such information. BT Wolfensohn did not conduct a physical inspection of any
of the properties or assets, and did not prepare or obtain any independent
evaluation or appraisal of any of the assets or liabilities of Host and
Crestline. With respect to the financial forecasts and projections made
available to BT Wolfensohn and used in its analysis, BT Wolfensohn has assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of Host and Crestline as
to the matters covered thereby. In rendering its opinion, BT Wolfensohn
expressed no view as to the reasonableness of such forecasts and projections,
or the assumptions on which they are based. The BT Wolfensohn Opinion was
necessarily based upon economic, market and other conditions as in effect on,
and the information made available to BT Wolfensohn as of, the date of such
opinion.
For purposes of rendering its opinion, BT Wolfensohn has assumed that the
REIT Transactions will take place prior to or in connection with Host's
election of REIT status in accordance with Sections 856 through 860 of the
Code (the "REIT Rules"). For purposes of rendering its opinion, BT Wolfensohn
has analyzed the REIT Transactions assuming alternatively that the Blackstone
Acquisition is not consummated or is consummated in accordance with the terms
of such transaction. BT Wolfensohn has also assumed that all material federal,
state, local and other approvals and consents required in connection with the
REIT Transactions will be obtained and that in connection with obtaining any
necessary federal, state, local and other approvals and consents, or any
amendments, modifications or waivers to any agreements, instruments or orders
to which Host is a party or subject or by which it is bound, no limitations,
restrictions or conditions will be imposed or amendments, modifications or
waivers made that would have a material adverse effect on Host or Crestline or
materially reduce the contemplated benefits of the REIT Transactions to Host.
In addition, BT Wolfensohn has been advised by Host, and accordingly has
assumed for purposes of its opinion, that the Initial E&P Distribution will be
taxable to the Host stockholders.
BT Wolfensohn has also assumed that upon consummation of the REIT
Transactions, Host will qualify for treatment as a REIT under the REIT Rules
(and BT Wolfensohn understands that Host will obtain an opinion, which will be
based on certain assumptions and representations of Host and subject to
certain qualifications, to that effect from its outside counsel prior to
consummation of the REIT Transactions). At the request of the Host Board of
Directors, BT Wolfensohn has not solicited any proposals from any third
parties for the acquisition of any of the assets of Host or Crestline nor made
any determination as to whether any such proposals could be obtained if
solicited.
Set forth below is a brief summary of certain financial analyses performed
by BT Wolfensohn in connection with its opinion.
Comparable Company Trading Analysis. BT Wolfensohn performed a comparable
company trading analysis to derive a range of implied future equity values per
share for Host, assuming it retains its existing corporate structure, and for
Host and Crestline after giving effect to the proposed REIT Transactions. BT
Wolfensohn reviewed market statistics and financial and operating information
with respect to selected publicly traded companies considered by BT Wolfensohn
to be comparable in certain respects to Host and Crestline. BT Wolfensohn
selected publicly traded companies organized as C-Corporations engaged in the
lodging industry (the "Lodging C-Corp Peer Group"), publicly traded lodging
REITs (the "Lodging REIT Peer Group") and publicly traded healthcare REITs
(the "Healthcare REIT Peer Group" and, together with the Lodging C-Corp Peer
Group and the Lodging REIT Peer Group, the "BT Wolfensohn Peer Groups"). The
business composition, market positions and capital structures of these
companies made them, in BT Wolfensohn's judgment, most closely comparable to
Host and Crestline. In BT Wolfensohn's judgment, the Health Care REIT Peer
Group is the most comparable set of companies for the purposes of valuing
Crestline due to its ownership of senior living real estate assets. Based upon
the market price of their common shares as of November , 1998 and the number
of common shares outstanding, BT Wolfensohn calculated for each company in the
BT Wolfensohn Peer Groups the market value of its common equity. For each C-
Corporation engaged in the lodging industry, BT Wolfensohn added the market
value of outstanding net debt, preferred stock instruments and capitalized
leases (if applicable) in order to arrive at a total enterprise value ("TEV")
for each company. BT Wolfensohn calculated the multiple
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of each company's TEV to its historical earnings before interest, taxes,
depreciation and amortization ("EBITDA") using publicly available information
regarding each company's last twelve months of reported earnings. BT
Wolfensohn also calculated the multiple of each company's stock price to its
earnings per share ("EPS") for the latest twelve months and to its estimated
earnings for calendar years 1998 and 1999 as reported by the Institutional
Brokers Estimate System ("I/B/E/S"). I/B/E/S is a data service that monitors
and publishes compilations of earning estimates by selected research analysts
regarding companies of interest to institutional investors. BT Wolfensohn also
calculated the current market value to current and projected Funds from
Operations ratio for each company in the Lodging REIT Peer Group and
Healthcare REIT Peer Group, using publicly available information regarding
each company's latest twelve months Funds from Operations and Funds from
Operations estimates for calendar years 1998 and 1999 as reported by I/B/E/S.
Such multiples were then reviewed to determine the median, mean, high and low
multiples for the BT Wolfensohn Peer Groups. The resulting Lodging C-Corp Peer
Group and Lodging REIT Peer Group multiple ranges were applied to forecasted
EBITDA, EPS and Funds from Operations of Host to determine a range of expected
future equity values per share of Host under its existing corporate structure.
Subsequently, the resulting Lodging REIT Peer Group multiple ranges were
applied to forecasted Funds from Operations of Host and the resulting Health
Care REIT Peer Group multiple ranges were to applied to forecasted Funds from
Operations per share (less applicable corporate taxes) of Crestline to
determine a range of expected future equity values per share of Host and
Crestline after giving effect to the proposed REIT Transactions. In arriving
at its conclusion as to the expected future trading value of Host and
Crestline's Stock, BT Wolfensohn also considered various factors affecting the
trading values of specific members of the BT Wolfensohn Peer Groups as well as
possible deviations from the indicated valuation range based upon specific
factors related to Host and Crestline.
IRR Analysis. Utilizing financial projections from Host's management and the
multiples calculated by BT Wolfensohn from the above BT Wolfensohn Peer
Groups, BT Wolfensohn analyzed the internal rate of return ("IRR") to a Host
stockholder buying one share of Host stock on December 31, 1998 ("Beginning
Stock Price") at an assumed price of $15 per share and holding such share for
a period of five years ending December 31, 2003 ("Ending Stock Price"), both
under Host's existing corporate structure and after giving effect to the
proposed REIT Transactions. The stock price on December 31, 2003 of Host under
its existing corporate structure was computed using the methodology described
above under Comparable Company Trading Analysis. The stock price on December
31, 2003 of Host based on the proposed REIT Transactions was computed using
the methodology described above under Comparable Company Trading Analysis by
adding the value of Host stock to the value of Crestline stock at such date.
The IRR was then computed by taking into account the Beginning Stock Price,
the Ending Stock Price, the cash component of the Initial E&P Distribution and
the annual dividends assumed to be received by a stockholder over the period.
The analysis did not take into account taxes outside of corporate level taxes
which would depend upon each individual shareholder's tax status.
The foregoing summary describes all analyses and factors that BT Wolfensohn
deemed material in rendering its fairness opinion, but is not a comprehensive
description of all analyses performed and factors considered by BT Wolfensohn
in connection with preparing its opinion. The preparation of a fairness
opinion is a complex process involving the application of subjective business
judgment in determining the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, is not readily susceptible to summary description. BT
Wolfensohn believes that its analyses must be considered as a whole and that
considering any portion of such analyses and of the factors considered without
considering all analyses and factors could create a misleading view of the
process underlying the opinion. In arriving at its fairness determination, BT
Wolfensohn did not assign specific weights to any particular analyses.
In conducting its analyses and arriving at its opinion, BT Wolfensohn
utilized a variety of generally accepted valuation methods. The analyses were
prepared solely for the purpose of enabling BT Wolfensohn to provide its
opinion to the Host Board of Directors as to the fairness to Host stockholders
of the REIT Transactions and does not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold,
which are inherently subject to uncertainty. In connection with its analyses,
BT Wolfensohn made, and was provided by Host and Crestline management with,
numerous assumptions with
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respect to industry performance, general business and economic conditions and
other matters, many of which are beyond Host's and Crestline's control.
Analyses based on estimates or forecasts of future results are not necessarily
indicative of actual past or future values or results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of Host and Crestline, or their
respective advisors, neither Host nor Crestline nor BT Wolfensohn nor any
other person assumes responsibility if future results or actual values are
materially different from these forecasts or assumptions.
The terms of the REIT Transactions were approved by the Host Board of
Directors. Although BT Wolfensohn provided advice to Host during the course of
these discussions, the decision to enter into the REIT Transactions was solely
that of the Host Board of Directors. As described above, the opinion and
presentation of BT Wolfensohn to the Host Board of Directors were only one of
a number of factors taken into consideration by the Host Board of Directors in
making its determination to approve the REIT Transactions. BT Wolfensohn's
written opinion was provided to the Host Board of Directors to assist it in
connection with its consideration of the REIT Transactions and does not
constitute a recommendation to any holder of Host Common Stock as to how to
vote with respect to the Merger.
Host selected BT Wolfensohn as financial advisor in connection with the REIT
Conversion based on BT Wolfensohn's qualifications, expertise, reputation and
experience in mergers and acquisitions. BT Wolfensohn is engaged in the merger
and acquisition and client advisory business of Bankers Trust (together with
its affiliates, the "BT Group") and, for legal and regulatory purposes, is a
division of BT Alex. Brown Incorporated, a registered broker dealer and member
of the New York Stock Exchange. Since 1993, Host has paid BT Wolfensohn an
annual retainer fee for providing ongoing merger, acquisition and corporate
advisory services. This retainer fee totaled $500,000 in 1998. Host separately
retained BT Wolfensohn pursuant to a letter agreement dated April 16, 1998
(the "Engagement Letter"). As compensation for BT Wolfensohn's services in
connection with the REIT Conversion, Host has paid BT Wolfensohn a cash fee of
$1 million and has agreed to pay an additional cash fee of $4 million if the
REIT Conversion is consummated. This amount will be reduced by BT Wolfensohn's
annual retainer fee received for 1998. Regardless of whether the REIT
Conversion is consummated, Host has agreed to reimburse BT Wolfensohn for
reasonable fees and disbursements of BT Wolfensohn's counsel and all of BT
Wolfensohn's reasonable travel and other out-of-pocket expenses incurred in
connection with the REIT Conversion or otherwise arising out of the retention
of BT Wolfensohn under the Engagement Letter. Host has also agreed to
indemnify BT Wolfensohn and certain related persons to the full extent lawful
against certain liabilities, including certain liabilities under the federal
securities laws arising out of its engagement or the REIT Conversion.
BT Wolfensohn is an internationally recognized investment banking firm
experienced in providing advice in connection with mergers and acquisitions
and related transactions. One or more members of the BT Group have, from time
to time, provided investment banking, commercial banking (including extension
of credit) and other financial services to Host or its affiliates for which it
has received compensation. A member of the BT Group is the lead administrative
agent for Host's $1.25 billion bank facility and was the co-administrative
agent for Host's recent bond tender and subsequent $1.7 billion re-offering.
The BT Group may actively trade securities of Host for its own account or the
account of its customers and, accordingly, may from time to time hold a long
or short position in such securities.
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BUSINESS AND PROPERTIES
BUSINESS OF THE COMPANY
Host REIT was organized as a Maryland corporation on September 28, 1998 by
Host to succeed to and continue the business of Host upon consummation of the
Merger of Host with and into Host REIT pursuant to the Agreement. Host REIT
has conducted no business to date other than that incident to the Merger and
the other transactions comprising the REIT Conversion and has no material
assets or liabilities.
Host REIT and the Operating Partnership have been formed primarily to
continue, in an UPREIT structure, the full-service hotel ownership business
currently conducted by Host. The primary business objectives of the Company
will be to (i) achieve long-term sustainable growth in Funds From Operations
(as defined below) and cash flow per share of Host REIT Common Stock, (ii)
increase asset values by improving and expanding the initial Hotels, as
appropriate, (iii) acquire additional existing and newly developed upscale and
luxury full-service hotels in targeted markets (primarily focusing on downtown
hotels in core business districts in major metropolitan markets and select
airport and resort/convention locations), (iv) develop and construct upscale
and luxury full-service hotels and (v) potentially pursue other real estate
investments. Host REIT will operate as a self-managed and self-administered
REIT and its operations will be conducted solely through the Operating
Partnership and its subsidiaries. Following the REIT Conversion, the Hotels
are expected to consist of approximately 125 hotels, representing
approximately 59,000 rooms, located throughout the United States and Canada.
The Hotels will be generally operated under the Marriott, Ritz-Carlton, Four
Seasons, Swissotel and Hyatt brand names and managed by subsidiaries of
Marriott International and other companies. These brand names are among the
most respected and widely recognized brand names in the lodging industry.
Subsequent to the REIT Conversion, the Hotels will be leased by the Company to
the Lessees and will be managed on behalf of the Lessees by subsidiaries of
Marriott International and other Managers.
Host REIT will be the sole general partner of the Operating Partnership and
will manage all aspects of the business of the Operating Partnership. This
will include decisions with respect to (i) sales and purchases of hotels, (ii)
the financing of the hotels, (iii) the leasing of the hotels and (iv) capital
expenditures for the hotels (subject to the terms of the leases and the
Management Agreements). Host REIT will be managed by its Board of Directors
and will have no employees who are not also employees of the Operating
Partnership.
Under current federal income tax law, REITs are not permitted to derive
revenues directly from the operations of hotels. Therefore, the Company will
lease the Hotels, through its subsidiaries, to the Lessees under the Leases.
See "--The Leases" below. The Lessees will pay rent to the Company generally
equal to a specified Minimum Rent plus, to the extent it would exceed Minimum
Rent, Percentage Rent. The Lessees will operate the Hotels pursuant to the
Management Agreements with the Managers. Each of the Management Agreements
provides for certain base and incentive management fees, plus reimbursement of
certain costs, as further described below. See "--The Management Agreements."
Such fees and cost reimbursements will be the obligation of the Lessees and
not the Company (although the obligation to pay such fees could adversely
affect the ability of the Lessees to pay the required rent to the Company).
The Leases, through the Percentage Rent provisions, are designed to allow
the Company to participate in any growth in room sales at the Hotels above
specified levels, which management expects can be achieved through increases
in room rates and occupancies. Although the economic trends affecting the
hotel industry will be the major factor in generating growth in lease
revenues, the abilities of the Lessees and the Managers will also have a
material impact on future sales growth.
In addition to external growth generated by new acquisitions, the Company
intends to carefully and periodically review its portfolio to identify
opportunities to selectively enhance existing assets to improve operating
performance through major capital improvements. The Company's Leases will
provide the Company with the right to approve and finance major capital
improvements.
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GENERAL
The Company's primary focus is on the acquisition of upscale and luxury
full-service hotel lodging properties. Since the beginning of 1994 through the
date hereof, the Company has acquired 79 full-service hotels representing more
than 36,000 rooms for an aggregate purchase price of approximately $3.9
billion. Based upon data provided by Smith Travel Research, the Company
believes that its full-service hotels outperform the industry's average
occupancy rate by a significant margin and averaged 78.4% occupancy for 1997
compared to a 71.1% average occupancy for competing hotels in the upscale and
luxury full-service segment of the lodging industry, the segment which is most
representative of the Company's full-service hotels.
The upscale and luxury full-service segments of the lodging industry are
benefiting from a favorable supply and demand relationship in the United
States, especially in the principal sub-markets in which the Company operates,
considering hotels of similar size and quality. Management believes that
demand increases have primarily resulted from a strong domestic economic
environment and a corresponding increase in business travel. In spite of
increased demand for rooms, the room supply growth rate in the full-service
segment has not similarly increased. Management believes that this slower
increase in the supply growth rate in the full-service segment is attributable
to many factors, including (i) the limited availability of attractive building
sites for full-service hotels, (ii) the lack of available financing for new
full-service hotel construction and (iii) the availability of existing full-
service properties for sale at a discount to their replacement cost. The
relatively high occupancy rates of the Company's hotels, along with increased
demand for full-service hotel rooms, have allowed the Managers of the
Company's hotels to increase average daily room rates by selectively raising
room rates and by replacing certain discounted group business with higher-rate
group and transient business. As a result, on a comparable basis, room revenue
per available room ("REVPAR") for the Company's full-service properties
increased approximately 12.6% in 1997. The Company expects this supply/demand
imbalance in the upscale and luxury full-service segments to continue, which
should result in improved REVPAR at its hotel properties in the near term;
however, there can be no assurance that such supply/demand imbalance will
continue or that REVPAR will continue to improve.
BUSINESS OBJECTIVES
The Company's primary business objective is to increase its "Funds From
Operations" or "FFO" (defined as net income (or loss) computed in accordance
with generally accepted accounting principles ("GAAP"), excluding gains (or
losses) from debt restructuring and sales of properties, plus real estate
related depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures) per share of Host REIT Common
Stock and cash flow and enhance its value by:
. Acquiring additional existing upscale and luxury full-service hotels,
including Marriott and Ritz-Carlton hotels and other hotels operated by
leading management companies such as Four Seasons, Hyatt and Swissotel,
which satisfy the Company's investment criteria, including entering into
joint ventures when the Company believes its return on investment will be
maximized by doing so.
. Developing new upscale and luxury full-service hotels, including Marriott
and Ritz-Carlton hotels and other hotels operated by leading management
companies such as Four Seasons, Hyatt and Swissotel, which satisfy the
Company's investment criteria, employing transaction structures which
mitigate risk to the Company.
. Participating in the growth in sales for each of the hotels through
leases which provide for the payment of rent based upon the lessees'
gross hotel sales in excess of specified thresholds.
. Enhancing existing hotel operations by funding selective capital
improvements which are designed to increase gross hotel sales.
BUSINESS STRATEGY
The Company's primary business strategy is to continue to focus on
maximizing the profitability of its existing full-service hotel portfolio and
acquiring and, in limited cases, constructing, additional high quality, full-
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service hotel properties, including controlling interests in joint ventures,
partnerships or other entities holding such hotel properties. Although
competition for acquisitions has increased, the Company believes that the
upscale and luxury full-service segments of the market offer opportunities to
acquire assets at attractive multiples of cash flow and at discounts to
replacement value, including underperforming hotels which can be improved by
conversion to the Marriott or Ritz-Carlton brands. The Company believes that
the upscale and luxury full-service segments are very promising because:
. There is a limited supply of new upscale and luxury full-service hotel
rooms currently under construction in the sub-markets in which the
Company operates. According to Smith Travel Research, from 1988 to 1991,
upscale and luxury full-service room supply for the Company's competitive
set increased an average of approximately 4% annually which resulted in
an oversupply of rooms in the industry. However, this growth slowed to an
average of approximately 1% from 1992 through 1997. Furthermore, the lead
time from conception to completion of construction of a full-service
hotel is generally three to five years or more in the markets in which
the Company is principally pursuing acquisitions, which management
believes will contribute to the continued low growth of room supply
relative to the growth of room demand in the upscale and luxury full-
service segments through 2000.
. Many desirable hotel properties continue to be held by inadvertent owners
such as banks, insurance companies and other financial institutions, both
domestic and international, which are motivated and willing sellers. In
recent years, the Company has acquired a number of properties from
inadvertent owners at significant discounts to replacement cost,
including luxury hotels operating under the Ritz-Carlton brand. While in
the Company's experience to date, these sellers have been primarily U.S.
financial organizations, the Company believes that numerous international
financial institutions are also inadvertent owners of U.S. lodging
properties and have only recently begun to dispose of such properties.
The Company expects that there will be increased opportunities to acquire
lodging properties from international financial institutions and expects
to dedicate significant resources to aggressively pursue these
opportunities.
. The Company believes that there are numerous opportunities to improve the
performance of acquired hotels by replacing the existing hotel manager
with Marriott International and converting the hotel to the Marriott
brand. Based upon data provided by Smith Travel Research, the Company
believes that Marriott-flagged properties have consistently outperformed
the industry. Demonstrating the strength of the Marriott brand name, the
average occupancy rate for the Company's comparable full-service
properties was 79.4%, compared to the average occupancy rate of 71.1% for
competing upscale and luxury full-service hotels for 1997. In addition,
the Company's comparable properties generated a 29% REVPAR premium over
its competitive set. Accordingly, management anticipates that any
additional full-service properties acquired by the Company in the future
and converted from other brands to the Marriott brand should achieve
higher occupancy rates and average room rates than has previously been
the case for those properties as the properties begin to benefit from
Marriott's brand name recognition, reservation system and group sales
organization. The Company intends to pursue additional full-service hotel
acquisitions, some of which may be conversion opportunities. Sixteen of
the Company's 79 acquired full-service hotels from the beginning of 1994
through the date hereof were converted to the Marriott brand following
their acquisition.
. The Company intends to increase its pool of potential acquisition
candidates by considering acquisitions of select non-Marriott and non-
Ritz-Carlton hotels that offer long-term growth potential and are
consistent with the overall quality of its current portfolio. The Company
will focus on upscale and luxury full-service properties in difficult to
duplicate locations with high barriers to entry, such as hotels located
in downtown, airport and resort/convention locations, which are operated
by quality managers. In April 1998, the Company reached a definitive
agreement with the Blackstone Entities to acquire interests in twelve
upscale and luxury full-service hotels and a mortgage loan secured by a
thirteenth hotel in the U.S. and certain other assets in a transaction
valued at the time of the agreement, including the assumption of debt.
The Company expects to pay approximately $862 million in cash and assumed
debt, issue approximately 43.7 million OP Units (based upon a negotiated
value of $20.00 per OP Unit) and
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distribute up to 18% of the shares of Crestline common stock to the
Blackstone Entities in exchange for the assets received from the
Blackstone Entities. The Blackstone portfolio consists of two Ritz-
Carltons, three Four Seasons (including one in which the Company's only
interest will be a mortgage loan), one Grand Hyatt, three Hyatt Regencies
and four Swissotel properties. See "--Blackstone Acquisition."
The Company believes it is well qualified to pursue its acquisition and
development strategy. Management has extensive experience in acquiring and
financing lodging properties and believes its industry knowledge,
relationships and access to market information provide a competitive advantage
with respect to identifying, evaluating and acquiring hotel assets.
During 1997, the Company acquired, or purchased controlling interests in, 17
full-service hotels, containing 8,624 rooms, for an aggregate purchase price
of approximately $765 million (including the assumption of approximately $418
million of debt). The Company also completed the acquisition of the 504-room
New York Marriott Financial Center, following the acquisition of the mortgage
on the hotel for $101 million in late 1996.
The Company holds minority interests and serves as a general partner or
limited partner in various partnerships that own, as of the date hereof, an
aggregate of 240 hotel properties, 20 of which are full-service properties,
managed or franchised by Marriott International. In 1997, the Company
acquired, or obtained controlling interests in, five affiliated partnerships,
adding 10 hotels to its portfolio. In January, the Company acquired a
controlling interest in Marriott Hotel Properties Limited Partnership, a
Delaware limited partnership ("MHP"). MHP owns the 1,503-room Marriott Orlando
World Center and a 50.5% interest in the 624-room Marriott Harbor Beach
Resort. In April, the Company acquired a controlling interest in the 353-room
Hanover Marriott. In the fourth quarter, the Company acquired the Chesapeake
Hotel Limited Partnership ("CHLP"). CHLP owns the 430-room Boston Marriott
Newton; the 681-room Chicago Marriott O'Hare; the 595-room Denver Marriott
Southeast; the 588-room Key Bridge Marriott in Virginia; the 479-room
Minnesota Airport Marriott; and the 221-room Saddle Brook Marriott in New
Jersey. In December 1997, the Company obtained a controlling interest in the
partnership that owns the 884-room Marriott's Desert Springs Resort and Spa in
California.
In 1998, the Company acquired a controlling interest in the partnership that
owns the Atlanta Marriott Marquis, containing 1,671 rooms, for approximately
$239 million, including the assumption of approximately $164 million of
mortgage debt. The Company also acquired a controlling interest in a
partnership that owns three full-service hotels, containing a total of 1,029
rooms, for approximately $50 million and the outstanding interest in the 289-
room Park Ridge Marriott in New Jersey for $24 million. More recently, the
Company acquired the 281-room Ritz-Carlton, Phoenix for $75 million, the 397-
room Ritz-Carlton in Tysons Corner, Virginia for $96 million and the 487-room
Torrance Marriott for $52 million. In the third quarter of 1998, the Company
acquired the 308-room Ritz-Carlton, Dearborn for approximately $65 million,
the 336-room Ritz-Carlton, San Francisco for approximately $161 million and
the 404-room Memphis Marriott (which was converted to the Marriott brand upon
acquisition) for approximately $16 million. The Company is continually engaged
in discussions with respect to other potential acquisition properties.
In addition to investments in partnerships in which it already held minority
interests, the Company has been successful in adding properties to its
portfolio through partnership arrangements with either the seller of the
property or the incoming managers (typically Marriott International or a
Marriott franchisee). During 1997, the Company acquired interests in five such
partnerships which owned five full-service hotels, including the 197-room
Waterford Hotel in Oklahoma City, Oklahoma; the 404-room Norfolk Waterside
Marriott in Norfolk, Virginia; the 380-room Hartford/Farmington Marriott near
Farmington, Connecticut; the 380-room former Manhattan Beach Radisson Plaza in
Manhattan Beach, California; and the 299-room Ontario Airport Marriott in
Ontario, California. The Waterford Hotel and the Manhattan Beach Radisson
Plaza have been converted to the Marriott brand. As discussed above, in 1998,
the Company acquired a controlling interest in a partnership that owns three
hotels: the 359-room Albany Marriott in New York; the 350-room San Diego
Marriott Mission Valley in California; and the 320-room Minneapolis Marriott
Southwest in Minnesota. The Company has the financial flexibility and, due to
its existing partnership investment portfolio, the administrative
infrastructure in place to
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accommodate such arrangements. The Company views this ability as a competitive
advantage and expects to enter into similar arrangements to acquire additional
properties in the future.
The Company believes there is a significant opportunity to acquire
additional Ritz-Carlton hotels due to the Company's relationship with Marriott
International and due to the number of Ritz-Carlton brand hotels currently
owned by inadvertent owners. The Company also intends to purchase upscale and
luxury full-service hotels with the intention of converting them to the Ritz-
Carlton brand.
The Company currently owns six international properties, with 2,550 rooms,
located in Canada and Mexico. The overbuilding and economic stress currently
being experienced in some European and Pacific Rim countries may eventually
lead to additional international acquisition opportunities. The Company will
acquire international properties only when such acquisitions achieve
satisfactory returns after adjustments for currency and country risks.
In addition to acquisitions, the Company plans to selectively develop new
upscale and luxury full-service hotels in major urban markets and
convention/resort locations with strong growth prospects, unique or difficult
to duplicate sites, high barriers to entry for other new hotels and limited
new supply. The Company intends to target only development projects that show
promise of providing financial returns that represent a premium to
acquisitions. In 1997, the Company announced that it will develop the 717-room
Tampa Convention Center Marriott for $104 million, including a $16 million
subsidy provided by the City of Tampa.
The Company may also expand certain existing hotel properties where strong
performance and market demand exists. Expansions to existing properties
creates a lower risk to the Company as the success of the market is generally
known and development time is significantly shorter than new construction. The
Company recently committed to add approximately 500 rooms and an additional
15,000 square feet of meeting space to the 1,503-room Marriott Orlando World
Center.
HOTEL LODGING INDUSTRY
The upscale and luxury full-service segments of the lodging industry
continue to benefit from a favorable cyclical imbalance in the supply/demand
relationship in which room demand growth has exceeded supply growth, which has
remained fairly limited. The lodging industry posted strong gains in revenues
and profits in 1997, as demand growth continued to outpace additions to
supply. The Company believes that upscale and luxury full-service hotel room
supply growth will remain limited through at least 1998. Accordingly, the
Company believes this supply/demand imbalance will result in improving
occupancy and room rates which should result in improved REVPAR and operating
profit.
Following a period of significant overbuilding in the mid-to-late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction, excluding casino-related construction, has been modest and
largely offset by the number of rooms taken out of service each year. Due to
an increase in travel and an improving economy, hotel occupancy has grown
steadily over the past several years and room rates have improved. The Company
believes that room demand for upscale and luxury full-service properties will
continue to grow at approximately the rate of inflation (approximately 3% for
1998). Increased room demand should result in increased hotel occupancy and
room rates. According to Smith Travel Research, upscale and luxury full-
service occupancy for the Company and its competitive set grew in 1997 to
72.5% from 72.2% in 1996, while room rate growth continued to exceed
inflation. While room demand has been rising, new hotel supply growth has been
minimal. Smith Travel Research data shows that upscale and luxury full-service
room supply increased an average of only 1% annually from 1991 through 1997.
According to Coopers & Lybrand, L.L.P., hotel supply in the upscale and luxury
full-service segment is expected to grow annually at 1.8% to 1.9% through
1998. The increase in room demand and minimal growth in new hotel supply has
also led to increased room rates. The Company believes that these recent
trends will continue, with overall occupancy changing slightly and room rates
increasing at more than one and one-half times the rate of inflation in 1998.
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While the supply/demand relationship has generally remained favorable in the
upper upscale and luxury markets in which the Company's properties operate, a
number of new construction projects have been announced or commenced in 1998,
particularly in suburban and smaller metropolitan markets where the Company
does not have a significant presence. This growth in new supply, together with
slowing demand growth, have served to reduce the rate of REVPAR growth at the
Company's properties from year earlier growth rates. In part, as a reaction to
a concern regarding the potential for lodging industry overbuilding as well as
general economic concerns which have been heightened by the Asian crisis and
other factors, the availability of capital to the lodging industry has
diminished greatly in the second half of 1998. While this condition is having
a favorable effect by curtailing construction of a number of potentially
competing hotel projects, it is also limiting the Company's ability to grow
through acquisitions.
The lodging industry is cyclical with operating results correlated highly to
the Gross Domestic Product ("GDP"). During recent months, a number of
investment banks and economists have substantially reduced their estimates of
growth in GDP through 1999. Should such estimates of diminished GDP growth
prove accurate, the Company believes that REVPAR growth would be substantially
reduced at its properties.
As a result of the overbuilding in the mid-to-late 1980s, many full-service
hotels have not performed as originally planned. Cash flow has often not
covered debt service requirements, causing lenders (e.g., banks, insurance
companies and savings and loans) to foreclose and become "inadvertent owners"
who are motivated to sell these assets. In the Company's experience to date,
these sellers have been primarily U.S. financial organizations. The Company
believes that numerous international financial institutions are also
inadvertent owners of lodging properties and expects there will be increased
opportunities to acquire lodging properties from international financial
institutions. While the interest of inadvertent owners to sell has created
attractive acquisition opportunities with strong current yields, the lack of
supply growth and increasing room night demand should contribute to higher
long-term returns on invested capital. Given the relatively long lead time to
develop urban, convention and resort hotels, as well as the lack of project
financing, management believes the growth in room supply in this segment will
be limited, at least until the year 2000.
HOTEL LODGING PROPERTIES
The Company's lodging portfolio consists of 104 upscale and luxury full-
service hotels with over 50,000 rooms. The Company's hotel lodging properties
represent quality assets in the upscale and luxury full-service lodging
segments. All but three of the Company's hotel properties are currently
operated under the Marriott or Ritz-Carlton brand names.
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The following tables set forth certain information with respect to the
operations of the Hotels to be owned by the Company following the REIT
Conversion on a historical and pro forma basis for fiscal year 1997 and for
the First Three Quarters 1998.
<TABLE>
<CAPTION>
FISCAL YEAR 1997
-------------------------------------------
AVERAGE
PARTNERSHIP NO. OF HOTELS NO. OF ROOMS HOTEL REVENUES OCCUPANCY DAILY RATE REVPAR
- ----------- ------------- ------------ -------------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Atlanta Marquis(1)(2)... 1 1,671 $ 85,397 69.8% $127.36 $ 88.95
Chicago Suites(2)....... 1 256 6,568 83.2 146.83 122.14
Desert Springs(2)(3).... 1 884 33,369 73.0 169.55 123.77
Hanover(2).............. 1 353 6,735 80.8 123.55 99.82
MDAH(2)................. 6 1,692 26,699 76.4 102.97 78.63
MHP(2)(4)............... 2 2,127 75,211 80.3 155.44 124.84
MHP2(2)(5).............. 4 3,411 69,014 80.7 133.75 107.91
PHLP(2)(6).............. 8 3,181 50,323 78.5 105.21 82.63
Blackstone Hotels....... 12 5,520 147,524 72.8 166.72 121.33
Host (historical)(7).... 95 45,718 946,726 78.4 133.74 104.84
Host (pro forma)(7)(8).. 127 59,118 3,601,866 77.7 132.73 103.09
<CAPTION>
FIRST THREE QUARTERS 1998
----------------------------------------------------------------------
AVERAGE
PARTNERSHIP NO. OF HOTELS NO. OF ROOMS HOTEL REVENUES OCCUPANCY DAILY RATE REVPAR
- ----------- ------------- ------------ -------------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Atlanta Marquis(1)(2)... 1 1,671 $ 58,625 68.9 $131.43 $ 90.51
Chicago Suites(2)....... 1 256 5,120 83.5 159.34 132.98
Desert Springs(2)(3).... 1 884 80,334 75.9 182.77 138.63
Hanover(2).............. 1 353 5,238 75.7 138.41 104.81
MDAH(2)................. 6 1,692 26,351 76.6 113.82 87.20
MHP(2)(4)............... 2 2,127 61,245 83.3 161.15 134.17
MHP2(2)(5).............. 4 3,411 29,513 83.7 150.16 125.76
PHLP(2)(6).............. 8 3,181 37,238 79.3 112.28 89.01
Blackstone Hotels....... 12 5,520 327,885 74.2 176.17 130.77
Host (historical)(7).... 101 49,019 921,864 79.1 139.48 110.33
Host (pro forma)(7)(8).. 127 59,118 2,665,023 78.4 141.61 111.05
</TABLE>
- --------
(1) Atlanta Marquis has an 80% residual interest in the Atlanta Marriott
Marquis Hotel. Revenues represents sales generated by the Hotel.
(2) Partnership is participating in the Consent Solicitation.
(3) Subsequent to November 25, 1997, revenues reflect gross hotel sales. Prior
to that date, revenues reflected hotel rental income.
(4) Includes Marriott's Harbor Beach Resort, in which MHP owns a 50.5%
interest.
(5) Includes the Santa Clara Marriott, in which MHP2 owns a 50% interest and
Host owns the remaining 50% interest.
(6) Includes the Tampa Westshore Marriott and the Raleigh Crabtree Marriott,
which are currently consolidated by Host. A subsidiary of Host provided
100% nonrecourse financing totaling approximately $35 million to PHLP, in
which Host owns the sole general partner interest, for the acquisition of
these two hotels.
(7) Includes the hotels owned by Desert Springs, Hanover, MHP and MHP2 for
both fiscal year 1997 and First Three Quarters 1998 and Atlanta Marquis
for First Three Quarters 1998 because the Company owned a controlling
interest in such Partnerships for the periods indicated. Such Partnerships
are part of the Partnership Mergers (if and to the extent consummated).
(8) Includes the hotels owned by all Partnerships and Private Partnerships and
the Blackstone Hotels, assuming the Full Participation Scenario (i.e., the
transactions comprising the REIT Conversion, including the Blackstone
Acquisition, occur, all Partnerships participate in the Partnership
Mergers and no shares of Host REIT Common Stock or Notes are issued in the
Partnership Mergers).
One commonly used indicator of market performance for hotels is room revenue
per available room, or REVPAR, which measures daily room revenues generated on
a per room basis. This does not include food and beverage or other ancillary
revenues generated by the property. REVPAR represents the combination of the
average daily room rate charged and the average daily occupancy achieved. The
Company has reported annual increases in REVPAR since 1993.
To maintain the overall quality of the Company's lodging properties, each
property undergoes refurbishments and capital improvements on a regularly
scheduled basis. Typically, refurbishing has been
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provided at intervals of five years, based on an annual review of the
condition of each property. For the First Three Quarters 1998, First Three
Quarters 1997, fiscal years 1997, 1996 and 1995, the Company spent $113
million, $86 million, $131 million, $87 million and $56 million, respectively,
on capital improvements to existing properties. As a result of these
expenditures, the Company will be able to maintain high quality rooms at its
properties.
The Company's hotels average nearly 500 rooms. Twelve of the Company's
hotels have more than 750 rooms. Hotel facilities typically include meeting
and banquet facilities, a variety of restaurants and lounges, swimming pools,
gift shops and parking facilities. The Company's hotels primarily serve
business and pleasure travelers and group meetings at locations in downtown
and suburban areas, near airports and at resort convention locations
throughout the United States. The properties are generally well situated in
locations where there are significant barriers to entry by competitors
including downtown areas of major metropolitan cities at airports and
resort/convention locations where there are limited or no development sites.
Marriott International serves as the manager for 88 of the 104 hotels owned by
the Company and all but three are part of Marriott International's full-
service hotel system. The average age of the properties is 15 years, although
several of the properties have had substantial, more recent renovations or
major additions. In 1997, for example, the Company substantially completed a
two-year $30 million capital improvement program at the New York Marriott
Marquis which included renovations to all guestrooms, refurbishment of
ballrooms, restaurant updates and retail additions. In early 1998, the Company
completed a $15 million capital improvement program at the Denver Marriott
Tech Center. The program included replacement of guestroom interiors,
remodeling of the lobby, ballroom, meeting rooms and corridors, as well as
renovations to the exterior of the building.
The chart below sets forth performance information for the Company's
comparable hotels:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- ----------------
1998 1997 1997 1996
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
COMPARABLE FULL-SERVICE HOTELS(1)
Number of properties.................. 78 78 54 54
Number of rooms....................... 38,589 38,589 27,074 27,044
Average daily rate.................... $ 141.68 $ 131.51 $134.49 $121.58
Occupancy percentage.................. 79.9% 79.8% 79.4% 78.0%
REVPAR................................ $ 113.27 $ 105.00 $106.76 $ 94.84
REVPAR % change....................... 7.9% -- 12.6% --
</TABLE>
- --------
(1) Consists of the 78 properties owned by the Company for the entire First
Three Quarters 1998 and First Three Quarters 1997, respectively, and the
54 properties owned by the Company for the entire 1997 and 1996 fiscal
years, respectively, except for the 85-room Sacramento property, which is
operated as an independent hotel. These properties, for the respective
periods, represent the "comparable properties." Properties held for less
than all of the periods discussed above, respectively, are not considered
comparable.
The chart below sets forth certain performance information for the Company's
hotels:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- -------------------------
1998 1997 1997 1996 1995
---------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of properties........ 104 86 95 79 55
Number of rooms............. 50,064 41,171 45,718 37,210 25,932
Average daily rate(1)....... $ 139.48 $ 132.14 $133.74 $119.94 $110.30
Occupancy percentage(1)..... 79.1% 79.9% 78.4% 77.3% 75.5%
REVPAR(1)................... $ 110.33 $ 105.57 $104.84 $ 92.71 $ 83.32
</TABLE>
- --------
(1) Excludes the information related to the 85-room Sacramento property, which
is operated as an independent hotel.
Revenues in 1997 for nearly all of the Company's hotels were improved or
comparable to 1996. This improvement was achieved through steady increases in
customer demand, as well as yield management techniques applied by the manager
to maximize REVPAR on a property-by-property basis. REVPAR for
96
<PAGE>
comparable properties increased 12.6% for fiscal year 1997 as average room
rates increased almost 11% and average occupancy increased over one percentage
point. Overall, this resulted in outstanding sales growth. Sales expanded at a
9% rate for comparable hotels and house profit margins increased by over two
percentage points. REVPAR in 1997 for all of the Company's properties
(including both comparable and non-comparable properties) increased 12.9% as
average room rates increased over 11% and average occupancy increased over one
percentage point. For the First Three Quarters 1998, REVPAR for comparable
properties increased 7.9% as average room rates increased nearly 8% and
average occupancy had no change. Sales for the First Three Quarters 1998
expanded at an 8% rate for comparable hotels and the house profit margin
increased by one percentage point. REVPAR for the First Three Quarters of 1998
for all of the Company's properties increased 4.5% as average room rates
increased nearly 6% and average occupancy decreased over one percentage point.
The Company believes that its hotels consistently outperform the industry's
average REVPAR growth rates. The relatively high occupancy rates of the
Company's hotels, along with increased demand for upscale and luxury full-
service hotel rooms, allowed the managers of the Company's hotels to increase
average room rates by selectively raising room rates and replacing certain
discounted group business with higher-rate group and transient business. The
Company believes that these favorable REVPAR growth trends should continue due
to the limited new construction of full-service properties and the expected
improvements from the conversion of seven properties to the Marriott brand in
1996 and 1997.
A number of the Company's full-service hotel acquisitions were converted to
the Marriott brand upon acquisition--most recently the Coronado Island
Marriott Resort and the Manhattan Beach Marriott were converted in the second
half of 1997. The conversion of these properties to the Marriott brand is
intended to increase occupancy and room rates as a result of Marriott
International's nationwide marketing and reservation systems, its Marriott
Rewards program, group sales force, as well as customer recognition of the
Marriott brand name. The Marriott brand name has consistently delivered
occupancy and REVPAR premiums over other brands. Based upon data provided by
Smith Travel Research, the Company's comparable properties have an eight
percentage point occupancy premium and a 29% REVPAR premium over its
competitive set for 1997. The Company actively manages the conversions and, in
many cases, has worked closely with the manager to selectively invest in
enhancements to the physical product to make the property more attractive to
guests or more efficient to operate. The invested capital with respect to
these properties is primarily used for the improvement of common areas, as
well as upgrading soft and hard goods (i.e., carpets, drapes, paint, furniture
and additional amenities). The conversion process typically causes periods of
disruption to these properties as selected rooms and common areas are
temporarily taken out of service. Historically, the conversion properties have
shown improvements as the benefits of Marriott International's marketing and
reservation programs, group sales force and customer service initiatives take
hold. In addition, these properties have generally been integrated into
Marriott International's systems covering purchasing and distribution,
insurance, telecommunications and payroll processing.
Following the REIT Conversion, the Lessees and the Managers will continue to
focus on cost control in an attempt to ensure that hotel sales increases serve
to maximize house and operating profit. While control of fixed costs serves to
improve profit margins as hotel sales increase, it also results in more
properties reaching financial performance levels that allow the Managers to
share in the growth of profits in the form of incentive management fees. The
Company believes this is a positive development as it strengthens the
alignment of the Company's, the Lessees' and the Managers' interests.
During 1996, the Company completed its divestiture of limited service
properties through the sale and leaseback of 16 Courtyard and 18 Residence Inn
properties. These properties, along with 37 Courtyard properties sold and
leased back during 1995, continue to be reflected in the Company's revenues
and are managed by Marriott International under long-term management
agreements. Following the REIT Conversion, these properties will be subleased
to a subsidiary of Crestline. During 1997, limited service properties
represented 2% of the Company's hotel EBITDA, compared to 5% in 1996, and the
Company expects this percentage to continue to decrease as the Company
continues to acquire primarily full-service properties.
97
<PAGE>
The following table presents full-service hotel information by geographic
region for fiscal year 1997:
<TABLE>
<CAPTION>
AGGREGATE
AVERAGE COMPLETED
NUMBER AVERAGE RENOVATION
NUMBER OF GUEST AVERAGE DAILY EXPENDITURES
GEOGRAPHIC REGION OF HOTELS ROOMS OCCUPANCY RATE REVPAR (IN THOUSANDS)
- ----------------- --------- -------- --------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Atlanta................. 7 441 76.5% $131.69 $100.74 $ 4,115
Florida................. 11 511 80.9 131.78 106.64 14,007
Mid-Atlantic............ 12 364 76.1 111.71 85.00 3,477
Midwest................. 10 418 74.3 107.65 79.99 2,751
New York................ 10 708 84.7 173.85 147.22 15,232
Northeast............... 7 367 75.2 96.75 72.72 9,260
South Central........... 15 525 76.5 120.81 92.39 15,190
Western................. 21 519 79.5 140.07 111.39 19,806
Latin America........... 2 436 62.7 129.54 81.17 290
Average-all regions... -- 485 78.4 133.74 104.84 --
</TABLE>
98
<PAGE>
HOTEL PROPERTIES
The following table sets forth, as of November 6, 1998, the location and
number of rooms relating to each of the Company's hotels. All of the properties
are operated under Marriott brands by Marriott International, unless otherwise
indicated.
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Alabama
Grand Hotel Resort and Golf Club......................................... 306
Arizona
Scottsdale Suites........................................................ 251
The Ritz-Carlton, Phoenix (1)............................................ 281
California
Coronado Island Resort (2)(6)............................................ 300
Costa Mesa Suites........................................................ 253
Desert Springs Resort and Spa (3)(4)..................................... 884
Manhattan Beach (5)(6)................................................... 380
Marina Beach (6)......................................................... 368
Newport Beach............................................................ 570
Newport Beach Suites..................................................... 250
Ontario Airport (7)...................................................... 299
Sacramento Airport (6)(8)................................................ 85
San Diego Marriott Hotel and Marina (6).................................. 1,355
San Diego Mission Valley (9)............................................. 350
San Francisco Airport.................................................... 684
San Francisco Fisherman's Wharf (10)..................................... 285
San Francisco Moscone Center (6)......................................... 1,498
San Ramon (6)............................................................ 368
Santa Clara (6).......................................................... 754
The Ritz-Carlton, Marina del Rey (1)(6)(11).............................. 306
The Ritz-Carlton, San Francisco (1)...................................... 336
Torrance................................................................. 487
Colorado
Denver Southeast (6)(12)................................................. 595
Denver Tech Center....................................................... 625
Denver West (6).......................................................... 307
Marriott's Mountain Resort at Vail....................................... 349
Connecticut
Hartford/Farmington...................................................... 380
Hartford/Rocky Hill (6).................................................. 251
Florida
Fort Lauderdale Marina................................................... 580
Harbor Beach Resort (3)(4)(6)............................................ 624
Jacksonville (6)(9)...................................................... 256
Miami Airport (6)........................................................ 782
Orlando World Center (3)(4).............................................. 1,503
Palm Beach Gardens (6)(10)............................................... 279
Singer Island (Holiday Inn) (8).......................................... 222
Tampa Airport (6)........................................................ 295
Tampa Westshore (6)(13).................................................. 309
The Ritz-Carlton, Naples (1)............................................. 463
Georgia
Atlanta Marriott Marquis (3)(4).......................................... 1,671
Atlanta Midtown Suites (6)............................................... 254
Atlanta Norcross......................................................... 222
Atlanta Northwest........................................................ 400
Atlanta Perimeter (6).................................................... 400
JW Marriott Hotel at Lenox (6)........................................... 371
The Ritz-Carlton, Atlanta (1)............................................ 447
The Ritz-Carlton, Buckhead (1)........................................... 553
Illinois
Chicago/Deerfield Suites................................................. 248
Chicago/Downers Grove Suites............................................. 254
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Chicago/Downtown Courtyard............................................... 334
Chicago O'Hare (6)(12)................................................... 681
Indiana
South Bend (6)........................................................... 300
Louisiana
New Orleans (4).......................................................... 1,290
Maryland
Bethesda (6)............................................................. 407
Gaithersburg/Washingtonian Center........................................ 284
Massachusetts
Boston/Newton (3)........................................................ 430
Michigan
Detroit Romulus.......................................................... 245
The Ritz Carlton, Dearborn (1)........................................... 306
Minnesota
Minneapolis/Bloomington (12)............................................. 479
Minneapolis City Center (6).............................................. 583
Minneapolis Southwest (9)................................................ 320
Missouri
Kansas City Airport (6).................................................. 382
St. Louis Pavilion (6)................................................... 672
New Hampshire
Nashua................................................................... 251
New Jersey
Hanover (3)(4)........................................................... 353
Newark Airport (6)....................................................... 590
Park Ridge (6)........................................................... 289
Saddle Brook (6)(12)..................................................... 221
New York
Albany (9)............................................................... 359
New York Marriott Financial Center (14).................................. 504
New York Marriott Marquis (6)............................................ 1,911
Marriott World Trade Center (6).......................................... 820
North Carolina
Charlotte Executive Park (10)............................................ 298
Raleigh Crabtree Valley (13)............................................. 375
Oklahoma
Oklahoma City............................................................ 354
Oklahoma City Waterford (5).............................................. 197
Oregon
Portland................................................................. 503
Pennsylvania
Philadelphia (Convention Center) (6)..................................... 1,200
Philadelphia Airport (6)................................................. 419
Pittsburgh City Center (6)(10)........................................... 400
Tennessee
Memphis (2)(6)........................................................... 404
Texas
Dallas/Fort Worth........................................................ 492
Dallas Quorum (6)........................................................ 547
El Paso (6).............................................................. 296
Houston Airport (6)...................................................... 566
JW Marriott Houston (6).................................................. 503
</TABLE>
99
<PAGE>
HOTEL PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- ------
<S> <C>
Plaza San Antonio (6)(10).............................................. 252
San Antonio Rivercenter (4)(6)......................................... 999
San Antonio Riverwalk (6).............................................. 500
Utah
Salt Lake City (6)..................................................... 510
Virginia
Dulles Airport (6)..................................................... 370
Key Bridge (6)(12)..................................................... 588
Norfolk Waterside (6)(7)............................................... 404
Pentagon City Residence Inn............................................ 300
The Ritz-Carlton, Tysons Corner (6).................................... 397
Washington Dulles Suites............................................... 254
Westfields............................................................. 335
Williamsburg........................................................... 295
Washington, D.C.
Washington Metro Center................................................ 456
Canada
Calgary................................................................ 380
Toronto Airport (15)................................................... 423
Toronto Eaton Centre (6)............................................... 459
Toronto Delta Meadowvale (8)........................................... 374
Mexico
Mexico City Airport (15)............................................... 600
JW Marriott Hotel, Mexico City (15).................................... 314
------
TOTAL.................................................................. 50,067
======
</TABLE>
Properties that are currently not consolidated by Host and are subject to
the Partnership Mergers ("MDAH" refers to Marriott Diversified America Hotels,
L.P., a Delaware limited partnership; "Chicago Suites" refers to Mutual
Benefit Chicago Marriott Suite Hotel Partners, L.P., a Rhode Island limited
partnership; and "PHLP" refers to Potomac Hotel Limited Partnership, a
Delaware limited partnership):
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
MDAH
Fairview Park (6)......................................... Virginia 395
Dayton.................................................... Ohio 399
Research Triangle Park.................................... North Carolina 224
Detroit Marriott Southfield............................... Michigan 226
</TABLE>
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Detroit Marriott Livonia.................................. Michigan 224
Fullerton (6)............................................. California 224
-----
1,692
-----
Chicago Suites
Marriott O'Hare Suites (6)................................ Illinois 256
-----
PHLP
Albuquerque (6)........................................... New Mexico 411
Greensboro-High Point (6)................................. North Carolina 299
Houston Medical Center (6)................................ Texas 386
Miami Biscayne Bay (6).................................... Florida 605
Marriott Mountain Shadows Resort.......................... Arizona 337
Seattle SeaTac Airport.................................... Washington 459
-----
2,497
-----
TOTAL.................................................................... 4,445
=====
</TABLE>
Properties that are included in the Blackstone portfolio are as follows:
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Four Seasons, Atlanta (8).................................. Georgia 246
Four Seasons, Philadelphia (8)............................. Pennsylvania 365
Grand Hyatt, Atlanta (8)................................... Georgia 439
Hyatt Regency, Burlingame (8).............................. California 793
Hyatt Regency, Cambridge (8)............................... Massachusetts 469
Hyatt Regency, Reston (8).................................. Virginia 514
Swissotel, Atlanta (8)..................................... Georgia 348
Swissotel, Boston (8)...................................... Massachusetts 498
Swissotel, Chicago (8)..................................... Illinois 630
The Drake (Swissotel), New York (8)........................ New York 494
The Ritz-Carlton, Amelia Island (1)........................ Florida 449
The Ritz-Carlton, Boston (1)............................... Massachusetts 275
-----
TOTAL................................................................... 5,520
=====
</TABLE>
- --------
(1) Property is operated as a Ritz-Carlton. The Ritz-Carlton Hotel Company,
L.L.C. manages the property and is wholly owned by Marriott
International.
(2) This property was acquired by the Company and converted to the Marriott
brand in 1997 or 1998.
(3) The Company acquired a controlling interest in the partnership that owns
this property in 1997 or 1998. The Company previously owned a general
partner interest in the partnership.
(4) Property is held within a partnership and is currently consolidated by
Host.
(5) The Company acquired a controlling interest in the newly-formed
partnership that owns this property in 1997. The property was converted
to the Marriott brand and is operated as a Marriott franchised property.
(6) The land on which the hotel is built is leased under one or more long-
term lease agreements.
(7) The Company acquired a controlling interest in the newly-formed
partnership that owns this property in 1997. The property is operated as
a Marriott franchised property.
(8) Property is not operated under the Marriott brand and is not managed by
Marriott International.
(9) The Company acquired a controlling interest in the partnership that owns
this property in 1998. The property will be operated as a Marriott
franchised property.
(10) Property is operated as a Marriott franchised property.
(11) Property was acquired by the Company in 1997.
(12) The Company acquired the partnership that owns this property in 1997. The
Company previously owned a general partner interest in the partnership.
100
<PAGE>
(13) Property is owned by PHLP. A subsidiary of the Company provided 100%
nonrecourse financing totaling approximately $35 million to PHLP, in
which the Company owns the sole general partner interest, for the
acquisition of these two hotels. The Company consolidates these
properties in the accompanying financial statements.
(14) The Company completed the acquisition of this property in early 1997. The
Company previously had purchased the mortgage loan secured by the hotel
in late 1996.
(15) Property will be transferred to the Non-Controlled Subsidiary in
conjunction with the REIT Conversion and no longer consolidated by the
Company.
1998 ACQUISITIONS
In January 1998, the Company acquired an additional interest in Atlanta
Marriott Marquis II Limited Partnership, a Delaware limited partnership, which
owns an interest in the 1,671-room Atlanta Marriott Marquis Hotel, for
approximately $239 million, including the assumption of approximately $164
million of mortgage debt. The Company previously owned a 1.3% general and
limited partnership interest. In March 1998, the Company acquired a
controlling interest in the partnership that owns three hotels: the 359-room
Albany Marriott, the 350-room San Diego Marriott Mission Valley and the 320-
room Minneapolis Marriott Southwest for approximately $50 million. In the
second quarter of 1998, the Company acquired the partnership that owns the
289-room Park Ridge Marriott in Park Ridge, New Jersey for $24 million. The
Company previously owned a 1% managing general partner interest and a note
receivable interest in such partnership. In addition, the Company acquired the
281-room Ritz-Carlton, Phoenix for $75 million, the 397-room Ritz-Carlton in
Tysons Corner, Virginia for $96 million and the 487-room Torrance Marriott
near Los Angeles, California for $52 million. In the third quarter of 1998,
the Company acquired the 308-room Ritz-Carlton, Dearborn for approximately $65
million, the 336-room Ritz-Carlton, San Francisco for approximately $161
million and the 404-room Memphis Crowne Plaza (which was converted to the
Marriott brand upon acquisition) for approximately $16 million. In April 1998,
the Company, through the Operating Partnership, entered into an agreement to
acquire certain assets from various affiliates of The Blackstone Group. See
"--Blackstone Acquisition."
BLACKSTONE ACQUISITION
In April 1998, the Company reached a definitive agreement with the
Blackstone Entities to acquire ownership of, or controlling interests in,
twelve hotels and two mortgage loans, one secured by one of the acquired
hotels and one secured by an additional hotel. In addition, the Company will
acquire a 25% interest in Swisshotel Management (USA) L.L.C., which operates
five Swisshotel hotels in the United States, from the Blackstone Entities,
which the Company will transfer to Crestline in connection with the Initial
E&P Distribution of Crestline common stock to the Company's stockholders and
the Blackstone Entities. If the Blackstone Acquisition is consummated, the
Operating Partnership expects to issue approximately 43.7 million OP Units
(based upon a negotiated value of $20.00 per OP Unit), assume debt and make
cash payments totaling approximately $862 million and distribute up to 18% of
the shares of Crestline common stock and other consideration to the Blackstone
Entities. The consideration received by the Blackstone Entities was determined
through negotiations between the Company and Blackstone and was not based upon
appraisals of the assets. Each OP Unit will be exchangeable for one share of
Host REIT Common Stock (or its cash equivalent, at the Company's election).
Upon completion of the Blackstone Acquisition and the REIT Conversion, the
Blackstone Entities will own approximately 16% of the outstanding OP Units.
John G. Schreiber, co-chairman of the Blackstone Real Estate Partners'
investment committee, has joined the Board of Directors of the Company.
The Blackstone portfolio is one of the premier collections of hotel real
estate properties. It includes: The Ritz-Carlton, Amelia Island (449 rooms);
The Ritz-Carlton, Boston (275 rooms); Hyatt Regency Burlingame at San
Francisco Airport (793 rooms); Hyatt Regency Cambridge, Boston (469 rooms);
Hyatt Regency Reston, Virginia (514 rooms); Grand Hyatt Atlanta (439 rooms);
Four Seasons Philadelphia (365 rooms); Four Seasons Atlanta (246 rooms); The
Drake (Swissotel) New York (494 rooms); Swissotel Chicago (630 rooms);
Swissotel Boston (498 rooms) and Swissotel Atlanta (348 rooms). Additionally,
the transaction includes: the first mortgage loan on the Four Seasons Beverly
Hills (285 rooms); two office buildings in Atlanta--the offices at The Grand
(97,879 sq. ft.) and the offices at the Swissotel (67,110 sq. ft.); and a 25%
interest in the Swissotel U.S. management company (which will be transferred
to Crestline).
101
<PAGE>
At the closing of the Blackstone Acquisition, the Blackstone portfolio will
be contributed to the Company and its hotels will be leased to subsidiaries of
Crestline and will continue to be managed on behalf of the Lessees under their
existing management agreements. The Company's acquisition of the Blackstone
portfolio is subject to certain conditions, including the REIT Conversion
being consummated by March 31, 1999 and Host REIT qualifying as a REIT for
1999 (which condition may not be satisfied if the REIT Conversion is not
completed prior to January 1, 1999).
INVESTMENTS IN AFFILIATED PARTNERSHIPS
The Company and certain of its subsidiaries also manage the Company's
partnership investments and conduct the partnership services business. As
such, as of the date hereof, the Company and/or its subsidiaries own an
investment in, and generally serve as a general partner or managing general
partner for, 18 unconsolidated partnerships which collectively own 20 Marriott
full-service hotels, 120 Courtyard hotels, 50 Residence Inns and 50 Fairfield
Inns. In addition, the Company holds notes receivable (net of reserves) from
partnerships totaling approximately $23 million at January 2, 1998. Thirteen
of the 20 full-service hotels owned by the unconsolidated partnerships will be
acquired by the Company in connection with the REIT Conversion.
As the managing general partner of these partnerships, the Company and its
subsidiaries are responsible for the day-to-day management of partnership
operations, which includes payment of partnership obligations from partnership
funds, preparation of financial reports and tax returns and communications
with lenders, limited partners and regulatory bodies. The Company or its
subsidiaries are reimbursed for the cost of providing these services subject
to limitations in certain cases.
Hotel properties owned by the unconsolidated partnerships generally were
acquired from the Company or its subsidiaries in connection with limited
partnership offerings. These hotel properties are currently operated under
management agreements with Marriott International. As the managing general
partner of such partnerships, the Company or its subsidiaries oversee and
monitor Marriott International's performance pursuant to these agreements.
The Company's interests in these partnerships range from 1% to 50%. Cash
distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt owed by
the partnership. Partnership distributions to the Company were $1 million for
the First Two Quarters 1998, $4 million for the First Two Quarters 1997, $5
million in each of 1997 and 1996 and $3 million in 1995. All partnership debt
is nonrecourse to the Company and its subsidiaries, except that the Company is
contingently liable under various guarantees of debt obligations of certain of
these partnerships. Such commitments are limited in the aggregate to $60
million at January 2, 1998. Subsequent to year-end, such maximum commitments
were reduced to $20 million in connection with the refinancing and acquisition
of a controlling interest in the Atlanta Marriott Marquis. In most cases,
fundings of such guarantees represent loans to the respective partnerships.
MARKETING
As of the date hereof, 88 of the Company's 104 hotel properties are managed
by Marriott International as Marriott or Ritz-Carlton brand hotels. Thirteen
of the 16 remaining hotels are operated as Marriott brand hotels under
franchise agreements with Marriott International. The Company believes that
these Marriott-managed and franchised properties will continue to enjoy
competitive advantages arising from their participation in the Marriott
International hotel system. Marriott International's nationwide marketing
programs and reservation systems as well as the advantage of the strong
customer preference for Marriott brands should also help these properties to
maintain or increase their premium over competitors in both occupancy and room
rates. Repeat guest business in the Marriott hotel system is enhanced by the
Marriott Rewards program, which expanded the previous Marriott Honored Guest
Awards program. Marriott Rewards membership includes more than 7.5 million
members.
The Marriott reservation system provides Marriott reservation agents
complete descriptions of the rooms available for sale and up-to-date rate
information from the properties. The reservation system also features
102
<PAGE>
connectivity to airline reservation systems, providing travel agents with
access to available rooms inventory for all Marriott and Ritz-Carlton lodging
properties. In addition, software at Marriott's centralized reservations
centers enables agents to immediately identify the nearest Marriott or Ritz-
Carlton brand property with available rooms when a caller's first choice is
fully occupied.
COMPETITION
The Company's hotels compete with several other major lodging brands in each
segment in which they operate. Competition in the industry is based primarily
on the level of service, quality of accommodations, convenience of locations
and room rates. Although the competitive position of each of the Company's
hotel properties differs from market to market, the Company believes that its
properties compare favorably to their competitive set in the markets in which
they operate on the basis of these factors. The following table presents key
participants in segments of the lodging industry in which the Company
competes:
<TABLE>
<CAPTION>
SEGMENT REPRESENTATIVE PARTICIPANTS
------- ---------------------------
<C> <S>
Luxury Full-Service................. Ritz-Carlton; Four Seasons
Upscale Full-Service................ Crowne Plaza; Doubletree; Hyatt; Hilton;
Marriott Hotels, Resorts andSuites;
Radisson; Red Lion; Sheraton; Swissotel;
Westin; Wyndham
</TABLE>
RELATIONSHIP WITH HM SERVICES
On December 29, 1995, the Company distributed to its stockholders through a
special dividend (the "HMS Special Dividend") all of the outstanding shares of
common stock of Host Marriott Services Corporation ("HM Services"), formerly a
direct, wholly-owned subsidiary of the Company which, as of the date of the
HMS Special Dividend, owned and operated the food, beverage and merchandise
concessions at airports, on tollroads and at stadiums and arenas and other
tourist attractions. The HMS Special Dividend provided Company stockholders
with one share of common stock of HM Services for every five shares of Company
common stock held by such stockholders on the record date of December 22,
1995.
For the purpose of governing certain of the ongoing relationships between
the Company and HM Services after the HMS Special Dividend, and to provide an
orderly transition, the Company and HM Services have entered into various
agreements, including agreements to (i) allocate certain responsibilities with
respect to employee compensation, benefit and labor matters; (ii) define the
respective parties' rights and obligations with respect to deficiencies and
refunds of federal, state and other income or franchise taxes relating to the
Company's businesses for tax years prior to the HMS Special Dividend and with
respect to certain tax attributes of the Company after the HMS Special
Dividend; (iii) provide certain administrative and other support services to
each other for a transitional period on an as-needed basis; and (iv) to
provide for the issuance of HM Services common stock in connection with the
exercise of certain outstanding warrants to purchase shares of Company common
stock.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL; MARRIOTT INTERNATIONAL DISTRIBUTION
Prior to October 8, 1993, the Company was named "Marriott Corporation." In
addition to conducting its existing hotel ownership business and the business
of HM Services (prior to its distribution to stockholders through the Special
Dividend), Marriott Corporation engaged in lodging and senior living services
management, timeshare resort development and operation, food service and
facilities management and other contract services businesses (the "Management
Business"). On October 8, 1993, the Company completed the Marriott
International Distribution (as defined herein). Marriott International
conducts the Management Business as a separate publicly traded company.
The Company and Marriott International have entered into agreements which
provide, among other things, for Marriott International to (i) manage or
franchise various hotel properties owned or leased by the Company, (ii)
advance up to $225 million to the Company under the Marriott International
line of credit, which was
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terminated in 1997, (iii) provide first mortgage financing of $109 million for
the Philadelphia Marriott Hotel, which was repaid in December 1996, (iv)
provide financing for certain Company acquisitions, (v) guarantee the
Company's performance in connection with certain loans or other obligations
and (vi) provide certain limited administrative services. The Company views
its relationship with Marriott International as providing various advantages,
including access to high quality management services, strong brand names and
superior marketing and reservation systems.
Marriott International has the right to purchase up to 20% of the voting
stock of the Company if certain events involving a change of control (or
potential change of control) of the Company occur, subject to certain
limitations (including a limitation effective after the REIT Conversion
intended to help protect the qualification of Host REIT as a REIT). See
"Certain Relationships and Related Transactions--Relationship Between Host and
Marriott International."
EMPLOYEES
Currently, the Company and its subsidiaries collectively have approximately
225 corporate employees, and approximately 300 other employees (primarily
employed at one of its non-U.S. hotels) which are covered by collective
bargaining agreements that are subject to review and renewal on a regular
basis. The Company believes that it has good relations with its labor unions
and has not experienced any material business interruptions as a result of
labor disputes. Following the REIT Conversion, the Company expects to have
approximately 175 employees. The balance of the Company's current employees
are expected to become employees of Crestline following the REIT Conversion.
ENVIRONMENTAL AND REGULATORY MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials ("ACMs"), and third parties may
seek recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or business may be
operated, and these restrictions may require expenditures. In connection with
its current or prior ownership or operation of hotels, the Company may be
potentially liable for any such costs or liabilities. Although the Company is
currently not aware of any material environmental claims pending or threatened
against it, no assurance can be given that a material environmental claim will
not be asserted against the Company.
LEGAL PROCEEDINGS
Following the Restructuring Transactions and the other transactions
comprising the REIT Conversion, the Operating Partnership will assume all
liability arising under legal proceedings filed against Host and will
indemnify Host REIT as to all such matters. Host and the other defendants
believe all of the lawsuits in which Host is a defendant, including the
following lawsuits, are without merit and the defendants intend to defend
vigorously against such claims. However, no assurance can be given as to the
outcome of any of the lawsuits.
Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in
several limited partnerships sponsored by Host filed a lawsuit, Robert M.
Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott International,
Inc., et al., Case No. 98-CI-04092, in the 57th Judicial District Court of
Bexar County, Texas, alleging that the defendants conspired to sell hotels to
the partnerships for inflated prices and that they charged the partnerships
excessive management fees to operate the partnerships' hotels. The plaintiffs
further allege that the defendants committed fraud, breached fiduciary duties
and violated the provisions of various contracts. The plaintiffs are seeking
unspecified damages. Although the partnerships have not been named as
defendants, their
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partnership agreements include provisions which require the partnerships to
indemnify the general partners against losses, expenses and fees. The
defendants filed answers and defenses to the petition.
Atlanta Marquis. Certain limited partners of Atlanta Marriott Marquis
Limited Partnership ("AMMLP"), filed a putative class action lawsuit, Hiram
and Ruth Sturm v. Marriott Marquis Corporation, et al., Case No. 97-CV-3706,
in the U.S. District Court for the Northern District of Georgia, on December
12, 1997 against AMMLP's general partner, its directors and Host, regarding
the merger of AMMLP into a new partnership (the "AMMLP Merger") as part of a
refinancing of the partnership's debt. The plaintiffs allege that the
defendants misled the limited partners in order to induce them to approve the
AMMLP Merger, violated securities regulations and federal roll-up regulations
and breached their fiduciary duties to the partners. The plaintiffs sought to
enjoin, or in the alternative, rescind, the AMMLP Merger and damages. The
partnership agreement includes provisions which require the partnership to
indemnify the general partners against losses, expenses and fees. The
defendants have filed a motion to dismiss.
Another limited partner of AMMLP sought similar relief and filed a separate
lawsuit, styled Poorvu v. Marriott Marquis Corporation, et al., Civil Action
No. 16095-NC, on December 19, 1997, in Delaware State Chancery Court. The
defendants have filed an answer to the complaint.
Courtyard II. A group of partners in Courtyard by Marriott II Limited
Partnership ("CBM II") filed a lawsuit, Whitey Ford, et al. v. Host Marriott
Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in the 285th
Judicial District Court of Bexar County, Texas, against Host, Marriott
International and others alleging breach of fiduciary duty, breach of
contract, fraud, negligent misrepresentation, tortious interference, violation
of the Texas Free Enterprise and Antitrust Act of 1983 and conspiracy in
connection with the formation, operation and management of CBM II and its
hotels. The plaintiffs are seeking unspecified damages. On January 29, 1998,
two other limited partners filed a petition in intervention seeking to convert
the lawsuit into a class action. The defendants have filed an answer, the
class has been certified, class counsel has been appointed and discovery is
underway. Trial is presently scheduled for May 1999.
MHP2. Two groups of limited partners of Marriott Hotel Properties II Limited
Partnership ("MHP2"), are each asserting putative class claims in lawsuits,
filed in the United States District Court for the Southern District of Florida
on May 10, 1996, Leonard Rosenblum, as Trustee of the Sylvia Bernice Rosenblum
Trust, et al. v. Marriott MHP Two Corporation, et al., Case No. 96-8377-CIV-
HURLEY, and, on December 18, 1997, Mackenzie Patterson Special Fund 2, L.P. et
al. v. Marriott MHP Two Corporation, et al., Case No. 97-8989-CIV-HURLEY,
respectively, against Host and certain of its affiliates alleging that the
defendants violated their fiduciary duties and engaged in fraud and coercion
in connection with a tender offer for MHP2 units. The District Court dismissed
the Mackenzie Patterson case on August 4, 1998 and remanded the Rosenblum case
to Palm Beach County Circuit Court on July 25, 1998. The defendants have moved
to dismiss Rosenblum's fifth amended complaint in the case now styled Leonard
Rosenblum, as Trustee of the Sylvia Bernice Rosenblum Trust, et al. v.
Marriott MHP Two Corporation, et al., Case No. CL-96-4087-AD, or, in the
alternative, to deny class certification.
PHLP. On July 15, 1998, one limited partner in PHLP filed a class action
lawsuit styled Michael C. deBerardinis v. Host Marriott Corporation, Civil
Action No. WMN 98-2263, in the United States District Court for the District
of Maryland. The plaintiff alleges that Host misled the limited partners in
order to induce them into approving the sale of one of the Partnership's
hotels, violated the securities regulations by issuing a false and misleading
consent solicitation and breached fiduciary duties and the partnership
agreement. The complaint seeks unspecified damages. Host intends to vigorously
defend against the claims asserted in the lawsuit.
THE LEASES
Due to current federal income tax law restrictions on a REIT's ability to
derive revenues directly from the operation of a hotel, Host recognized that
it would be necessary to lease its hotels to one or more lessees just as other
hotel REITs have done. Host desired to have a single lessee (or multiple
lessees controlled by a single
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person) in order to achieve substantial uniformity in its lease terms and
avoid protracted negotiations with multiple parties over the terms of the
lease arrangements, all of which would have been more complicated as a result
of the existing long-term management agreements with Marriott International.
Host also did not seriously attempt to restructure the existing Marriott
International management agreements as leases (and Marriott International has
not offered to do so in any of the negotiations with Host to date) because
Host understands that Marriott International's general policy is to manage
rather than lease hotels and Host also believed that Marriott International
was unlikely to be an acceptable lessee of hotels operating under other brand
names. Primarily for these reasons, and in order to give the economic benefit
of the lessee's interest in the leases to Host's stockholders at the time of
the REIT Conversion, Host decided to enter into leases with subsidiaries of
Crestline and distribute the stock of Crestline to Host's stockholders. Host
believed that Crestline was a more appropriate lessee than a newly formed
company because Crestline already had an independent business and substantial
assets and net worth and, thus, could perform well as a separate publicly
traded company. In Host's judgment, these factors make it more likely that
Crestline and its subsidiaries will have the financial stability, access to
capital and wherewithal to perform on an ongoing basis the substantial
obligations as lessee under the Leases (which is critical both to the Leases
being respected for federal income tax purposes and to a viable long-term
lessor-lessee relationship between Host REIT and Crestline, particularly in
light of the fact that Host REIT remains secondarily liable to pay the
management fees if Crestline defaults on its obligations). While Host
recognized that, as with other REITs that own hotels, there would be
additional administrative and operating complexities that would result from
leasing its hotels to another party (including to Crestline and its
subsidiaries) that has separate interests and economic objectives, Host
believed that the advantages of the REIT Conversion substantially outweighed
this disadvantage.
The following summary of the principal terms of the Leases is qualified in
its entirety by reference to the Leases, a form of which has been filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
is a part.
Lessees. There generally will be a separate Lessee for each Hotel or group
of Hotels that is owned by a separate subsidiary of Host REIT. Each Lessee
will be a Delaware limited liability company, whose purpose will be limited to
acting as lessee under the applicable Lease(s). For those hotels where it is
the Manager, Marriott International or a subsidiary will have a noneconomic
membership interest in the Lessee entitling it to certain voting rights but no
economic rights. The operating agreements for such Lessees will provide that
the Crestline member of the Lessee will have full control over the management
of the business of the Lessee, except with respect to certain decisions which
will require the consent of both members. These decisions are: (i) dissolving,
liquidating, consolidating, merging, selling or leasing all or substantially
all of the assets of the Lessee; (ii) engaging in any other business or
acquiring any assets or incurring any liabilities not reasonably related to
the conduct of the Lessee's business; (iii) instituting voluntary bankruptcy
or similar proceedings or consenting to involuntary bankruptcy or similar
proceedings; (iv) terminating the Management Agreement relating to the
Lessee's hotel, other than by reason of a breach by the Manager or upon
exercise of express termination rights in the Management Agreement; (v)
challenging the status of rights of the Manager or the enforceability of the
membership rights; or (vi) incurring debt in excess of certain limits. Upon
any termination of the applicable Management Agreement, these special voting
rights of Marriott International (or its subsidiary) will cease.
Full-Service Lease Terms. Each full-service Hotel Lease will have a fixed
term generally ranging from seven to ten years (depending upon the Lease),
subject to earlier termination upon the occurrence of certain contingencies
described in the Leases (including, particularly, the provisions described
herein under "--Damage or Destruction," "--Termination of Hotel Leases upon
Disposition of Full-Service Hotels" and "--Termination of the Leases upon
Changes in Tax Laws").
Minimum Rent; Percentage Rent; Additional Charges. Each Lease will require
the Lessee to pay (i) Minimum Rent (as defined below) in a fixed dollar amount
per annum plus (ii) to the extent it exceeds Minimum Rent, Percentage Rent
based upon specified percentages of aggregate sales from the applicable Hotel,
including room sales, food and beverage sales and other income ("Gross
Revenues"), in excess of specified thresholds. "Minimum Rent" will be a fixed
dollar amount specified in each Lease less the FF&E Adjustment
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(which is described under "Personal Property Limitation" below). Any amounts
other than Minimum Rent and Percentage Rent due to the Host REIT Lessor under
the Hotel Leases are deemed to be "Additional Charges." The amount of Minimum
Rent and the Percentage Rent thresholds will be adjusted each year (the
"Annual Adjustment") based upon any increases in the Consumer Price Index
("CPI") and the Employment Cost Index during the previous twelve months.
Neither Minimum Rent nor Percentage Rent thresholds will be decreased because
of the Annual Adjustment.
Rental payments will be made on a Fiscal Year basis. The "Fiscal Year" shall
mean the fiscal year used by the hotel Manager. Payments of Rent (defined
herein) will be made within two business days after the required payment date
under the Management Agreement for each Accounting Period. "Accounting Period"
shall mean for those Hotels where Marriott International is the Manager, any
of the thirteen four-week accounting periods which are used in the hotel
Manager's accounting system. Rent payable for each Accounting Period will be
the sum of (i) the excess (if any) of (x) the greater of cumulative Minimum
Rent due and payable year-to-date or cumulative Percentage Rent due and
payable year-to-date over (y) the total amount of Minimum Rent and Percentage
Rent paid year-to-date plus (ii) any Additional Charges due ("Rent"). If the
total amount of Minimum Rent and Percentage Rent actually paid year-to-date,
as of any rent payment date, is greater than both cumulative Minimum Rent due
and payable year-to-date and cumulative Percentage Rent due and payable year-
to-date, then the Lessor will remit the difference to the Lessee.
The full-service Hotel Leases will generally provide for a Rent adjustment
in the event of damage, destruction, partial taking, certain capital
expenditures, or an FF&E Adjustment.
Lessee Expenses. Each Lessee will be responsible for paying all of the
expenses of operating the applicable Hotel(s), including all personnel costs,
utility costs and general repair and maintenance of the Hotel(s). The Lessee
also will be responsible for all fees payable to the applicable Manager,
including base and incentive management fees, chain services payments and
franchise or system fees, with respect to periods covered by the term of the
Lease. The Lessee will not be obligated to bear the cost of any capital
improvements or capital repairs to the Hotels or the other expenses borne by
the Host REIT Lessor, as described below.
Host REIT Lessor Expenses. The Host REIT Lessor will be responsible for the
following expenses: real estate taxes, personal property taxes (to the extent
the Host REIT Lessor owns the personal property), casualty insurance on the
structures, ground lease rent payments, required expenditures for FF&E
(including maintaining the FF&E reserve, to the extent such is required by the
applicable Management Agreement) and capital expenditures.
The consent of the Host REIT Lessor will be required for any capital
expenditures funded by the Lessor (except in an emergency or where the owner's
consent is not required under the Management Agreement) or a change in the
amount of the FF&E Reserve payment.
Crestline Guarantees. Crestline and certain of its subsidiaries will enter
into guarantees of the Lease obligations of each Lessee. For each of four
identified "pools" of Hotels, the cumulative limit of Crestline's guarantee
obligation will be the greater of 10% of the aggregate Rent paid in the
immediately preceding Fiscal Year under all Leases in the pool or 10% of the
aggregate Rent paid under all Leases in the pool in 1999 (with an agreed
estimate of the 1999 Rent serving as the limit during 1999). For each pool,
the subsidiary of Crestline that is the parent of the Lessees in the pool (a
"Pool Parent") also will be a party to the guarantee of the Lease obligations
for that pool. The obligations of the Pool Parent will not be limited in this
manner.
The obligations of the Pool Parent under each guarantee will be secured by
all funds received by the applicable Pool Parent from the Lessees in the pool,
and the Lessees in the pool will be required to distribute their excess cash
flow to the Pool Parent each Accounting Period, in certain events. These
events include a decline in Crestline's tangible net worth or consolidated
interest coverage ratio below specified levels, a payment default under any
Lease, or a reduction in Crestline's obligation under a pool guarantee to
zero. Funds received from the Lessees will be deposited in a cash collateral
account and applied, to the extent of available funds, to
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pay any shortfalls in payment of Rent under any Lease in the Pool. If certain
conditions are satisfied, any remaining funds will then be released to the
Pool Parent. Otherwise, the remaining funds will be applied to make a payment
to the Pool Parent in a specified amount for overhead expenses and to maintain
a reserve equal to the amount of Crestline's liability under the applicable
guarantee, and, if certain conditions are satisfied, any remaining funds will
be released to the Pool Parent.
In the event that Crestline's obligation under a guarantee is reduced to
zero, the applicable Pool Parent can elect to terminate its guarantee by
giving notice to the Operating Partnership. In that event, the Pool Parent's
guarantee will terminate six months after such notice, subject to
reinstatement in certain limited circumstances.
Security. The obligations of the Lessee will be secured by a pledge of all
personal property (tangible and intangible) of the Lessee related to or used
in connection with the operation of the Hotels (including any cash and
receivables from the Manager or others held by the Lessee as part of "working
capital").
Working Capital. Each Host REIT Lessor will sell the existing working
capital (including Inventory and fixed asset supplies (which principally
consist of linen and similar items) and net receivables due from the Manager,
net of accounts payable and accrued expenses) to the applicable Lessee upon
the commencement of the Lease at a price equal to the fair market value of
such assets (which shall be deemed to be book value). The purchase price will
be represented by a note evidencing a loan that bears interest at a rate per
annum equal to the "long-term applicable federal rate" in effect on the
commencement of the Lease. Interest accrued on the working capital loan will
be due simultaneously with each periodic Rent payment and the amount of each
payment of interest will be credited against such Rent payment. The principal
amount of the working capital loan will be payable upon termination of the
Lease. At the termination or expiration of the Lease, the Lessee will sell to
the Host REIT Lessor the then existing working capital at a price equal to the
value of such assets at that time. The Host REIT Lessor will pay the purchase
price of the working capital by offsetting the purchase price against the
outstanding principal balance of the working capital loan. To the extent that
the value of the working capital delivered to the Host REIT Lessor exceeds or
is less than the value of the working capital delivered by the Host REIT
Lessor to the Lessee at the commencement of the Lease, the Host REIT Lessor,
or the Lessee, as appropriate, shall pay to the other party an amount equal to
the difference in cash.
Termination of Leases upon Disposition of Full-Service Hotels. In the event
the applicable Host REIT Lessor enters into an agreement to sell or otherwise
transfer any full-service Hotel free and clear of the applicable Lease, the
Host REIT Lessor must pay the Lessee a termination fee equal to the fair
market value of the Lessee's leasehold interest in the remaining term of the
Lease using a discount rate of 12%. Alternatively, the Host REIT Lessor will
be entitled to (i) substitute a comparable Hotel or Hotels (in terms of
economics and quality for the Host REIT Lessor and the Lessee as agreed to by
the Lessee) for any Hotel that is sold or (ii) sell the Hotel subject to the
Lease (subject to the Lessee's reasonable approval if the sale is to an entity
that does not have sufficient financial resources and liquidity to fulfill the
"owner's" obligations under the Management Agreement and the Host REIT
Lessor's obligations under the Lease or is or controls or is controlled by a
person convicted of a felony involving moral turpitude), without being
required to pay a termination fee. Pursuant to the Lease, the Host REIT Lessor
and the Lessee will each have the right to terminate the Lease without being
required to pay any fee or other compensation as a result of such termination,
provided that the termination rights of both the Host REIT Lessor and the
Lessee may only be exercised if the Host REIT Lessors and the Lessees under
twelve of the other Hotel Leases have not already exercised their respective
rights to terminate, and the Host REIT Lessor will only be permitted to
exercise such right in connection with a sale of a Hotel to an unrelated third
party or the transfer of a Hotel to a joint venture in which the Operating
Partnership does not have a two-thirds or greater interest.
Termination of the Hotel Leases upon Changes in Tax Laws. In the event that
changes in the federal income tax laws allow the Host REIT Lessors, or
subsidiaries or affiliates of the Host REIT Lessors, to directly operate the
Hotels without jeopardizing Host REIT's status as a REIT, the Host REIT
Lessors will have the right to terminate all, but not less than all, of the
full-service Hotel Leases (excluding Leases for Hotels that must continue to
be leased following the tax law change) in return for paying the Lessees the
fair market value of the
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remaining terms of the full-service Hotel Leases, valued in the same manner as
provided above under "Termination of the Hotel Leases upon Disposition of
Full-Service Hotels." The payment will be payable in cash or, subject to
certain conditions, shares of Host REIT Common Stock, at the election of Host
REIT and the Host REIT Lessor. Host has been pursuing the enactment of such
legislation for more than one year, but there is no such bill pending in
Congress, and there can be no prediction as to whether such legislation would
be enacted in the future.
Damage or Destruction. If a Hotel is partially or totally destroyed and is
no longer suitable for use as a hotel (as reasonably determined by the Host
REIT Lessor), the Lease of such Hotel shall automatically terminate and the
insurance proceeds shall be retained by the Host REIT Lessor, except to the
extent of any personal property owned by the Lessee. In this event, no
termination fee shall be owed to the Lessee. If a Hotel is partially
destroyed, but is still suitable for use as a hotel (as reasonably determined
by the Host REIT Lessor), the Lessee, subject to the Host REIT Lessor agreeing
to release the insurance proceeds to fund any shortfall in the insurance
proceeds, shall apply the insurance proceeds to restore the Hotel to its
preexisting condition. The Host REIT Lessor shall fund any shortfall in
insurance proceeds less than or equal to 5% of the estimated cost of repair.
The Host REIT Lessor may fund, in its sole discretion, any shortfall in
insurance proceeds greater than 5% of the estimated cost of the repair,
provided that if the Host REIT Lessor elects not to fund such shortfall, the
Lessee may terminate the Lease and the Host REIT Lessor shall pay to the
Lessee a termination fee equal to the Lessee's Operating Profit for the
immediately preceding Fiscal Year.
Events of Default. Except as otherwise provided below, and subject to the
notice and, in some cases, cure periods in the Hotel Lease, the Hotel Lease
may be terminated without penalty by the applicable Host REIT Lessor if any of
the following Events of Default (among others) occur:
. Failure to pay Rent within ten days after the due date;
. Failure to comply with, or observe any of, the terms of the Hotel Lease
(other than failure to pay Rent) for 30 days after notice from the Host
REIT Lessor, including failure to properly maintain the Hotel (other
than by reason of the failure of the Host REIT Lessor to perform its
obligations under the Hotel Lease), such period to be extended for up to
an additional 90 days if such default cannot be cured with due diligence
within 30 days;
. Acceleration of maturity of certain indebtedness of the Lessee with a
principal amount in excess of $1,000,000;
. Failure of Crestline to maintain minimum net worth or debt service
coverage ratio requirements;
. Filing of any petition for relief, bankruptcy or liquidation by or
against the Lessee or any parent company of the Lessee;
. The Lessee voluntarily ceases to operate the Hotel for 30 consecutive
days, except as a result of a casualty, condemnation or emergency
situation;
. A change in control of Crestline, the Lessee or any subsidiary of
Crestline that is a direct or indirect parent of the Lessee (unless the
change in control involves an "adverse party" which would include a
competitor in the hotel business, a party without adequate financial
resources, a party that has been convicted of a felony (or controlled by
such a person), or a party who would jeopardize Host REIT's
qualification as a REIT, the Host REIT Lessor must pay a termination fee
equal to the Lessee's Operating Profit from the Hotel for the
immediately preceding Fiscal Year if the Lease is terminated following
such a change in control); or
. The Lessee, or Crestline or Lessee's direct parent defaults under the
assignment of the Management Agreement, the guarantees described above,
the noncompetition agreement described below or certain other related
agreements between the parties or their affiliates.
Assignment of the Lease. A Lessee will be permitted to sublet all or part of
the Hotel or assign its interest under its Hotel Lease, without the consent of
the Host REIT Lessor, to any wholly-owned and controlled single- purpose
subsidiary of Crestline, provided that Crestline continues to meet the minimum
net worth test and all
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other requirements of the Lease. Transfers to other parties will be permitted
if approved by the Host REIT Lessor.
Subordination to Qualifying Mortgage Debt. The rights of each Lessee will be
expressly subordinate to qualifying mortgage debt and any refinancing thereof.
A default under the loan documents may result in the termination of the Hotel
Lease by the lender. The lender will not be required to provide a non-
disturbance agreement to the Lessee.
The Host REIT Lessor will be obligated to compensate the Lessee, on a basis
equal to the lease termination provision described in "--Termination of the
Hotel Leases upon Disposition of Full-Service Hotels" above, if the full-
service Hotel Lease is terminated because of a non-monetary default under the
terms of a loan that occurs because of an action or omission by the Host REIT
Lessor (or its affiliates) or a monetary default where there is not an uncured
monetary Event of Default of the Lessee. In addition, if any loan is not
refinanced in a timely manner, and the loan amortization schedule is converted
to a cash flow sweep structure, the Lessee has the right to terminate the
Lease after a twelve-month cure period and the Host REIT Lessor will owe a
termination fee as provided above. During any period of time that a cash flow
sweep structure (or other similar cash management procedure) is in effect, the
Host REIT Lessor will compensate the Lessee for any lost revenue resulting
from such cash flow sweep. The Operating Pertnership will guarantee these
obligations.
Personal Property Limitation. If a Host REIT Lessor reasonably anticipates
that the average tax basis of the items of the Host REIT Lessor's FF&E and
other personal property that are leased to the applicable Lessee will exceed
15% of the aggregate average tax basis of the real and personal property
subject to the applicable Lease, the following procedures will apply, subject
to obtaining lender consent where required:
. Although the Host REIT Lessor would acquire any replacement FF&E that
would cause the applicable limits to be exceeded (the "Excess FF&E"),
immediately thereafter the Lessee would be obligated either to acquire
such Excess FF&E from the Host REIT Lessor or to cause a third party to
purchase such FF&E.
. The Lessee would agree to give a right of first opportunity to a Non-
Controlled Subsidiary to acquire the Excess FF&E and to lease the
Excess FF&E to the Lessee at an annual rental equal to the market
leasing factor (as defined below) times the cost of the Excess FF&E. If
such Non-Controlled Subsidiary does not agree to acquire the Excess
FF&E and to enter into such lease, then the Lessee may either acquire
the Excess FF&E itself or arrange for another third party to acquire
such Excess FF&E and to lease the same to Lessee.
. The annual Rent under the applicable Hotel Lease would be reduced in
accordance with a formula based on market recovery rates.
Certain Actions under the Hotel Leases. The Leases prohibit the Lessee from
taking the following actions with respect to the Management Agreement without
notice to the Host REIT Lessor and, if the action would have a material
adverse effect on the Host REIT Lessor, the consent of the Host REIT Lessor:
(i) terminate the Management Agreement prior to the expiration of the term
thereof; (ii) amend, modify or assign the Management Agreement; (iii) waive
(or fail to enforce) any right of the "Owner" under the Management Agreement;
(iv) waive any breach or default by the Manager under the Management Agreement
(or fail to enforce any right of the "Owner" in connection therewith); (v)
agree to any change in the Manager or consent to any assignment by the
Manager; or (vi) take any other action which reasonably would be expected to
materially adversely affect the Host REIT Lessor's rights or obligations under
the Management Agreement for periods following the termination of the Hotel
Lease (whether upon the expiration of its term or upon earlier termination as
provided for therein).
Change in Manager. A Lessee will be permitted to change the Manager or the
brand affiliation of a Hotel only with the approval of the applicable Host
REIT Lessor, which approval may not be unreasonably withheld. The replacement
manager must be a nationally recognized manager with substantial experience in
managing hotels of comparable quality. No such replacement can extend beyond
the term of the Lease without the consent of the Host REIT Lessor, which
consent may be withheld in the Host REIT Lessor's sole discretion.
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THE MANAGEMENT AGREEMENTS
General. The Lessees will lease the Hotels from the Partnerships and the
Private Partnerships under the Management Agreements between the Operating
Partnership and the subsidiaries of Marriott International and other companies
that currently manage the Hotels. Following the REIT Conversion and as a
result of their assumptions of obligations under the Management Agreements,
the Lessees will have substantially all of the rights and obligations of the
"Owners" of the Hotels under the Management Agreements for the period during
which the Leases are in effect (including the obligation to pay the management
and other certain fees thereunder) and will hold the Company harmless with
respect thereto. See "--Management Services Provided by Marriott International
and Affiliates--Assignment of Management Agreements."
Relationship with Marriott International. Subsidiaries of Marriott
International will serve as Managers for a substantial majority of the
Company's Hotels which will be leased to the Lessees, pursuant to the
Management Agreements. Marriott International and its subsidiaries also will
provide various other services to Host REIT and its affiliates and to
Crestline and its affiliates. With respect to these contractual arrangements,
the potential exists for disagreement as to contract compliance. Additionally,
the possible desire of the Company to finance, refinance or effect a sale of
any of the Hotels leased to the Lessees and managed by subsidiaries of
Marriott International may, depending upon the structure of such transactions,
result in a need to modify the Management Agreements with respect to such
Hotel. Any such modification proposed by the Company may not be acceptable to
Marriott International or the applicable Lessee, and the lack of consent from
either Marriott International or the applicable Lessee that has assumed the
Management Agreement could adversely affect the Company's ability to
consummate such financing or sale. In addition, certain situations could arise
where actions taken by Marriott International in its capacity as manager of
competing lodging properties would not necessarily be in the best interests of
the Company or the Lessees. Nevertheless, the Company believes that there is
sufficient mutuality of interest between the Company, the Lessees and Marriott
International to result in a mutually productive relationship.
Management Services Provided by Marriott International and Affiliates.
General. Under each Management Agreement related to a Marriott
International-managed Hotel, the Manager will provide complete management
services to the applicable Lessees in connection with its management of such
Lessee's Hotels following the REIT Conversion. Except where specifically
noted, these relationships are substantially identical to those that exist
between the applicable Manager and Host or the applicable Partnership or
Private Partnership currently, and that would exist between the Company's
subsidiaries and the Manager in the event the Leases expire or otherwise
terminate while the Management Agreements remain in effect. The services
provided by each Manager to each Lessee will include the following:
Assignment of Management Agreements. The Management Agreements applicable to
each Hotel will be assigned to the applicable Lessee for the term of the Lease
of such Hotel. The Lessee will be obligated to perform all of the obligations
of the Lessor under the Management Agreement during the term of its Lease
including the payment of fees due under the Management Agreement, other than
certain retained obligations, including, without limitation, payment of
property taxes, property casualty insurance and ground lease rent, and
maintaining a reserve fund for FF&E replacements and capital expenditures, for
which the Lessor will retain responsibility. Although the Lessee will assume
obligations of the Lessor under the Management Agreement, the Lessor will not
be released from its obligations and, if a Lessee fails to perform any
obligations, the Manager will be entitled to seek performance by or damages
from the Lessor. The Lessees' obligation to pay the fees due under the
Management Agreements, however, could adversely affect the ability of the
Lessee to pay rent under the Leases, even though such amounts are otherwise
due and owed to the Lessor. If the Lease is terminated for any reason, any new
or successor Lessee must meet certain requirements for an "Approved Lessee" or
otherwise be acceptable to Marriott International. The requirements for an
"Approved Lessee" includes that the entity (i) has sufficient financial
resources and liquidity to fill the obligations under the Management
Agreement, (ii) is not in control of or controlled by persons who have been
convicted of felonies, (iii) is not engaged, or affiliated with any person or
entity engaged in the business of operating a branded hotel chain having 5,000
or more guest rooms in competition with Marriott International, and (iv) must
be a single purpose entity in which Marriott
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International has a noneconomic membership interest with the same rights as it
has in Lessee. Any new lease must be in substantially the same form as the
Lease or otherwise be acceptable to Marriott International.
Operational Services. The Managers have sole responsibility and exclusive
authority for all activities necessary for the day-to-day operation of the
Hotels, including establishment of all room rates, the processing of
reservations, procurement of inventories, supplies and services, periodic
inspection and consultation visits to the Hotels by the Managers' technical
and operational experts and promotion and publicity of the Hotels. The Manager
will receive compensation from the Lessee in the form of a base management fee
and an incentive management fee, which are normally calculated as percentages
of gross revenues and operating profits, respectively.
Executive Supervision and Management Services. The Managers generally
provide all managerial and other employees for the Hotels; review the
operation and maintenance of the Hotels; prepare reports, budgets and
projections; provide other administrative and accounting support services,
such as planning and policy services, financial planning, divisional financial
services, risk planning services, product planning and development, employee
planning, corporate executive management, legislative and governmental
representation and certain in-house legal services; and protect the "Marriott"
trademark and other tradenames and service marks. The Manager also will
provide a national reservations system.
Chain Services. The Management Agreements require the Manager to furnish
certain services (the "Chain Services") that are furnished generally on a
central or regional basis to hotels in the Marriott hotel system. Such
services include the following: (i) the development and operation of computer
systems and reservation services, (ii) regional management and administrative
services, regional marketing and sales services, regional training services,
manpower development and relocation costs of regional personnel and (iii) such
additional central or regional services as may from time to time be more
efficiently performed on a regional or group level. Costs and expenses
incurred in providing such services are allocated among all hotels in the
Marriott hotel system managed by the Manager or its affiliates and each
applicable Lessee will be required to reimburse the Manager for its allocable
share of such costs and expenses.
Working Capital and Fixed Asset Supplies. The Lessee will be required to
maintain working capital for each Hotel and fund the cost of fixed asset
supplies, which principally consist of linen and similar items. The applicable
Lessee will also be responsible for providing funds to meet the cash needs for
the operations of the Hotels if at any time the funds available from
operations are insufficient to meet the financial requirements of the Hotels.
Use of Affiliates. The Manager employs the services of its affiliates to
provide certain services under the Management Agreements. Certain of the
Management Agreements provide that the terms of any such employment must be no
less favorable to the applicable Lessee, in the reasonable judgment of the
Manager, than those that would be available from the Manager.
FF&E Replacements. The Management Agreements generally provide that once
each year the Manager will prepare a list of FF&E to be acquired and certain
routine repairs that are normally capitalized to be performed in the next year
("FF&E Replacements") and an estimate of the funds necessary therefor. Under
the terms of the Leases, the Company, as lessor, is required to provide to the
applicable Lessee, all necessary FF&E for the operation of the Hotels
(including funding any required FF&E Replacements). Under each full-service
Lease, Host REIT will be responsible for the costs of FF&E Replacements and
for decisions with respect thereto (subject to its obligations to the Lessee
under the Lease).
Building Alterations, Improvements and Renewals. The Management Agreements
require the Manager to prepare an annual estimate of the expenditures
necessary for major repairs, alterations, improvements, renewals and
replacements to the structural, mechanical, electrical, heating, ventilating,
air conditioning, plumbing and vertical transportation elements of each Hotel.
Such estimate will be submitted to the Company and the Lessee
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for their approval. In addition to the foregoing, the Management Agreements
generally provide that the Manager may propose such changes, alterations and
improvements to the Hotel as are required, in the Manager's reasonable
judgment, to keep the Hotel in a competitive, efficient and economical
operating condition or in accordance with Marriott standards. The cost of the
foregoing shall be paid from the FF&E Reserve Account; to the extent that
there are insufficient funds in such account, the Company is required to pay
any shortfall.
Service Marks. During the term of the Management Agreements, the service
mark "Marriott" and other symbols, logos and service marks currently used by
the Manager and its affiliates may be used in the operation of the Hotels.
Marriott International (or its applicable affiliates) intends to retain its
legal ownership of these marks. Any right to use the service marks, logo and
symbols and related trademarks at a Hotel will terminate with respect to that
Hotel upon termination of the Management Agreement with respect to such Hotel.
Termination Fee. Certain of the Management Agreements provide that if the
Management Agreement is terminated prior to its full term due to casualty,
condemnation or the sale of the Hotel, the Manager will receive a termination
fee as specified in the specific Management Agreement.
Termination for Failure to Perform. Substantially all of the Management
Agreements may be terminated based upon a failure to meet certain financial
performance criteria, subject to the Manager's right to prevent such
termination by making certain payments to the Lessee based upon the shortfall
in such criteria.
Events of Default. Events of default under the Management Agreements
include, among others, the following: (i) the failure of either party to make
payments pursuant to the Management Agreement within ten days after written
notice of such non-payment has been made, (ii) the failure of either party to
perform, keep or fulfill any of the covenants, undertakings, obligations or
conditions set forth in the Management Agreement and the continuance of such
default for a period of 30 days after notice of said failure or, if such
default is not susceptible of being cured within 30 days, the failure to
commence said cure within 30 days or thereafter the failure to diligently
pursue such efforts to completion, (iii) if either party files a voluntary
petition in bankruptcy or insolvency or a petition for reorganization under
any bankruptcy law or admits that it is unable to pay its debts as they become
due, (iv) if either party consents to an involuntary petition in bankruptcy or
fails to vacate, within 90 days from the date of entry thereof, any order
approving an involuntary petition by such party; or (v) if an order, judgment
or decree by any court of competent jurisdiction, on the application of a
creditor, adjudicating either party as bankrupt or insolvent or approving a
petition seeking reorganization or appointing a receiver, trustee or
liquidator of all or a substantial part of such party's assets is entered, and
such order, judgment or decree continues unstayed and in effect for any period
of 90 days.
As described above, all fees payable under the Management Agreements
excluding the termination fee, if any, will become obligations of the Lessees,
to be paid by the Lessees, as modified prior to the consummation of the REIT
Conversion, for so long as the Leases remain in effect. The Lessees'
obligations to pay these fees, however, could adversely affect the ability of
one or more Lessees to pay Base Rent or Percentage Rent payable under the
Leases, even though such amounts otherwise are due and owing to the Company.
Restrictions on Sales and Other Transfers of Interests in Hotels. The
Management Agreements prohibit the hotel owner from selling, leasing or
otherwise transferring the hotels unless the transferees assume the Management
Agreements and satisfy certain criteria, including having sufficient financial
resources and liquidity to satisfy the owner's obligations under the
Management Agreements, not being in control or controlled by persons who have
been convicted of felonies and not being engaged in operating a branded hotel
chain having 5,000 or more guest rooms in competition with Marriott
International. The Management Agreements also prohibit the Lessees from
subleasing all or any portion of the Leases and from assigning the Leases
except to entities which are wholly-owned by Crestline and have organizational
documents which are the same as those of the Lessees, in each case without the
prior written consent of Marriott International.
Restrictions on Lease Amendments. The Management Agreements prohibit the
Lessees and the hotel lessors from entering in certain amendments of the
Leases, including shortening the term of the Leases and
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modifying the parties' respective rights and obligations with respect to FF&E,
capital expenditures and approval of hotel budgets, in each case without the
prior written consent of Marriott International.
Marriott International's Right to Cause Termination of Leases. The
Management Agreements provide that if the hotel lessors do not elect to
terminate the Lease upon a "Change in Control," Marriott International may
require the hotel lessors to exercise their termination rights if, as a result
of such Change in Control, the Lessee is or is controlled by a person who has
been convicted of a felony or who is engaged (or affiliated with persons who
are engaged) in operating a branded hotel chain having 5,000 or more guest
rooms in competition with Marriott International.
NONCOMPETITION AGREEMENT
Crestline, Host and the Non-Controlled Subsidiary which will lease to
Crestline any Excess FF&E existing at the commencement of the Leases (the
"Initial FF&E Lessor") will enter into a non-competition agreement in
connection with the Initial E&P Distribution. Pursuant to this non-competition
agreement, Crestline will agree, among other things, that until the earlier of
December 31, 2008 or the date on which it is no longer a Lessee of more than
25% of the number of hotels owned by Host REIT at the time of the Initial E&P
Distribution, it will not (i) own, acquire, develop or construct for ownership
any full-service hotel (except for (a) investments which represent an
immaterial portion of a merger or similar transaction, (b) a minimal portfolio
investment or (c) the provision of limited financing); (ii) without the
consent of Host or Host REIT in its sole discretion, manage or operate (other
than through a third party manager) any limited-service or full-service hotel
properties owned by Host or Host REIT; or (iii) conduct, participate in,
engage in or have a financial interest in any person that engages in the
ownership or operation of any single or multiple full-service hotel franchise
system operating under one or more common name brands. The restrictions
described in (i) and (iii) above do not apply to any activities of Crestline
related to limited-service hotels, and none of these restrictions preclude
Crestline from acting as a lessee or third party manager with respect to full-
service hotels owned by others.
Until the earlier of December 31, 2008 or the date upon which Crestline is
not the lessee of more than 25% of the number of hotels owned by Host at the
time of the Initial E&P Distribution, Host or Host REIT and the FF&E Lessor
have agreed that they will not conduct, participate in, engage in or have a
financial interest in any person that engages in the business of leasing,
operating or franchising limited-service or full-service hotel properties;
provided, however, that this restriction does not prevent Host or Host REIT or
the FF&E Lessor from (i) managing, operating or franchising limited-service or
full-service hotels with respect to matters incident to the operation of such
properties (e.g., management services with respect to food and beverages,
plant and equipment operation and maintenance, reservations, sales and
marketing) on behalf of third parties or (ii) leasing full-service or limited-
service hotels to and from each other or (iii) in the case of Host or Host
REIT, leasing full-service or limited-service hotels from certain other
related parties. Until December 31, 2003, Host or Host REIT and the FF&E
Lessor have also agreed that they will not conduct, participate in, engage in
or have a financial interest in any person that engages in the ownership,
acquisition or operation of senior living communities (except for (a)
investments which represent an immaterial portion of a merger or similar
transaction, (b) a minimal portfolio investment or (c) the provision of
limited financing). In addition, both Crestline and Host REIT will agree not
to hire or attempt to hire any of the other company's other senior employees
at any time prior to December 31, 2000. See "Business and Properties--
Noncompetition Agreement." Subject to the Marriott International hotel
noncompetition agreement, which continues until October 2000, Crestline is
free to pursue any and all activities with respect to limited service hotels
(other than limited service hotels owned by Host), and it is permitted to
operate full-service hotels as a third-party manager so long as it is not the
owner of the brand or franchise under which such hotels are operated.
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INDEBTEDNESS
Senior Note Refinancing. On August 5, 1998, HMH Properties, Inc. ("HMH
Properties"), a subsidiary of Host that will merge into the Operating
Partnership prior to the Effective Date, issued $1.7 billion of 7 7/8% senior
notes issued in two series, consisting of $500 million due 2005 and $1.2
billion due 2008 (the "New Senior Notes"). The New Senior Notes are guaranteed
by Host, Host Marriott Hospitality, Inc. and certain subsidiaries of HMH
Properties and are secured by pledges of equity interests in certain
subsidiaries of HMH Properties. The Operating Partnership will assume the New
Senior Notes in connection with the REIT Conversion and the guarantee by Host
Marriott is expected to terminate on the Effective Date.
The indenture under which the New Senior Notes were issued contains
covenants restricting the ability of HMH Properties and certain of its
subsidiaries to incur indebtedness, acquire or sell assets or make investments
in other entities, and make distributions to equityholders of HMH Properties
and (following the REIT Conversion) the Operating Partnership. Following the
REIT Conversion, the indenture permits the Operating Partnership to make
distributions to holders of OP Units, including Host REIT, in amounts equal to
the greater of (i) 95% of FFO plus net proceeds of equity offerings (provided
that no event of default under the indenture has occurred and is continuing
and the Operating Partnership is able to incur debt under the applicable
indenture covenants) or (ii) an amount sufficient to permit Host REIT to
maintain its status as a REIT and satisfy certain other requirements (provided
that no event of default under the indenture has occurred and is continuing
and the Operating Partnership has a consolidated debt to adjusted total assets
ratio that is less than a specified level). The indenture also permits the
Operating Partnership to make distributions to Host REIT sufficient to enable
Host REIT to make the Initial E&P Distribution. The New Senior Notes also
contain a financial covenant requiring the maintenance of a specified ratio of
unencumbered assets to unsecured debt.
New Credit Facility. On August 5, 1998, HMH Properties entered into a $1.25
billion credit facility (the "New Credit Facility") provided by a syndicate of
financial institutions (the "Lenders") led by Bankers Trust Company. The New
Credit Facility provides the Operating Partnership with (i) a $350 million
term loan facility (subject to increases as provided in the succeeding
paragraph) and (ii) a $900 million revolving credit facility. The New Credit
Facility will have an initial term of three years with two one-year options to
extend. The proceeds of the New Credit Facility, along with the proceeds from
the New Senior Notes, were used to fund the purchase of $1.55 billion of
senior notes of HMH Properties at the initial closing on August 5, 1998, and
repay $22 million of outstanding borrowings under a line of credit provided by
the Lenders to certain subsidiaries of Host and will be used (i) to acquire
full-service hotels and other real estate assets including, under certain
circumstances, senior living properties, (ii) under certain circumstances, to
develop new full-service hotels and (iii) for general working capital
purposes.
The term loan facility was funded on the closing date of the New Credit
Facility. The $350 million term loan facility may be increased by up to $250
million after the initial closing and will be available, subject to terms and
conditions thereof and to the commitment of sufficient Lenders, in up to two
drawings to be made on or prior to the second anniversary of the closing of
the New Credit Facility. The Lenders will advance funds under the revolving
credit facility as requested by the Operating Partnership with minimum
borrowing amounts and frequency limitations to be agreed upon, subject to
customary conditions including, but not limited to, (i) no existing or
resulting default or event of default under the New Credit Facility and (ii)
continued accuracy of representations and warranties in all material respects.
As of September 11, 1998, approximately $350 million was outstanding under the
New Credit Facility.
The interest rate applicable to the New Credit Facility and the unused
commitment fee applicable to the revolving portion of the New Credit Facility
are calculated based on a spread over LIBOR that will fluctuate based on the
quarterly recalculation of a leverage ratio set forth in the New Credit
Facility (7.5% at September 11, 1998). The New Credit Facility provides that
in the event that the Operating Partnership achieves one of several investment
grade long-term unsecured indebtedness ratings, the spread over LIBOR
applicable to the New Credit Facility will be fixed based on the particular
rating achieved. If the Operating Partnership elects to
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exercise its one-year extensions, the Operating Partnership will be required
to amortize approximately 22.5% per annum of the principal amount outstanding
under the New Credit Facility at the end of the initial three-year term.
The Operating Partnership's obligations under the New Credit Facility are
guaranteed, subject to certain conditions, on a senior basis by Host, Host
Marriott Hospitality, Inc. and certain of HMH Properties' existing and future
subsidiaries. The New Credit Facility will be assumed by the Operating
Partnership in connection with the REIT Conversion and the guarantee of Host
is expected to terminate on the Effective Date. While there are certain
conditions to the termination of the guarantee of Host, the REIT Conversion
has been structured so that such conditions will be satisfied. Termination
does not otherwise require Lender approval. In addition, certain subsidiaries
of Host other than HMH Properties and its subsidiaries may, under certain
circumstances, guarantee the obligations under the New Credit Facility in the
future. Borrowings under the New Credit Facility will rank pari passu with the
New Senior Notes and other existing and future senior indebtedness of the
Operating Partnership. The New Credit Facility is secured, on an equal and
ratable basis, with the New Senior Notes by a pledge of the capital stock of
certain direct and indirect subsidiaries of HMH Properties. In addition, the
New Credit Facility may, under certain circumstances in the future, be secured
by a pledge of capital stock of certain subsidiaries of Host other than HMH
Properties and its subsidiaries.
The New Credit Facility includes financial and other covenants that require
the maintenance of certain financial ratios and that restrict payment of
distributions and investments, acquisitions and sales of assets by the
Operating Partnership. The financial covenants impose the following
requirements, among others, on the Operating Partnership:
. the ratio of consolidated total debt to consolidated EBITDA must not
exceed 5.5:1.0 through the end of the fiscal quarter ending on or about
June 30, 1999, declining periodically to 4.5:1.0 at any time after the
end of the fiscal quarter ending on or about June 30, 2000;
. the ratio of consolidated secured debt to consolidated total debt must
not exceed 0.57:1.0 through the end of the fiscal quarter ending on or
about June 30, 1999, declining periodically to 0.40:1.0 at any time
after the end of the fiscal quarter ending on or about December 31,
2001, with certain exceptions;
. the ratio of EBITDA attributable to unencumbered properties of the
Operating Partnership and its subsidiaries to consolidated EBITDA for
any four fiscal quarters must not be less than 0.425:1.0 through the end
of the fiscal quarter ending on or about March 31, 1999, increasing
periodically to 0.60:1.0 for any four fiscal quarters ending on or after
December 31, 2001;
. the ratio of the consolidated EBITDA to consolidated interest expense
for any four fiscal quarters must not be less than 2.25:1.0 through the
end of the fiscal quarter ending on or about June 30, 1999, increasing
periodically to 2.50:1.0 for any four fiscal quarters ending after the
fiscal quarter that ends on or about June 30, 2000;
. the ratio of EBITDA attributable to unencumbered properties of the
Operating Partnership and its subsidiaries to consolidated unsecured
debt for any four fiscal quarters must not be less than 2.0:1.0;
. the ratio of consolidated EBITDA to total fixed charges (as defined in
the New Credit Facility) for any four fiscal quarters must not be less
than 1.5:1.0; and
. the consolidated tangible net worth of the Operating Partnership must
not be less than the sum of 75% of the tangible net worth on August 5,
1998 plus 75% of the aggregate net proceeds received from issuance of
equity by the Operating Partnership after August 5, 1998.
Following the REIT Conversion, the New Credit Facility permits the Operating
Partnership to make distributions to holders of OP Units, including Host REIT,
in an aggregate amount for every four fiscal quarters equal to the greater of
(i) 85% of adjusted funds from operations plus the net proceeds of equity
offerings and (ii) the minimum amount necessary to permit Host REIT to
maintain its status as a REIT and to satisfy certain other requirements,
provided that no specified default or event of default has occurred under the
New Credit Facility and is continuing. The New Credit Facility also permits
the Operating Partnership to make distributions to Host REIT sufficient to
enable Host REIT to make the Initial E&P Distribution.
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DISTRIBUTION AND OTHER POLICIES
The following is a discussion of the anticipated policies with respect to
distributions, investments, financing, lending, conflicts of interest and
certain other activities of the Company. Upon consummation of the REIT
Conversion, the Company's policies with respect to these activities will be
determined by the Board of Directors of Host REIT and may be amended or
revised from time to time at the discretion of the Board of Directors without
notice to, or a vote of, the stockholders of Host REIT, except that changes in
certain policies with respect to conflicts of interest must be consistent with
legal and contractual requirements.
DISTRIBUTION POLICY
Host REIT and the Operating Partnership intend to pay regular quarterly
distributions to holders of Host REIT Common Stock and OP Units. Host REIT and
the Operating Partnership anticipate that distributions will be paid during
January, April, July and October of each year, except that the first
distribution in 1999 is expected to be paid at the end of February if the REIT
Conversion is completed in 1998. The following discussion and the information
set forth in the table and footnotes below should be read in conjunction with
the Pro Forma Statements of Operations and notes thereto, "Summary--Forward-
Looking Statements," "Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Although the Code generally requires a REIT to distribute 95% of its taxable
income for each year (within a certain period after the end of such year), the
Operating Partnership will establish its initial distribution at a level that
will enable Host REIT to distribute to its stockholders an amount equal to
100% of Host REIT's taxable income (other than capital gains, which will be
addressed on a case-by-case basis) for each year no later than the end of
January of the following year. Host REIT anticipates that distributions
generally will be paid from cash available for distribution, but to the extent
that cash available for distribution is insufficient, the Operating
Partnership intends to borrow funds in order to make distributions consistent
with such distribution policy. Based upon Host's preliminary estimates of Host
REIT's taxable income for the twelve months ending December 31, 1999, Host and
the Operating Partnership currently estimate that this policy will result in
an initial annual distribution by the Operating Partnership of approximately
$0.84 per OP Unit ($0.21 per quarter) during the twelve months ending December
31, 1999.
The Operating Partnership has estimated its pro forma cash available for
distribution during the twelve months ending December 31, 1999 based upon the
Operating Partnership's pro forma cash from operations during the fifty-two
weeks ended September 11, 1998 (the "Last Twelve Months"), adjusted for
certain known material events and/or contractual commitments that either have
occurred or will occur prior to December 31, 1999. No effect was given to any
changes in working capital resulting from changes in current assets and
liabilities (which changes are not expected to be material) or to any
immaterial changes in the net amount of cash estimated to be used for (or
provided by) investing activities or financing activities. Rental income is
recognized only for leases to be executed at or prior to completion of the
REIT Conversion. The estimate of cash available for distribution is not
intended to be a projection or forecast of the Operating Partnership's results
of operations or its liquidity. The following table describes the calculation
of the Operating Partnership's pro forma cash from operations during the Last
Twelve Months and its estimated cash available for distribution, cash from
contingent rents and borrowings to make estimated distributions during the
twelve months ending December 31, 1999:
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<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS, EXCEPT PER
OP UNIT AND
SHARE AMOUNTS)
--------------------
<S> <C>
Pro forma income before extraordinary items for the fiscal
year ended January 2, 1998............................... $ 26
Plus: Pro forma income before extraordinary items for
the First Three Quarters 1997.......................... 230
Less: Pro forma loss before extraordinary items for the
First Three Quarters 1998........................... (198)
-----
Pro forma income before extraordinary items for the Last
Twelve Months............................................ 58
Plus: Pro forma loss on sale of real estate for the Last
Twelve Months(1).................................... 15
Plus: Pro forma real estate related depreciation and
amortization for the Last Twelve
Months(2)........................................... 333
Plus: Pro forma portion of cash from operations of
unconsolidated equity investments for the Last
Twelve Months, net of pro forma equity in earnings
of affiliates for the Last Twelve Months(3)......... 26
Less: One-time gain for the Last Twelve Months(4)....... (10)
Less: Pro forma portion of cash from operations relating
to minority owners for the Last Twelve Months, net
of pro forma portion of minority interest relating
to OP Units for the Last Twelve Months(5)........... (4)
-----
Pro forma cash from operations during the Last Twelve
Months................................................... 418
Adjustments:
FF&E reserves(6)........................................ (191)
Principal repayments(7)................................. (69)
-----
Estimated cash available for distribution of the Operating
Partnership during the twelve months ending
December 31, 1999........................................ 158
Adjustments:
Estimated cash from contingent rents(8)................. 64
Estimated borrowings to make estimated initial annual
cash distributions..................................... 9
-----
Total estimated initial annual cash distributions of the
Operating Partnership during the twelve months ending
December 31, 1999(9)(13)................................. $ 231
=====
Host REIT's share of total estimated initial annual cash
distributions of the Operating Partnership during the
twelve months ending December 31, 1999(10)(13)........... $ 172
=====
Estimated initial annual cash distributions per OP Unit
during the twelve months ending December 31,
1999(11)(13)............................................. $0.84
=====
Estimated initial annual cash distributions per share of
Host REIT Common Stock during the twelve months ending
December 31, 1999(12)(13)................................ $0.84
=====
</TABLE>
- --------
(1) Represents loss on sale of real estate for the last quarter 1997 of $15
million.
(2) Represents pro forma real estate related depreciation and amortization
for the fiscal year ended January 2, 1998 of $342 million minus pro forma
real estate related depreciation and amortization for the First Three
Quarters 1997 of $230 million plus pro forma real estate related
depreciation and amortization for the First Three Quarters 1998 of $221
million.
(3) Represents pro forma portion of cash from operations of unconsolidated
equity investments, net of pro forma equity in earnings of affiliates,
for the fiscal year ended January 2, 1998 of $30 million minus pro forma
portion of cash from operations of unconsolidated equity investments, net
of pro forma equity in earnings of affiliates, for the First Three
Quarters 1997 of $16 million plus pro forma portion of cash from
operations of unconsolidated equity investments, net of pro forma equity
in earnings of affiliates, for the First Three Quarters 1998 of $12
million.
(4) Represents pro forma one-time gain for the last quarter 1997 of $10
million.
(5) Represents pro forma portion of cash from operations relating to minority
owners, net of pro forma portion of minority interest relating to OP
Units, for the fiscal year ended January 2, 1998 of $10 million minus pro
forma portion of cash from operations relating to minority owners, net of
pro forma portion of minority interest relating to OP Units, for the
First Three Quarters 1997 of $8 million plus pro forma portion of cash
from operations relating to minority owners, net of pro forma portion of
minority interest relating to OP Units, for the First Three Quarters 1998
of $3 million.
(6) Represents FF&E reserves for the year ending December 31, 1999 of $191
million based on pro forma FF&E for the Last Twelve Months. Any
differences between such estimated amount and the Last Twelve Month pro
forma amount are not expected to be material.
(7) Represents principal repayments required for the year ending December 31,
1999 of $69 million based on the terms of the pro forma indebtedness at
September 11, 1998.
(8) The amount of contingent rent received but deferred pursuant to EITF 98-
9, "Accounting for Contingent Rents in Interim Financial Periods," at
September 11, 1998 and September 12, 1997 was $320 million and $256
million, respectively. The difference of $64 million represents the
elimination of the net effect of these two deferred items, which has the
effect of applying the applicable lease rental terms to the historical
gross sales from the leased Hotels for the last Twelve Months to estimate
rental revenues for the calendar year 1999. Interim and annual revenues
will be impacted to the extent percentage rent thresholds under the
leases are not met or exceeded. If the rental revenues represented by
this adjustment were not realized for the twelve months ending December
31, 1999, then the Operating Partnership would be required to borrow the
amount of the shortfall under the New Credit Facility or from other
sources to make estimated initial annual cash distributions during 1999.
(9) Based on a total of 274.6 million OP Units outstanding on a pro forma
basis after the Partnership Mergers (based upon an assumed price of
$12.50 per OP Unit) and the preliminary estimated cash distributions
during the twelve months ending December 31, 1999 of $0.84 per OP Unit.
(10) Based upon a total of 204.5 million OP Units to be owned by Host REIT on
a pro forma basis after the Merger (based on a price of $12.50 per OP
Unit).
(11) Based on a total of 274.6 million OP Units outstanding on a pro forma
basis after the Partnership Mergers (based upon an assumed price of
$12.50 per OP Unit).
(12) Based on a total of 204.5 million shares of Host REIT Common Stock
outstanding on a pro forma basis after the Merger (based on an assumed
price of $12.50 per share).
(13) Does not include 29.6 million shares (or OP Units) which are issuable
upon conversion of the convertible debentures underlying the Convertible
Preferred Securities (assuming a conversion price of $18.604 per share),
which does not take into account any anti-dilution adjustments which may
result from certain effects of the REIT Conversion that cannot be
determined at this time or any shares which are issuable upon exercise of
outstanding stock options (6.8 million shares as of January 2, 1998), or
any shares issued pursuant to the Special Dividend.
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<PAGE>
If Host's preliminary estimate of $231 million of cash distributions by the
Operating Partnership during the twelve months ending December 31, 1999 proves
accurate but the Operating Partnership's aggregate estimated cash available
for distribution were only $158 million and estimated cash from contingent
rents were only $64 million during the twelve months ending December 31, 1999,
then the Operating Partnership would be required to borrow approximately $9
million (or $0.03 per OP Unit) to make such distributions to enable Host REIT
to distribute 100% of its estimated taxable income in accordance with its
distribution policy. Moreover, if estimated cash from contingent rents were
less than $64 million, then the Operating Partnership also would be required
to borrow any such shortfall in order to make such distributions. While the
Operating Partnership does not believe this will be necessary, it believes it
would be able to borrow the necessary amounts under the New Credit Facility or
from other sources and that any such borrowing would not have a material
adverse effect on its financial condition or results of operations.
The distributions to stockholders per share of Host REIT Common Stock are
expected to be equal to the amount distributed by the Operating Partnership
per OP Unit. However, if the REIT Conversion is not completed until after
January 1, 1999, then Host REIT's distributions to stockholders in 1999 would
be lower than the Operating Partnership's distributions per OP Unit (by the
amount of Host REIT's 1999 corporate income tax payments) until its REIT
election becomes effective, which would be no later than January 1, 2000. The
Operating Partnership intends to make distributions during 1999 at the
estimated level described above even if the REIT election of Host REIT were
not effective until January 1, 2000. The following table describes the
calculation of Host REIT's estimated initial cash distributions and estimated
cash distributions per share of Host REIT Common Stock for the twelve months
ending December 31, 1999, based on the Operating Partnership's estimated cash
distributions of $0.84 per OP Unit, if the REIT Conversion were to occur on
January 1, 1999 but Host REIT's REIT election were not effective until January
1, 2000:
<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS EXCEPT
PER SHARE AMOUNT)
-----------------
<S> <C>
Estimated cash distributions by the Operating Partnership for
the twelve months ending December 31, 1999.................. $ 231
Less: Estimated cash distributions to OP Unitholders (other
than Host REIT)............................................. (59)
-----
Host REIT's share of estimated cash distributions by the
Operating Partnership for the twelve months ending December
31, 1999.................................................... 172
Less: Estimated cash payments for federal and state income
taxes (if Host REIT has not yet made REIT election)(1).. (65)
-----
Estimated cash distributions by Host REIT (if Host REIT has
not yet made a REIT election) for the twelve months ending
December 31, 1999........................................... $107
=====
Estimated cash distributions per share of Host REIT Common
Stock (if Host REIT has not yet made a REIT election) for
the twelve months ending December 31, 1999(2)............... $0.52
=====
</TABLE>
- --------
(1) Estimated cash tax payments based on applying Host REIT's blended
statutory tax rate (assumed to be a federal rate of 35%, plus a blended
state rate of 5% net of the federal benefit), taking into account
utilization of Host REIT's estimated alternative minimum tax ("AMT")
credit carryforwards (approximately $21 million) and estimated AMT
preferences (approximately $55 million), and applying the resulting
effective rate (25%) to estimated taxable income for the year.
(2) Based on a total of 204.5 million shares of Host REIT Common Stock
outstanding.
Investors are cautioned that Host expects that its preliminary estimate of
1999 taxable income (and the resulting estimated distributions during 1999)
may materially change as a result of issuances of additional common or
preferred stock by Host either prior to or following the Partnership Mergers
(which could reduce the distribution per OP Unit in accordance with its
distribution policy), changes in operations, acquisitions or dispositions of
assets, changes in the preliminary estimate of taxable income for 1999 and
various other factors (some of which may be beyond the control of Host REIT
and the Operating Partnership). Distributions will be made in the discretion
of Host REIT's Board of Directors and will be affected by a number of factors,
including the rental payments received by the Operating Partnership from the
Lessees with respect to the Leases of the
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<PAGE>
Hotels, the operating expenses of the Operating Partnership, the level of
borrowings and interest expense incurred in borrowing, the Operating
Partnership's financial condition and cash available for distribution, the
taxable income of Host REIT and the Operating Partnership, the effects of
acquisitions and dispositions of assets, unanticipated capital expenditures
and distributions required to be made on any preferred units issued by the
Operating Partnership. Actual results may vary substantially from the
estimates and no assurance can be given that the Operating Partnership's
estimates will prove accurate or that any level of distributions will be made
or sustained.
For a discussion of the tax treatment of distributions to the holders of
Host REIT Common Stock, see "Federal Income Tax Consequences--Taxation of
Taxable U.S. Stockholders Generally," "--Taxation of Tax-Exempt Stockholders
of Host REIT" and "--Taxation of Non-U.S. Stockholders." For a discussion of
the annual distribution requirements applicable to REITs, see "Federal Income
Tax Consequences--Federal Income Taxation of Host REIT Following the Merger--
Annual Distribution Requirements Applicable to REITs."
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. Host REIT is
required to conduct all of its investment activities through the Operating
Partnership. The Company's investment objectives are to (i) achieve long-term
sustainable growth in Funds From Operations per share of Host REIT Common
Stock, (ii) increase asset values by improving and expanding the initial
Hotels, as appropriate, (iii) acquire additional existing and newly developed
upscale and luxury full-service hotels in targeted markets, (iv) develop and
construct upscale and luxury full-service hotels and (v) potentially pursue
other real estate investments. The Company's business will be primarily
focused on upscale and luxury full-service hotels. Where appropriate, and
subject to REIT qualification rules and limitations contained in the
Partnership Agreement, the Company may sell certain of its hotels.
The Company also may participate with other entities in property ownership
through joint ventures or other types of co-ownership. Equity investments may
be subject to existing mortgage financing and other indebtedness or such
financing or indebtedness may be incurred in connection with acquiring
investments. Any such financing or indebtedness will have priority over the
Company's equity interest in such property.
Investments in Real Estate Mortgages. While the Company will emphasize
equity real estate investments, it may, in its discretion, invest in mortgages
and other similar interests. The Company does not intend to invest to a
significant extent in mortgages or deeds of trust, but may acquire mortgages
as a strategy for acquiring ownership of a property or the economic equivalent
thereof, subject to the investment restrictions applicable to REITs. See
"Business and Properties--Blackstone Acquisition," "Federal Income Tax
Consequences--Federal Income Taxation of Host REIT Following the Mergers--
Income Tests Applicable to REITs" and "--Asset Tests Applicable to REITs." As
of June 19, 1998, the Company held two mortgages secured by hotels. In
addition, the Company may invest in mortgage-related securities and/or may
seek to issue securities representing interests in such mortgage-related
securities as a method of raising additional funds.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage ownership limitations
and gross and asset income tests necessary for REIT qualification, the Company
also may invest in securities of other entities engaged in real estate
activities or invest in securities of other issuers, including for the purpose
of exercising control over such entities. The Company may acquire all or
substantially all of the securities or assets of other REITs or similar
entities where such investments would be consistent with the Company's
investment policies. No such investments will be made, however, unless the
Board of Directors determines that the proposed investment would not cause
either Host REIT or the Operating Partnership to be an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
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<PAGE>
FINANCING POLICIES
The Operating Partnership's and Host REIT's organizational documents
currently contain no restrictions on incurring debt. The Company, however,
will have a policy of incurring debt only if upon such incurrence the debt-to-
total market capitalization of Host REIT and the Operating Partnership would
be 60% or less. In addition, the New Senior Notes indenture and the New Credit
Facility impose limitations on the incurrence of indebtedness. The indenture
for the Notes also limits the amount of debt that the Operating Partnership
may incur if, immediately after giving effect to the incurrence of such
additional debt, the aggregate principal amount of all outstanding debt of the
Operating Partnership and its Subsidiaries (as defined in the Indenture) on a
consolidated
basis is greater than 75% of the Operating Partnership's undepreciated total
assets on the date of such incurrence. Indentures for debt issued to replace
the public bonds may contain other restrictions. The Company may, from time to
time, reduce its outstanding indebtedness by repurchasing a portion of such
outstanding indebtedness, subject to certain restrictions contained in the
Partnership Agreement and the terms of its outstanding indebtedness. The
Company will from time to time reevaluate its borrowing policies in light of
then current economic conditions, relative costs of debt and equity capital,
market conditions, market values of properties, growth and acquisition
opportunities and other factors. Consequently, the Company's financing policy
is subject to modification and change. The Company may waive or modify its
borrowing policy without any vote of the stockholders of Host REIT.
To the extent that the Board of Directors determines to seek additional
capital, the Company may raise such capital through equity offerings, debt
financing or retention of cash flow or a combination of these methods. As long
as the Operating Partnership is in existence, the net proceeds of all equity
capital raised by Host REIT will be contributed to the Operating Partnership
in exchange for OP Units in the Operating Partnership, which will dilute the
ownership interest of limited partners of the Operating Partnership.
In the future, the Company may seek to extend, expand, reduce or renew its
New Credit Facility, or obtain new credit facilities or lines of credit,
subject to its general policy relating to the ratio of debt-to-total market
capitalization, for the purpose of making acquisitions or capital improvements
or providing working capital or meeting the taxable income distribution
requirements for REITs under the Code. In the future, the Company also may
determine to issue securities senior to the Host REIT Common Stock or OP
Units, including preferred shares and debt securities (either of which may be
convertible into Host REIT Common Stock or OP Units or may be accompanied by
warrants to purchase Host REIT Common Stock or OP Units).
The Company has not established any limit on the number or amount of
mortgages that may be placed on any single hotel or on its portfolio as a
whole, although the Company's objective is to reduce its reliance on secured
indebtedness.
LENDING POLICIES
The Company may consider offering purchase money financing in connection
with the sale of a hotel where the provision of such financing will increase
the value received by the Company for the hotel sold.
CONFLICTS OF INTEREST POLICIES
Under the MGCL, no contract or transaction between a Maryland corporation
and any of its directors or between a Maryland corporation and any other
corporation, firm, or other entity in which any of its directors is a
director, or has a material financial interest, shall be void or voidable
solely for this reason, or solely because the director is present at the
meeting of the board or committee of the board which authorizes, approves, or
ratifies the contract or transaction, or solely because such director's or
directors' votes are counted for such purpose, if (i) the fact of common
directorship or interest is disclosed or known to the board of directors or
the committee, and the board or committee authorizes, approves, or ratifies
the contract or transaction by the affirmative vote of a majority of
disinterested directors, even if the disinterested directors constitute less
than a quorum, (ii) the fact of common directorship or interest is disclosed
or known to the stockholders entitled to vote, and the contract or
121
<PAGE>
transaction is authorized, approved, or ratified by a majority of the votes
cast by the stockholders entitled to vote other than the votes of shares owned
of record or beneficially by the interested corporation, firm or other entity,
or (iii) the contract or transaction is fair and reasonable to the
corporation. Common or interested directors or the stock owned by them or by
an interested corporation, firm, or other entity may be counted in determining
the presence of a quorum at a meeting of the board of directors or a committee
of the board or at a meeting of the stockholders, as the case may be, at which
the contract or transaction is authorized, approved or ratified.
Host REIT's Board of Directors also has adopted a policy to address
conflicts of interest. In addition, Maryland and Delaware law impose certain
duties on the Board of Directors and Host REIT, as general partner of the
Operating Partnership (to the extent such duties have not been eliminated
pursuant to the Host REIT Charter or the Partnership Agreement). There can be
no assurance, however, that these policies always will be successful in
eliminating the influence of such conflicts. If they are not successful,
decisions could be made that may fail to reflect fully the interests of all
holders of Host REIT Common Stock and limited partners of the Operating
Partnership.
Host REIT has adopted a policy which would require that all material
contracts and transactions between Host REIT, the Operating Partnership or any
of its subsidiaries, on the one hand, and a director or executive officer of
Host REIT or any entity in which such director or executive officer is a
director or has a material financial interest, on the other hand, must be
approved by the affirmative vote of a majority of the disinterested directors.
Where appropriate in the judgment of the disinterested directors, the Board of
Directors may obtain a fairness opinion or engage independent counsel to
represent the interests of nonaffiliated security holders, although the Board
of Directors will have no obligation to do so.
In addition, under Delaware law (where the Operating Partnership is formed),
Host REIT, as general partner, has a fiduciary duty to the Operating
Partnership and, consequently, such transactions are subject to the duties of
care and loyalty that Host REIT, as general partner, owes to limited partners
of the Operating Partnership (to the extent such duties have not been
eliminated pursuant to the terms of the Partnership Agreement). The
Partnership Agreement provides that (i) in considering to dispose of any of
the assets of the Operating Partnership, Host REIT shall take into account the
tax consequences to it of any such disposition and shall have no liability to
the Operating Partnership or the limited partners for decisions based upon or
influenced by such tax consequences (and the Operating Partnership generally
is obligated to pay any taxes Host REIT incurs as result of such
transactions), (ii) Host REIT, as general partner, is under no obligation to
consider the separate interests of the limited partners (including, without
limitation, tax consequences) in deciding whether to cause the Operating
Partnership to take, or decline to take, any action and (iii) any act or
omission by Host REIT, as a general partner, undertaken in the good faith
belief that such action is necessary or desirable to protect the ability of
Host REIT to continue to qualify as a REIT or to allow Host REIT to avoid
incurring liability for taxes under Section 857 or 4981 of the Code (relating
to required distributions) is deemed approved by all limited partners.
J.W. Marriott, Jr. and Richard E. Marriott, who are brothers, currently
serve as directors of Host and directors (and, in the case of J.W. Marriott,
Jr., also an officer) of Marriott International. After the REIT Conversion,
J.W. Marriott, Jr. will serve as a director of Host REIT and will continue to
serve as the Chairman of the Board and Chief Executive Officer of Marriott
International, and Richard E. Marriott will serve as Chairman of the Board of
Host REIT and continue to serve as a director of Marriott International.
J.W. Marriott, Jr. and Richard E. Marriott also beneficially own (as
determined for securities law purposes) approximately 10.6% and 10.2%,
respectively, of the outstanding shares of common stock of Marriott
International and will beneficially own approximately 5.33% and 5.31%,
respectively, of the outstanding shares of Crestline (but neither will serve
as an officer or director thereof). Because they will serve as directors of
Host REIT, as well as directors (and in the case of J.W. Marriott, Jr., the
Chief Executive Officer) of Marriott International they may be subject to
certain potential conflicts of interest in fulfilling their responsibilities
to Host REIT and its stockholders. See "Risk Factors--Conflicts of Interest--
Relationship with Marriott International and Crestline."
122
<PAGE>
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company may, but does not presently intend to, make investments other
than as previously described. Host REIT will make investments only through the
Operating Partnership. Host REIT and the Operating Partnership will have
authority to offer their securities and to repurchase or otherwise reacquire
their securities and may engage in such activities in the future. Host REIT
and the Operating Partnership also may make loans to joint ventures in which
they may participate in the future to meet working capital needs. Neither Host
REIT nor the Operating Partnership will engage in trading, underwriting,
agency distribution or sale of securities of other issuers. Host REIT's
policies with respect to such activities may be reviewed and modified from
time to time by Host REIT's directors without notice to, or the vote of, its
stockholders.
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<PAGE>
SELECTED FINANCIAL DATA
The following table presents certain selected historical financial data of
Host which has been derived from Host's audited Consolidated Financial
Statements for the five most recent fiscal years ended January 2, 1998 and the
unaudited condensed consolidated financial statements for the First Three
Quarters 1998 and First Three Quarters 1997. The income statement data for
fiscal year 1993 does not reflect the Marriott International Distribution and
related transactions and, accordingly, the table presents data for Host for
1993 that includes amounts attributable to Marriott International. As a result
of the Marriott International Distribution and related transactions, the
assets, liabilities and businesses of Host have changed substantially.
The information contained in the following table is not comparable to the
operations of Host or the Operating Partnership on a going-forward basis
because the historical information relates to an operating entity which owns
and operates its hotels, while the Company will own the Hotels but will lease
them to the Lessees and receive rental payments in connection therewith.
<TABLE>
<CAPTION>
FIRST
THREE QUARTERS FISCAL YEAR
---------------- ----------------------------------------------
1998(1) 1997(1) 1997(1) 1996(2) 1995(3) 1994(1) 1993(1)(4)
------- ------- ------- ------- ------- ------- ----------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............... $1,040 $ 768 $1,147 $ 732 $ 484 $ 380 $ 659
Operating profit....... 493 304 449 233 114 152 92
Interest expense....... 245 198 302 237 178 165 164
Income (loss) from con-
tinuing operations.... 100 38 47 (13) (62) (13) 56
Net income (loss)(5)... (48) 43 50 (13) (143) (25) 50
OTHER OPERATING DATA:
Cash from operations... 278 313 464 201 142 146 415
Cash used in investing
activities............ (273) (49) (1,046) (504) (208) (178) (262)
Cash provided by (used
in) financing activi-
ties.................. 23 391 389 806 200 26 (389)
Comparative FFO(6) (un-
audited).............. 282 202 295 164 136 N/A N/A
Depreciation and amor-
tization.............. 184 158 240 168 122 113 N/A
RATIO DATA (UNAUDITED):
Ratio of earnings to
fixed charges(7)...... 1.7x 1.4x 1.3x 1.0x -- -- N/A
Deficiency of earnings
to fixed charges(7)... -- -- -- -- 70 12 N/A
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
marketable
securities............ $ 575 $ 911 $ 865 $ 704 $ 201 $ 67 $ 73
Total assets........... 6,969 6,362 6,526 5,152 3,557 3,366 3,362
Debt................... 4,224 3,684 3,783 2,647 2,178 1,871 2,113
</TABLE>
- --------
(1) In the First Three Quarters of 1998, Host recognized a $148 million
extraordinary loss, net of taxes, on the extinguishment of certain debt.
In the First Three Quarters 1997 and fiscal year 1997, Host recognized a
$5 million and a $3 million, respectively, extraordinary gain, net of
taxes, on the extinguishment of certain debt. In 1994, Host recognized a
$6 million extraordinary loss, net of taxes, on the required redemption of
senior notes. In 1993, Host recognized a $4 million extraordinary loss,
net of taxes, on the completion of an exchange offer for its then
outstanding bonds.
(2) Fiscal year 1996 includes 53 weeks.
(3) Operating results for 1995 include a $10 million pre-tax charge to write
down the carrying value of five limited service properties to their net
realizable value and a $60 million pre-tax charge to write down an
undeveloped land parcel to its estimated sales value. In 1995, Host
recognized a $20 million extraordinary loss, net of taxes, on the
extinguishment of debt.
(4) Operating results for 1993 include the operations of Marriott
International through the Marriott International Distribution date of
October 8, 1993. These operations had a net pre-tax effect on income of
$211 million for the year ended December 31, 1993 and are recorded as
"Profit from operations distributed to Marriott International" on Host's
consolidated statements of operations and are, therefore, not included in
sales, operating profit before corporate expenses and interest, interest
expense and interest income for the same period. The net pre-tax effect of
these operations is, however, included in income before income taxes,
extraordinary item and cumulative effect of changes in accounting
principles and in net income for the same periods. Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," was
adopted in the first quarter of 1993. In the second quarter of 1993, Host
changed its accounting method for assets held for sale. During 1993, Host
recorded a $34 million credit to reflect the adoption of SFAS No. 109 and
a $32 million charge, net of taxes, to reflect the change in its
accounting method for assets held for sale. Operating results in 1993
included pre-tax expenses related to the Marriott International
Distribution totaling $13 million.
(5) Host recorded a loss from discontinued operations, net of taxes, as a
result of the Special Dividend (as defined herein) of $61 million in 1995,
$6 million in 1994, and $4 million in 1993. The 1995 loss from
discontinued operations includes a pre-tax charge of $47 million
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for the adoption of SFAS No. 121, "Accounting For the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of," a pre-tax $15 million
restructuring charge and an extraordinary loss of $10 million, net of taxes,
on the extinguishment of debt.
(6) Host considers Comparative Funds From Operations ("Comparative FFO," which
represents Funds From Operations, as defined by NAREIT, plus deferred tax
expense) a meaningful disclosure that will help the investment community
to better understand the financial performance of Host, including enabling
its stockholders and analysts to more easily compare Host's performance to
REITs. FFO is defined by NAREIT as net income computed in accordance with
GAAP, excluding gains or losses from debt restructurings and sales of
properties, plus real estate related depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures. FFO
should not be considered as an alternative to net income, operating
profit, cash flows from operations or any other operating or liquidity
performance measure prescribed by GAAP. FFO is also not an indicator of
funds available to fund Host's cash needs, including its ability to make
distributions. Host's method of calculating FFO may be different from
methods used by other REITs and, accordingly, may not be comparable to
such other REITs.
(7) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges is largely the result of
depreciation and amortization of $122 million and $113 million in 1995 and
1994, respectively.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LACK OF COMPARABILITY FOLLOWING THE MERGER AND THE REIT CONVERSION
Because substantially all of the Company's Hotels will be leased following
the Merger and the REIT Conversion, the Company does not believe that the
historical results of operations will be comparable to the results of
operations of Host following the Merger and the REIT Conversion. For pro forma
information giving effect to the Merger and the REIT Conversion (including the
Leases), see "Pro Forma Financial Statements."
HISTORICAL RESULTS OF OPERATIONS
Revenues primarily represent house profit from hotel properties and senior
living communities, net gains (losses) on property transactions and equity in
the earnings (losses) of affiliates. House profit reflects the net revenues
flowing to Host as property owner and represents gross hotel sales less
property-level expenses (excluding depreciation, management fees, property
taxes, ground and equipment rent, insurance and certain other costs which are
classified as operating costs and expenses included in the accompanying
financial statements). Other operating costs and expenses include idle land
carrying costs and certain other costs.
Host's hotel operating costs and expenses are, to a great extent, fixed.
Therefore, Host derives substantial operating leverage from increases in
revenue. This operating leverage is somewhat diluted, however, by the impact
of base management fees which are calculated as a percentage of sales,
variable lease payments and incentive management fees tied to operating
performance above certain established levels. Successful hotel performance
resulted in certain of Host's properties reaching levels which allowed the
manager to share in the growth of profits in the form of higher management
fees. Host expects that this trend will continue in 1998 as the upscale and
luxury full-service segments continue to strengthen. At these higher operating
levels, Host's and the managers' interests are closely aligned, which helps to
drive further increases in profitability, but moderates operating leverage.
For the periods discussed herein, Host's hotel properties have experienced
substantial increases in REVPAR. REVPAR is a commonly used indicator of market
performance for hotels which represents the combination of the average daily
room rate charged and the average occupancy achieved. REVPAR does not include
food and beverage or other ancillary revenues generated by the property. The
REVPAR increase primarily represents strong percentage increases in room
rates, while occupancy increases have been more moderate. Increases in average
room rates have generally been achieved by the managers through shifting
occupancies away from discounted group business to higher-rated group and
transient business and by selectively increasing room rates. This has been
made possible by increased travel due to improved economic conditions and by
the favorable supply/demand characteristics existing in the upscale and luxury
full-service segments of the lodging industry. Host expects this favorable
relationship between supply growth and demand growth to continue in the
upscale and luxury markets in which it operates, which should result in
improved REVPAR and operating profits at its hotel properties in the near
term. However, there can be no assurance that REVPAR will continue to increase
in the future.
FIRST THREE QUARTERS 1998 COMPARED TO FIRST THREE QUARTERS 1997 (HISTORICAL)
Revenues. Revenues primarily represent house profit from Host's hotel
properties, net gains (losses) on property transactions and equity in earnings
(losses) of affiliates. Revenues increased $272 million, or 35%, to $1,040
million for the First Three Quarters 1998 from $768 million for the First
Three Quarters 1997. Host's revenue and operating profit were impacted by
improved lodging results for comparable full-service hotel properties, the
addition of 18 full-service hotel properties during 1997 and 11 full-service
properties during the First Three Quarters 1998, the acquisition of 30 senior
living communities in 1997 and one senior living community in 1998 and the
gain on the sale of two hotel properties in the First Three Quarters 1998.
126
<PAGE>
Hotel revenues increased $46 million, or 21%, to $270 million in the third
quarter of 1998 and $186 million, or 25%, to $922 million for year-to-date
1998 due to growth in REVPAR and the addition of 29 full-service properties
acquired in 1997 and through the first three quarters of 1998.
Hotel sales (gross hotel sales, including room sales, food and beverage
sales, and other ancillary sales such as telephone sales) increased $449
million, or 24%, to over $2.3 billion in the First Three Quarters 1998,
reflecting the REVPAR increases for comparable units and the addition of full-
service properties in 1997 and 1998. Improved results for Host's full-service
hotels were driven by strong increases in REVPAR for comparable units of 7.9%
to $113.27 for the First Three Quarters 1998. Results were further enhanced by
a one percentage point increase in the house profit margin for comparable
full-service properties. On a comparable basis for Host's full-service hotel
properties, average room rates increased nearly eight percent with no change
in occupancy.
Revenues generated from Host's 31 senior living communities totaled $58
million for the First Three Quarters 1998 compared to $16 million for the
First Three Quarters 1997 (as the assets were purchased in the third quarter
of 1997). For the First Three Quarters 1998, average occupancy was nearly 92%
and the average per diem rate was $88.19, which resulted in REVPAR of $81.05.
Senior living communities' sales totaled $166 million for the First Three
Quarters 1998.
Revenues were also impacted by the gains on the sales of two hotel
properties. The New York East Side Marriott was sold for $191 million
resulting in a pre-tax gain of approximately $40 million. The Napa Valley
Marriott was sold for $21 million resulting in a pre-tax gain of approximately
$10 million.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation, management fees, real and personal property taxes,
ground, building and equipment rent, insurance and certain other costs.
Operating costs and expenses increased $17 million to $174 million in the
third quarter of 1998 from $157 million in the third quarter of 1997,
primarily representing increased hotel and senior living communities operating
costs. Year-to-date operating costs and expenses increased $83 million to $547
million. Hotel operating costs increased $17 million to $159 million for the
third quarter of 1998 and $69 million to $502 million year-to-date, primarily
due to the addition of 29 full-service hotel properties during 1997 and
through the first three quarters of 1998 and increased management fees and
rentals tied to improved property results. As a percentage of hotel revenues,
hotel operating costs and expenses decreased to 59% and 54% of revenues in the
third quarter of 1998 and year-to-date, respectively, from 63% and 59% of
revenues in the third quarter of 1997 and year-to-date 1997, respectively, due
to the significant increases in REVPAR discussed above, as well as the
operating leverage as a result of a significant portion of the Company's hotel
operating costs and expenses being fixed. The Company's senior living
communities' operating costs and expenses were $11 million for the third
quarter of 1998 and $31 million for year-to-date 1998, compared to $9 million
for the third quarter of 1997 and year-to-date 1997. As the senior living
communities were purchased at the beginning of the 1997 third quarter, year-
to-date operating costs and expenses are not comparable.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $30
million, or 34%, to $119 million for the third quarter of 1998 and $189
million, or 62%, to $493 million year-to-date. Hotel operating profit
increased $29 million, or 35%, to $111 million, or 41% of hotel revenues, for
the third quarter of 1998 from $82 million, or 37% of hotel revenues, for the
third quarter of 1997. Year-to-date hotel operating profit increased $117
million, or 39%, to $420 million, or 46% of hotel revenues, for 1998 compared
to $303 million, or 41% of hotel revenues, for 1997. Specifically, hotels in
New York City, San Francisco, Toronto and Atlanta reported significant
improvements for the 1998 third quarter over the third quarter of 1997.
Minority Interest. Minority interest expense increased $12 million to $33
million for the First Three Quarters 1998, primarily reflecting the impact of
the consolidation of affiliated partnerships and the acquisition of
controlling interests in newly-formed partnerships during 1997 and 1998.
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<PAGE>
Corporate Expenses. Corporate expenses increased $6 million to $33 million
for the First Three Quarters 1998. As a percentage of revenues, corporate
expenses decreased to 2.8% of revenues for the First Three Quarters 1998 from
1.1% in the First Three Quarters 1997, reflecting Host's efforts to control
its corporate expenses in spite of the substantial growth in revenues.
REIT Conversion Expenses. REIT Conversion Expenses reflect the professional
fees and other expenses associated with the Company's conversion to a REIT and
totaled $14 million for the First Three Quarters 1998.
Interest Expense. Interest expense increased 24% to $245 million in the
First Three Quarters 1998, primarily due to additional debt assumed in
connection with the 1997 and 1998 full-service hotel and senior living
community additions as well as the issuance of the New Senior Notes and the
New Credit Facility.
Dividends on Convertible Preferred Securities. The dividends on Convertible
Preferred Securities reflect the dividends accrued on the $550 million in
6.75% Convertible Preferred Securities issued by Host in December 1996.
Interest Income. Interest income decreased $1 million to $36 million for the
First Three Quarters 1998, primarily reflecting the lower level of cash and
marketable securities held in 1998 compared to 1997.
Income before Extraordinary Item. Income before extraordinary item for the
First Three Quarters 1998 was $100 million, compared to $38 million for the
First Three Quarters 1997.
Extraordinary Gain (Loss). In connection with the purchase of the Old Senior
Notes, Host recognized an extraordinary loss of $148 million, which represents
the bond premium and consent payments totaling approximately $175 million and
the write-off of deferred financing fees of approximately $52 million related
to the Old Senior Notes, net of taxes. In March 1997, Host purchased 100% of
the outstanding bonds secured by a first mortgage on the San Francisco
Marriott Hotel. Host purchased the bonds for $219 million, which was an $11
million discount to the face value of $230 million. In connection with the
redemption and defeasance of the bonds, Host recognized an extraordinary gain
of $5 million, which represents the $11 million discount and the write-off of
deferred financing fees, net of taxes.
Net Income (Loss). The significant net loss for the First Three Quarters
1998 was due to the $148 million extraordinary loss on the extinguishment of
debt. Net loss for the First Three Quarters 1998 was $48 million compared to
net income of $43 million for the First Three Quarters 1997. Basic and diluted
earnings (loss) per common share were $(.24) and $(.23), respectively, for
1998 and $.21 for the First Three Quarters 1997.
1997 COMPARED TO 1996 (HISTORICAL)
Revenues. Revenues increased $415 million, or 57%, to $1.1 billion for 1997.
Host's revenue and operating profit were impacted by:
-- improved lodging results for comparable full-service hotel properties;
-- the addition of 23 full-service hotel properties during 1996 and 18
full-service properties during 1997;
-- the addition of 30 senior living communities in 1997;
-- the 1996 sale and leaseback of 16 Courtyard properties and 18 Residence
Inns; and
-- the 1997 results including 52 weeks versus 53 weeks in 1996.
Hotel revenues increased $376 million, or 52% to $1.1 billion in 1997, as
all three of the Company's lodging concepts reported growth in REVPAR. Hotel
sales increased $864 million, or 44%, to over $2.8 billion in 1997, reflecting
the REVPAR increases for comparable units and the addition of full-service
properties during 1996 and 1997. Improved results for the Company's full-
service hotels were driven by strong increases in REVPAR for comparable units
of 12.6% in 1997. Results were further enhanced by a more than two percentage
point
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<PAGE>
increase in the house profit margin for comparable full-service properties. On
a comparable basis for Host's full-service properties, average room rates
increased almost 11%, while average occupancy increased over one percentage
point.
Revenues generated from Host's 1997 third quarter acquisition of 29 senior
living communities totaled $37 million. During 1997, average occupancy of the
communities was 92% and the average per diem rate was $84, which resulted in
1997 REVPAR of $77. Overall occupancies for 1997 were lower than the
historical and anticipated future occupancies due to the significant number of
expansion units added during the year, the overall disruption to the
communities as a result of the construction and the time required to fill the
expansion units. Senior living communities' sales totaled $111 million for
1997.
Operating Costs and Expenses. Operating costs and expenses increased $199
million to $698 million for 1997, primarily representing increased hotel and
senior living communities' operating costs, including depreciation and
management fees. Hotel operating costs increased $188 million to $649 million,
primarily due to the addition of 41 full-service properties during 1996 and
1997, and increased management fees and rentals tied to improved property
results. As a percentage of hotel revenues, hotel operating costs and expenses
decreased to 59% of revenues for 1997, from 64% of revenues for 1996,
reflecting the impact of increased 1997 revenues on relatively fixed operating
costs and expenses. Host's senior living communities operating costs and
expenses were $20 million (54% of revenues) for 1997.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, Host's operating profit increased $216 million,
or 93%, to $449 million in 1997. Hotel operating profit increased $188
million, or 73%, to $444 million, or 41% of hotel revenues, for 1997 compared
to $256 million, or 36% of hotel revenues, for 1996. In nearly all markets,
Host's hotels recorded improvements in comparable operating results. In
particular, Host's hotels in the Northeast, Mid-Atlantic and Pacific coast
regions benefited from the upscale and luxury full-service room supply and
demand imbalance. Hotels in New York City, Philadelphia, San Francisco/Silicon
Valley and in Southern California performed particularly well. In 1998, Host
expects results to be strong in these markets and other gateway cities in
which the Company owns hotels. In 1997, Host's suburban Atlanta properties
(three properties totaling 1,022 rooms) generally reported decreased results
due to higher activity in 1996 related to the Summer Olympics and the impact
of the additional supply added to the suburban areas. However, the majority of
Host's hotel rooms in Atlanta are in the core business districts in downtown
and Buckhead where they realized strong year-over-year results and were only
marginally impacted by the additional supply. Host's senior living communities
generated $17 million (46% of revenues) of operating profit.
Minority Interest. Minority interest expense increased $26 million to $32
million for 1997, primarily reflecting the impact of the consolidation of
affiliated partnerships and the acquisition of controlling interests in newly-
formed partnerships during 1996 and 1997.
Corporate Expenses. Corporate expenses increased $4 million to $47 million
in 1997. As a percentage of revenues, corporate expenses decreased to 4.1% of
revenues in 1997 from 5.9% of revenues in 1996. This reflects Host's efforts
to control its corporate expenses in spite of the substantial growth in
revenues.
Interest Expense. Interest expense increased $65 million to $302 million in
1997, primarily due to the additional mortgage debt of approximately $1.1
billion assumed in connection with the 1996 and 1997 full-service hotel
additions, approximately $315 million in debt incurred in conjunction with the
acquisition of senior living communities, as well as the issuance of $600
million of 8 7/8% senior notes in July 1997.
Dividends on Convertible Preferred Securities of Subsidiary Trust. The
dividends on the Convertible Preferred Securities reflect the dividends on the
$550 million in 6.75% Convertible Preferred Securities issued by Host in
December 1996.
Interest Income. Interest income increased $4 million to $52 million for
1997, primarily reflecting the interest income on the available proceeds
generated by the December 1996 offering of Convertible Preferred Securities
and the proceeds generated by the issuance of the 8 7/8% senior notes in July
1997.
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<PAGE>
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $47 million, compared to a $13 million loss before extraordinary
items for 1996 as a result of the items discussed above.
Extraordinary Gain (Loss). In March 1997, Host purchased 100% of the
outstanding bonds secured by a first mortgage on the San Francisco Marriott
Hotel. Host purchased the bonds for $219 million, which was an $11 million
discount to the face value of $230 million. In connection with the redemption
and defeasance of the bonds, Host recognized an extraordinary gain of $5
million, which represents the $11 million discount less the write-off of
unamortized deferred financing fees, net of taxes. In December 1997, Host
refinanced the mortgage debt secured by Marriott's Orlando World Center. In
connection with the refinancing, Host recognized an extraordinary loss of $2
million, which represents payment of a prepayment penalty and the write-off of
unamortized deferred financing fees, net of taxes.
Net Income (Loss). The Company's net income in 1997 was $50 million,
compared to a net loss of $13 million in 1996. Basic earnings per common share
was $.25 for 1997, compared to a basic loss per common share of $.07 in 1996.
Diluted earnings per common share was $.24 for 1997 compared to a diluted loss
per common share of $.07 in 1996.
1996 COMPARED TO 1995 (HISTORICAL)
Revenues. Revenues increased $248 million, or 51%, to $732 million in 1996.
Host's revenue and operating profit were impacted by:
-- improved lodging results for comparable full-service hotel properties;
-- the addition of nine full-service hotel properties during 1995 and 23
full-service properties during 1996;
-- the 1996 and 1995 sale and leaseback of 53 of Host's Courtyard
properties and 18 of Host's Residence Inns;
-- the 1996 change in the estimated depreciable lives and salvage values
for certain hotel properties which resulted in additional depreciation
expense of $15 million;
-- the 1996 results including 53 weeks versus 52 weeks in 1995;
-- the $60 million pre-tax charge in 1995 to write down the carrying value
of one undeveloped land parcel to its estimated sales value;
-- a $10 million pre-tax charge in 1995 to write down the carrying value of
certain Courtyard and Residence Inn properties held for sale to their
net realizable values included in "Net gains (losses) on property
transactions"; and
-- the 1995 sale of four Fairfield Inns.
Hotel revenues increased $243 million, or 51%, to $717 million in 1996, as
all three of Host's lodging concepts reported growth in REVPAR. Hotel sales
increased $590 million, or 44%, to $1.9 billion in 1996, reflecting the REVPAR
increases for comparable units and the addition of full-service properties
during 1995 and 1996.
Improved results for Host's full-service hotels were driven by strong
increases in REVPAR for comparable units of 11% in 1996. Results were further
enhanced by an almost two percentage point increase in the house profit margin
for comparable full-service properties. On a comparable basis for Host's full-
service properties, average room rates increased 8%, while average occupancy
increased over two percentage points.
Operating Costs and Expenses. Operating costs and expenses increased $129
million to $499 million for 1996, primarily representing increased hotel
operating costs, including depreciation, partially offset by the $60 million
pre-tax charge in 1995 to write down the carrying value of one undeveloped
land parcel to its estimated
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<PAGE>
sales value. Hotel operating costs increased $180 million to $461 million,
primarily due to the addition of 32 full-service properties during 1995 and
1996, increased management fees and rentals tied to improved property results
and a change in the depreciable lives and salvage values of certain large
hotel properties ($15 million). As a percentage of hotel revenues, hotel
operating costs and expenses increased to 64% of revenues for 1996, from 59%
of revenues for 1995, reflecting the impact of the lease payments on the
Courtyard and Residence Inn properties which have been sold and leased back,
and the change in depreciable lives and salvage values for certain large hotel
properties discussed above, as well as the shifting emphasis to full-service
properties. Full-service hotel rooms accounted for 100% of Host's total hotel
rooms on January 3, 1997, versus 84% on December 29, 1995.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, Host's operating profit increased $119 million,
or 104%, to $233 million in 1996. Hotel operating profit increased $63
million, or 33%, to $256 million, or 36% of hotel revenues, for 1996 compared
to $193 million, or 41% of hotel revenues, for 1995. Across the board, the
Company's hotels recorded substantial improvements in comparable operating
results. In addition, several hotels, including the New York Marriott Marquis,
the New York Marriott East Side, the Philadelphia Marriott, the San Francisco
Marriott and the Miami Airport Marriott posted particularly significant
improvements in operating profit for the year. Host's Atlanta properties also
posted outstanding results, primarily due to the 1996 Summer Olympics.
Additionally, several hotels which recently converted to the Marriott brand,
including the Denver Marriott Tech Center, the Marriott's Mountain Resort at
Vail and the Williamsburg Marriott, recorded strong results compared to the
prior year as they completed renovations and began to realize the benefit of
their conversions.
Corporate Expenses. Corporate expenses increased $7 million to $43 million
in 1996. As a percentage of revenues, corporate expenses decreased to 5.9% of
revenues in 1996 from 7.4% of revenues in 1995. This reflects Host's efforts
to control its corporate administrative expenses in spite of the substantial
growth in revenues.
Interest Expense. Interest expense increased 33% to $237 million in 1996,
primarily due to the additional mortgage debt of approximately $696 million
incurred in connection with the 1996 full-service hotel additions and the
issuance of $350 million of notes issued by HMC Acquisition Properties, Inc.,
a wholly-owned subsidiary of Host, in December 1995, partially offset by the
net impact of the 1995 redemptions of Host Marriott Hospitality, Inc. notes
("Hospitality Notes").
Loss from Continuing Operations. The loss from continuing operations for
1996 decreased $49 million to $13 million, as a result of the changes
discussed above.
Net Loss. Host's net loss in 1996 was $13 million, compared to a net loss of
$143 million in 1995, which included a $61 million loss from discontinued
operations and a $20 million extraordinary loss primarily representing
premiums paid on bond redemptions and the write-off of deferred financing fees
and discounts on the debt. The basic and diluted loss per common share was
$.07 for 1996 and $.90 for 1995.
PRO FORMA RESULTS OF OPERATIONS
Because substantially all of the Company's Hotels will be leased to the
Lessees following the REIT Conversion, the Company does not believe that the
Company's historical results of operations will be comparable to the results
of operations of the Company following the REIT Conversion. Accordingly, a
comparison of the Company's pro forma results of operations for the First
Three Quarters 1998 to the First Three Quarters 1997 and fiscal year 1997 to
fiscal year 1996 have been included below. The following discussion and
analysis should be read in conjunction with the Company's combined
consolidated financial statements and the Company's unaudited pro forma
financial statements and related notes thereto included elsewhere in this
Proxy Statement/Prospectus. The following discussion and analysis has been
prepared assuming the following two scenarios:
. All Partnerships participate in the Partnership Mergers and no Notes are
issued ("100% Participation with No Notes Issued").
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<PAGE>
. All Partnerships participate in the Partnership Mergers and Notes are
issued with respect to 100% of the OP Units allocable to each Partnership
("100% Participation with Notes Issued").
These presentations do not purport to represent what combination will result
from the Merger and the REIT Conversion, but instead are designed to
illustrate what the composition of the Company would have been like under the
above scenarios. Furthermore, the unaudited pro forma financial statements do
not purport to represent what the Company's results of operations or cash
flows would actually have been if the Merger and the REIT Conversion had in
fact occurred on such date or at the beginning of such period or to project
the Company's results of operations or cash flows for any future date or
period.
The following table presents the results of operations for the First Three
Quarters 1998 and the First Three Quarters 1997 on a pro forma basis under the
scenarios discussed above:
<TABLE>
<CAPTION>
100% PARTICIPATION 100% PARTICIPATION
WITH NO NOTES ISSUED WITH NOTES ISSUED
---------------------- ----------------------
FIRST THREE QUARTERS FIRST THREE QUARTERS
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Rental revenues................ $ 540 $ 521 $ 540 $ 521
Total revenues................. 542 528 542 528
Operating costs and expenses... 391 388 390 387
Operating profit before
minority interest, corporate
expenses and interest
expense....................... 151 140 152 141
Minority interest.............. (14) (8) (14) (8)
Corporate expenses............. (30) (29) (30) (29)
Interest expense............... (339) (332) (351) (343)
Interest income................ 24 20 24 20
---------- ---------- ---------- ----------
Loss before income taxes....... (208) (209) (219) (219)
Benefit (provision) for income
taxes......................... 10 10 11 11
---------- ---------- ---------- ----------
Loss before extraordinary
items......................... $ (198) $ (199) $ (208) $ (208)
========== ========== ========== ==========
</TABLE>
100% PARTICIPATION WITH NO NOTES ISSUED--FIRST THREE QUARTERS 1998 COMPARED TO
FIRST THREE QUARTERS 1997 (PRO FORMA)
Revenues. Revenues primarily represent lease revenues, net gains (losses) on
property transactions and equity in earnings (losses) of affiliates, including
the Non-Controlled Subsidiaries. Revenues increased $14 million, or 2.7%, to
$542 million for the First Three Quarters 1998 from $528 million for the First
Three Quarters 1997. EITF 98-9, "Accounting for Contingent Rents in Interim
Financial Periods," requires a lessor to defer recognition of contingent
rental income in interim periods until the specified target that triggers the
contingent rental income is achieved. Based on the structure of the Company's
leases, only minimum rent was recorded in the First Three Quarters 1998 and
First Three Quarters 1997. On a pro forma basis, the Company would have
received rental payments of $860 million and $777 million, respectively,
resulting in deferred revenue of $320 million and $256 million, respectively,
for the First Three Quarters 1998 and First Three Quarters 1997.
Hotel sales (gross hotel sales, including room sales, food and beverage
sales, and other ancillary sales such as telephone sales) increased $194
million, or 7.8%, to over $2.6 billion in the First Three Quarters 1998,
reflecting the REVPAR increases for the Company's hotels. Improved results for
the Company's hotels were driven by strong increases in REVPAR of 8.1% to
$111.05 for the First Three Quarters 1998. Average room rates increased 8.4%,
while average occupancy decreased slightly to 78.4%.
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Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation, property taxes, ground, rent, insurance and certain
other costs. Operating costs and expenses increased $3 million to $391 million
in the First Three Quarters 1998. As a percentage of rental revenues, hotel
operating costs and expenses decreased to 72% of rental revenues in the First
Three Quarters 1998 from 74% of rental revenues in the First Three Quarters
1997 due to the increase in minimum rent under the Company's leases.
Operating Profit. As a result of the changes in rental revenues and
operating costs and expenses discussed above, the Company's operating profit
increased $11 million, or 8%, to $151 million for the First Three Quarters
1998. Hotel operating profit increased $18 million, or 12%, to $165 million,
or 31% of rental revenues, for the First Three Quarters 1998 from $147
million, or 28% of rental revenues, for the First Three Quarters 1997. The
Company's hotels recorded significant improvements in comparable operating
results, however, due to EITF 98-9, only minimum rent could be recorded.
Specifically, hotels in New York City, Boston, Toronto and Atlanta reported
significant improvements for the First Three Quarters 1998. Properties in
Florida reported some temporary declines in operating results due to
exceptionally poor weather in 1998.
Minority Interest. Minority interest expense increased $6 million to $14
million for the First Three Quarters 1998, primarily reflecting improved
lodging results.
Corporate Expenses. Corporate expenses increased $1 million to $30 million
for the First Three Quarters 1998 due to increased staffing levels and the
impact of inflation.
Interest Expense. Interest expense increased $7 million to $339 million in
the First Three Quarters 1998, primarily due to the impact of principal
amortization on the Company's mortgage debt.
Interest Income. Interest income increased $4 million to $24 million for the
First Three Quarters 1998, primarily due to interest income from excess cash
and marketable securities.
Income before Extraordinary Items. The loss before extraordinary items for
the First Three Quarters 1998 was $198 million, compared to $199 million for
the First Three Quarters 1997.
100% PARTICIPATION WITH NOTES ISSUED--FIRST THREE QUARTERS 1998 COMPARED TO
FIRST THREE QUARTERS 1997 (PRO FORMA)
Revenues. Revenues increased $14 million, or 2.7%, to $542 million for the
First Three Quarters 1998 from $528 million for the First Three Quarters 1997.
Based on the structure of the Company's leases, only minimum rent was recorded
in the First Three Quarters 1998 and First Three Quarters 1997. On a pro forma
basis, the Company would have received rental payments of $860 million and
$777 million, respectively, resulting in deferred revenue of $320 million and
$256 million, respectively, for the First Three Quarters 1998 and First Three
Quarters 1997.
Hotel sales (gross hotel sales, including room sales, food and beverage
sales, and other ancillary sales such as telephone sales) increased $194
million, or 7.8%, to over $2.6 billion in the First Three Quarters 1998,
reflecting the REVPAR increases for the Company's hotels. Improved results for
the Company's hotels were driven by strong increases in REVPAR of 8.1% to
$111.05 for the First Three Quarters 1998. Average room rates increased 8.4%,
while average occupancy decreased slightly to 78.4%.
Operating Costs and Expenses. Operating costs and expenses increased $3
million to $390 million in the First Three Quarters 1998. As a percentage of
rental revenues, hotel operating costs and expenses decreased to 72% of
revenues in the First Three Quarters 1998 from 74% of rental revenues in the
First Three Quarters 1997 due to the increase in minimum rent under the
Company's leases.
Operating Profit. As a result of the changes in rental revenues and
operating costs and expenses discussed above, the Company's operating profit
increased $11 million, or 8%, to $152 million for the First Three Quarters
1998. Hotel operating profit increased $18 million, or 12%, to $166 million,
or 31% of rental revenues, for the First Three Quarters 1998 from $148
million, or 28% of rental revenues, for the First Three Quarters 1997. Once
again, the Company's hotels recorded significant improvements in comparable
operating results; however, due
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<PAGE>
to EITF 98-9, only minimum rent could be recorded. Specifically, hotels in New
York City, Boston, Toronto and Atlanta reported significant improvements for
the First Three Quarters 1998. Properties in Florida reported some temporary
declines in operating results due to exceptionally poor weather in 1998.
Minority Interest. Minority interest expense increased $6 million to $14
million for the First Three Quarters 1998, primarily reflecting improved
lodging results.
Corporate Expenses. Corporate expenses increased $1 million to $30 million
for the First Three Quarters 1998 due to increased staffing levels and the
impact of inflation.
Interest Expense. Interest expense increased $8 million to $351 million in
the First Three Quarters 1998, primarily due to the impact of principal
amortization on the Company's mortgage debt.
Interest Income. Interest income increased $4 million to $24 million for the
First Three Quarters 1998, primarily due to interest income from excess cash
and marketable securities.
Loss before Extraordinary Items. The loss before extraordinary items for the
First Three Quarters 1998 and First Three Quarters 1997 was $208 million,
respectively.
100% PARTICIPATION WITH NO NOTES ISSUED--1997 COMPARED TO 1996 (PRO FORMA)
The following table presents the results of operations for the Company for
1997 and 1996 on a pro forma basis under the two pro forma scenarios:
<TABLE>
<CAPTION>
100% PARTICIPATION WITH 100% PARTICIPATION WITH
NO NOTES ISSUED NOTES ISSUED
------------------------ ------------------------
FISCAL YEAR FISCAL YEAR
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Rental revenues........... $ 1,135 $ 1,050 $ 1,135 $ 1,050
Total revenues............ 1,131 1,040 1,131 1,040
Operating costs and
expenses................. 611 600 609 599
Operating profit before
minority interest,
corporate expenses and
interest expense......... 520 440 522 441
Minority interest......... (10) (9) (10) (9)
Corporate expenses........ (44) (39) (44) (39)
Interest expense.......... (468) (481) (485) (498)
Interest income........... 29 29 29 29
----------- ----------- ----------- -----------
Income (loss) before
income taxes............. 27 (60) 12 (76)
Benefit (provision) for
income taxes............. (1) 3 (1) 4
----------- ----------- ----------- -----------
Income (loss) before
extraordinary items...... $ 26 $ (57) $ 11 $ (72)
=========== =========== =========== ===========
</TABLE>
Revenues. Revenues increased $91 million, or 8.8%, to $1,131 million for
1997. The Company's revenue and operating profit were principally impacted by
improved lodging results for its hotel properties, which led to a substantial
increase in rental revenues. The 1997 results also included 52 weeks versus 53
weeks in 1996.
Hotel sales increased $263 million, or 7.9%, to nearly $3.6 billion in 1997,
reflecting the increases in REVPAR. Improved results for the Company's full-
service hotels were driven by strong increases in REVPAR of 9.6% to $103.09 in
1997. Average room rates increased nearly 9%, while average occupancy
increased slightly to 77.7%.
Operating Costs and Expenses. Operating costs and expenses increased $11
million to $611 million for 1997. As a percentage of rental revenues, hotel
operating costs and expenses decreased to 54% of rental revenues for 1997,
from 57% of rental revenues for 1996, reflecting the impact of increased 1997
rental revenues on relatively fixed operating costs and expenses.
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<PAGE>
Operating Profit. As a result of the changes in rental revenues and
operating costs and expenses discussed above, the Company's operating profit
increased $80 million, or 18%, to $520 million in 1997. Hotel operating profit
increased $74 million, or 16%, to $538 million, or 47% of rental revenues, for
1997 compared to $464 million, or 44% of rental revenues, for 1996. In nearly
all markets, the Company's hotels recorded improvements in comparable
operating results. In particular, the Company's hotels in the Northeast, Mid-
Atlantic and Pacific coast regions benefited from the upscale and luxury full-
service room supply and demand imbalance. Hotels in New York City,
Philadelphia, San Francisco/Silicon Valley and in Southern California
performed particularly well. In 1998, the Company expects results to be strong
in these markets and other gateway cities in which the Company owns hotels. In
1997, the Company's suburban Atlanta properties (three properties totaling
1,022 rooms) generally reported decreased results due to higher activity in
1996 related to the Summer Olympics and the impact of the additional supply
added to the suburban areas. However, the majority of the Company's hotel
rooms in Atlanta are in the core business districts in downtown and Buckhead
where they realized strong year-over-year results and were only marginally
impacted by the additional supply.
Minority Interest. Minority interest expense increased $1 million to $10
million in 1997.
Corporate Expenses. Corporate expenses increased $5 million to $44 million
in 1997 due to increased staffing levels and the impact of inflation.
Interest Expense. Interest expense decreased $13 million to $468 million in
1997, primarily due to the impact of principal amortization on the Company's
mortgage debt.
Interest Income. Interest income remained unchanged at $29 million for 1997,
reflecting the interest income earned on the loan to the Non-Controlled
Subsidiary for its acquisition of furniture and equipment, the working capital
loan to Crestline, and a mortgage note on one property.
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $26 million, compared to a $57 million loss before extraordinary
items for 1996 as a result of the items discussed above.
100% PARTICIPATION WITH NOTES ISSUED--1997 COMPARED TO 1996 (PRO FORMA)
Revenues. Revenues increased $91 million, or 8.8%, to $1,131 million for
1997. The Company's revenue and operating profit were principally impacted by
improved lodging results for the Company's hotel properties, which led to a
substantial increase in rental revenues. The 1997 results also included 52
weeks versus 53 weeks in 1996.
Hotel sales increased $263 million, or 7.9%, to nearly $3.6 billion in 1997,
reflecting increases in REVPAR. Improved results for the Company's full-
service hotels were driven by strong increases in REVPAR of 9.6% to $103.09 in
1997. Average room rates increased nearly 9%, while average occupancy
increased slightly to 77.7%.
Operating Costs and Expenses. Operating costs and expenses increased $10
million to $609 million for 1997. As a percentage of rental revenues, hotel
operating costs and expenses decreased to 54% of rental revenues for 1997,
from 57% of rental revenues for 1996, reflecting the impact of increased 1997
rental revenues on relatively fixed operating costs and expenses.
Operating Profit. As a result of the changes in rental revenues and
operating costs and expenses discussed above, the Company's operating profit
increased $81 million, or 18%, to $522 million in 1997. Hotel operating profit
increased $73 million, or 16%, to $535 million, or 47% of rental revenues, for
1997 compared to $462 million, or 44% of rental revenues, for 1996. In nearly
all markets, the Company's hotels recorded improvements in comparable
operating results. In particular, the Company's hotels in the Northeast, Mid-
Atlantic and Pacific coast regions benefited from the upscale and luxury full-
service room supply and demand imbalance. Hotels in New York City,
Philadelphia, San Francisco/Silicon Valley and in Southern California
performed particularly well. In 1998, the Company expects results to be strong
in these markets and other gateway cities in which the
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Company owns hotels. In 1997, the Company's suburban Atlanta properties (three
properties totaling 1,022 rooms) generally reported decreased results due to
higher activity in 1996 related to the Summer Olympics and the impact of the
additional supply added to the suburban areas. However, the majority of the
Company's hotel rooms in Atlanta are in the core business districts in
downtown and Buckhead where they realized strong year-over-year results and
were only marginally impacted by the additional supply.
Minority Interest. Minority interest increased $1 million to $10 million for
1997.
Corporate Expenses. Corporate expenses increased $5 million to $44 million
in 1997 due to increased staffing levels and the impact of inflation.
Interest Expense. Interest expense decreased $13 million to $485 million in
1997, reflecting the impact of principal amortization on the Company's
mortgage debt.
Interest Income. Interest income remained unchanged at $29 million for 1997.
Interest income includes the interest income earned on the loan to the Non-
Controlled Subsidiary for its acquisition of furniture and equipment, the
working capital loan to Crestline, and a mortgage note on one property.
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $11 million, compared to a $72 million loss before extraordinary
items for 1996 as a result of the items discussed above.
PRO FORMA RESULTS IF NO PARTNERSHIPS PARTICIPATE IN THE REIT CONVERSION
There is no requirement that any of the Partnerships participate in the REIT
Conversion in order for the REIT Conversion to be consummated. Accordingly,
the following discussion has been included assuming that no Partnerships
participate in the REIT Conversion and compares the "No Partnership
Participation" scenario to the 100% Participation with No Notes Issued
scenario, both of which assume that the Blackstone Acquisition occurs.
Revenues for the First Three Quarters 1998 and fiscal year 1997 would have
been higher by $1 million and lower by $69 million, respectively, as a result
of the Company not reporting rental revenues related to the 24 hotel
properties owned by the Partnerships, partially offset by the Company
reporting gross hotel sales for four of the Partnerships (Desert Springs, MHP,
MHP2 and Hanover) that it will continue to consolidate for financial reporting
purposes since these partnerships are controlled by Host. Operating profit
would have been higher by $49 million for the First Three Quarters due to
lower deferred rent under the No Partnership Participation scenario and lower
by $42 million for fiscal year 1997 due to the operating profit generated by
the Partnerships on a full year basis including the substantial impact of no
rental revenues from the 24 properties, partially offset by a significant
decrease in depreciation expense. Interest expense would have been lower by
$24 million and $29 million, respectively, due to the reduction in overall
debt levels by $426 million. The loss before extraordinary items for the First
Three Quarters 1998 would have been lower by $66 million principally due to
the changes in operating profit and interest expense discussed above and the
impact on deferred rent. Income before extraordinary items for fiscal year
1997 would have been lower by $14 million, reflecting the net income generated
by the Partnerships on a full year basis.
PRO FORMA RESULTS IF HOST REIT'S ELECTION IS DELAYED UNTIL JANUARY 1, 2000
Host intends to use its best efforts to cause the REIT Conversion to be
completed as soon as possible, but there is no assurance that it will be
completed during 1998 in time for Host REIT to elect REIT status effective
January 1, 1999, or at all. If the REIT Conversion does not occur in 1998, but
the conditions to the REIT Conversion are otherwise satisfied, the
effectiveness of Host REIT's election could be delayed to January 1, 2000,
which could cause the Blackstone Acquisition (which is conditioned, among
other things, on consummation of the REIT Conversion by March 31, 1999 and
Host REIT qualifying as a REIT for 1999) not to be consummated. Accordingly,
the following discussion compares the 100% Participation with No Notes Issued
scenario with the "REIT 2000" scenario that assumes that the REIT Conversion
occurs on January 1, 1999, the Blackstone Acquisition does not occur and Host
does not become a REIT until January 1, 2000 and no Notes are issued.
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Revenues for the First Three Quarters 1998 and fiscal year 1997 would have
been lower by $72 million and $137 million, respectively, due to the decrease
in rental revenues as a result of the Company not completing the Blackstone
Acquisition. Operating profit for the First Three Quarters 1998 and fiscal
year 1997 would have been lower by $32 million and $50 million, respectively,
due to the impact on rental revenues, of not completing the Blackstone
Acquisition, net of the related operating costs and expenses (principally
depreciation). Interest expense would have been lower by $36 million and $50
million, respectively, due to the reduction in overall debt levels of $600
million related to the Blackstone Acquisition. The loss before extraordinary
items for the First Three Quarters 1998 would have been $10 million higher and
income before extraordinary items for fiscal year 1997 $4 million higher
principally due to the changes in operating profit and interest expense
discussed above. Note that the First Three Quarters 1998 is significantly
impacted by $43 million of deferred revenue related to the Blackstone
properties.
LIQUIDITY AND CAPITAL RESOURCES
Host funds its capital requirements with a combination of operating cash
flow, debt and equity financing and proceeds from sales of selected properties
and other assets. Host utilizes these sources of capital to acquire new
properties, fund capital additions and improvements and make principal
payments on debt.
Capital Transactions. Host has recently substantially changed its debt
financing through the following series of transactions which were intended to
facilitate the consummation of the REIT Conversion.
On April 20, 1998, Host and certain of its subsidiaries filed a shelf
registration statement on Form S-3 (the "Shelf Registration") with the
Commission for $2.5 billion in securities, which may include debt, equity or
any combination thereof. Host anticipates that any net proceeds from the sale
of offered securities will be used for refinancing of Host's indebtedness, for
acquisitions and general corporate purposes.
On August 5, 1998, HMH Properties, an indirect wholly-owned subsidiary of
Host, which currently owns 72 of Host's hotels, purchased substantially all of
its (i) $600 million in 9 1/2% senior notes due 2005, (ii) $350 million in 9%
senior notes due 2007 and (iii) $600 million in 8 7/8% senior notes due 2007
(collectively, the "Old Senior Notes"). Concurrently with each offer to
purchase, HMH Properties solicited consents (the "1998 Consent Solicitations")
from registered holders of the Old Senior Notes to certain amendments to
eliminate or modify substantially all of the restrictive covenants and certain
other provisions contained in the indentures pursuant to which the Old Senior
Notes were issued. HMH Properties simultaneously utilized the Shelf
Registration to issue an aggregate of $1.7 billion in New Senior Notes. The
New Senior Notes were issued in two series, $500 million of 7 7/8% Series A
notes due in 2005 and $1.2 billion of 7 7/8% Series B notes due in 2008. The
1998 Consent Solicitations facilitated the merger of HMC Capital Resources
Holdings Corporation ("Capital Resources"), a wholly-owned subsidiary of Host,
with and into HMH Properties. Capital Resources, the owner of eight of Host's
hotel properties, was the obligor under the $500 million revolving credit
facility (the "Old Credit Facility"). The Operating Partnership will assume
the New Senior Notes in connection with the REIT Conversion and the guarantee
of Host is expected to terminate on the Effective Date.
In conjunction with the issuance of the New Senior Notes, HMH Properties
entered into the $1.25 billion New Credit Facility with a group of commercial
banks. The New Credit Facility has an initial three-year term with two one-
year extension options. Borrowings under the New Credit Facility generally
bear interest at the Eurodollar rate plus 1.75% (7.5% at September 11, 1998).
The interest rate and commitment fee (0.35% at September 11, 1998) on the
unused portion of the New Credit Facility fluctuate based on certain financial
ratios. The New Senior Notes and the New Credit Facility are guaranteed by
Host and its wholly-owned subsidiary, Host Marriott Hospitality, Inc., and
certain subsidiaries of HMH Properties and are secured by pledges of equity
interests in certain subsidiaries of HMH Properties. The New Credit Facility
will be assumed by the Operating Partnership in connection with the REIT
Conversion and the guarantee of Host is expected to terminate on the Effective
Date. As of September 11, 1998, $350 million was outstanding under the New
Credit Facility.
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The New Credit Facility and the indenture under which the New Senior Notes
were issued contain covenants restricting the ability of HMH Properties and
certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and make
distributions to equityholders of HMH Properties, Host, and (following the
REIT Conversion) the Operating Partnership and Host REIT. The New Credit
Facility and the New Senior Notes also contain certain financial covenants
relating to, among other things, maintaining certain levels of tangible net
worth and certain ratios of EBITDA to interest and fixed charges, total debt
to EBITDA, unencumbered assets to unsecured debt, and secured debt to total
debt.
The New Credit Facility replaces Host's Old Credit Facility. The net
proceeds from the offering and borrowings under the New Credit Facility were
used by Host to purchase substantially all of the Existing Senior Notes, to
repay amounts outstanding under the Existing Credit Facility and to make bond
premium and consent payments totaling $175 million. These costs, along with
the write-off of deferred financing fees of approximately $52 million related
to the Old Senior Notes and the Old Credit Facility, were recorded as a pre-
tax extraordinary loss on the extinguishment of debt in the First Three
Quarters 1998.
In June 1997, HMC Capital Resources Corporation ("Capital Resources"), a
wholly-owned subsidiary of Host, entered into the Old Credit Facility with a
group of commercial banks under which it may borrow up to $500 million for
certain permitted uses. As a result of this transaction, Host terminated its
line of credit with Marriott International.
In July 1997, HMH Properties and HMC Acquisition Properties, Inc.
("Acquisitions"), indirect, wholly-owned subsidiaries of Host, completed
consent solicitations with holders of their senior notes (the "1997 Consent
Solicitations") to amend certain provisions of their senior notes indentures.
The 1997 Consent Solicitations facilitated the merger of Acquisitions with and
into HMH Properties (the "HMH Properties Merger"). The amendments to the
indentures also increased the ability of HMH Properties to acquire, through
certain subsidiaries, additional properties subject to non-recourse
indebtedness and controlling interests in corporations, partnerships and other
entities holding attractive properties and increased the threshold for
distributions to affiliates to the excess of HMH Properties' earnings before
interest expense, income taxes, depreciation and amortization and other non-
cash items subsequent to the 1997 Consent Solicitations over 220% of HMH
Properties' interest expense. HMH Properties paid dividends to Host of $54
million, $29 million and $36 million in 1997, 1996 and 1995, respectively, as
permitted under the indentures.
Concurrent with the 1997 Consent Solicitations and the HMH Properties
Merger, HMH Properties issued an aggregate of $600 million of 8 7/8% senior
notes at par with a maturity of July 2007. HMH Properties received net
proceeds of approximately $570 million, net of the costs of the 1997 Consent
Solicitations and the offering.
In addition to the capital resources provided by its new debt financings,
Host Marriott Financial Trust (the "Issuer"), a wholly-owned subsidiary trust
of Host, has outstanding 11 million shares of 6 3/4% Convertible Quarterly
Income Preferred Securities (the "Convertible Preferred Securities"), with a
liquidation preference of $50 per share (for a total liquidation amount of
$550 million) issued in December 1996. The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer and,
pursuant to various agreements entered into in connection with the
transaction, are fully, irrevocably and unconditionally guaranteed by Host.
Proceeds from the issuance of the Convertible Preferred Securities were
invested in 6 3/4% Convertible Subordinated Debentures (the "Debentures") due
December 2, 2026 issued by Host. The Issuer exists solely to issue the
Convertible Preferred Securities and its own common securities (the "Common
Securities") and invest the proceeds therefrom in the Debentures, which are
its sole assets. Each of the Convertible Preferred Securities is convertible
at the option of the holder into shares of Host common stock at the rate of
2.6876 shares per Convertible Preferred Security (equivalent to a conversion
price of $18.604 per share of Host common stock). The Debentures are
convertible at the option of the holders into shares of Company common stock
at a conversion rate of 2.6876 shares for each $50 in principal amount of
Debentures. The conversion rate is subject to adjustments in certain events,
including (i) payment of dividends (and other distributions) on Host Common
Stock by Host in shares of Host Common Stock; (ii) distributions to all
holders of Host Common Stock of rights or warrants entitling such holders (for
a period not to exceed 45 days) to subscribe for or purchase Host Common
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Stock at an exercise price less than the market price of Host Common Stock;
(iii) subdivisions and combinations of Host Common Stock; (iv) payment of
dividends (and other distributions) on Host Common Stock consisting of
indebtedness of Host, capital stock or other securities, assets or cash (other
than certain cash dividends at an annualized rate of up to 12.5% of the market
price of Host Common Stock); (v) payments for Host Common Stock by Host or any
of its subsidiaries in respect of a tender or exchange offer (other than an
odd-lot offer) at a price per share in excess of 110% of the market price of
Host Common Stock; (vi) consummation by Host of certain mergers, a
consolidation, a sale of all or substantially all of its assets, a
recapitalization or certain reclassifications of Host Common Stock. The
distribution of the capital stock of Crestline to all holders of Host REIT
Common Stock would, and certain other elements of the REIT Conversion (such as
other distributions of Host's accumulated earnings and profits) may, result in
an adjustment to the conversion price of the Debentures. The Issuer will only
convert Debentures pursuant to a notice of conversion by a holder of
Convertible Preferred Securities. During 1997 and 1996, no shares were
converted into common stock. Holders of the Convertible Preferred Securities
are entitled to receive preferential cumulative cash distributions at an
annual rate of 6 3/4% accruing from the original issue date, commencing March
1, 1997, and payable quarterly in arrears thereafter. The distribution rate
and the distribution and other payment dates for the Convertible Preferred
Securities will correspond to the interest rate and interest and other payment
dates on the Debentures. Host may defer interest payments on the Debentures
for a period not to exceed 20 consecutive quarters. If interest payments on
the Debentures are deferred, so too are payments on the Convertible Preferred
Securities. Under this circumstance, Host will not be permitted to declare or
pay any cash distributions with respect to its capital stock or debt
securities that rank pari passu with or junior to the Debentures. Subject to
certain restrictions, the Convertible Preferred Securities are redeemable at
the Issuer's option upon any redemption by Host of the Debentures after
December 2, 1999. Upon repayment at maturity or as a result of the
acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.
In connection with consummation of the REIT Conversion, the Operating
Partnership will assume primary liability for repayment of the convertible
debentures of Host underlying the Convertible Preferred Securities. Upon
conversion by a Convertible Preferred Securities holder, Host REIT will issue
shares of Host REIT Common Stock, which will be delivered to such holder. Upon
the issuance of such shares by Host REIT, the Operating Partnership will issue
to Host REIT a number of OP Units equal to the number of shares of Host REIT
Common Stock issued in exchange for the Debentures.
In March 1996, Host completed the issuance of 31.6 million shares of common
stock for net proceeds of nearly $400 million.
In December 1995, Acquisitions issued $350 million of 9% senior notes (the
"Acquisitions Notes"). The Acquisitions Notes were issued at par and have a
final maturity of December 2007. The net proceeds totaled $340 million and
were utilized to repay in full the outstanding borrowings of $210 million
under Acquisitions' $230 million revolving credit facility (the "Revolver"),
which was then terminated to acquire three full-service properties and to
finance future acquisitions of full-service hotel properties with the
remaining proceeds.
In May 1995, two wholly-owned subsidiaries of Host Marriott Hospitality,
Inc. ("Hospitality"), a wholly-owned subsidiary of Host, issued an aggregate
of $1 billion of 9.5% senior secured notes in two concurrent offerings. HMH
Properties, and Host Marriott Travel Plazas, Inc. ("HMTP"), the
operator/manager of HM Services' food, beverage and merchandise concessions
business, issued $600 million and $400 million, respectively, of senior notes.
The net proceeds of approximately $971 million were used to defease, and
subsequently redeem, all of Hospitality's remaining bonds and to repay
borrowings under the line of credit with Marriott International. The HMTP
senior notes were included in the HM Services' special dividend.
During 1995, Host replaced its line of credit with a line of credit from
Marriott International pursuant to which Host had the right to borrow up to
$225 million. The line of credit with Marriott International was terminated as
a result of the Capital Resources transaction discussed above.
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Asset Dispositions. Host historically has sold, and may from time to time in
the future consider opportunities to sell, certain of its real estate
properties at attractive prices when the proceeds could be redeployed into
investments with more favorable returns. During the second quarter of 1998,
Host sold the 662-room New York Marriott East Side for proceeds of $191
million and recorded a pre-tax gain of approximately $40 million and the Napa
Valley Marriott for proceeds of $21 million and recorded a pre-tax gain of
approximately $10 million. During 1997, Host sold the 255-room Sheraton Elk
Grove Suites for proceeds of approximately $16 million. Host also sold 90% of
its 174-acre parcel of undeveloped land in Germantown, Maryland, for
approximately $11 million, which approximated its carrying value. During the
first and second quarters of 1996, 16 of Host's Courtyard properties and 18 of
Host's Residence Inn properties were sold (subject to a leaseback) to
Hospitality Properties Trust for approximately $314 million and Host will
receive approximately $35 million upon expiration of the leases. A gain on the
transactions of approximately $46 million was deferred and is being amortized
over the initial term of the leases. During the first and third quarters of
1995, 37 of Host's Courtyard properties were sold to and leased back from
Hospitality Properties Trust for approximately $330 million. Host received net
proceeds from the two 1995 transactions of approximately $297 million and will
receive approximately $33 million upon expiration of the leases. A deferred
gain of $14 million on the sale/leaseback transactions is being amortized over
the initial term of the leases. In 1995, Host also sold its four remaining
Fairfield Inns for net cash proceeds of approximately $6 million, which
approximated their carrying value.
In cases where Host has made a decision to dispose of particular properties,
Host assesses impairment of each individual property to be sold on the basis
of expected sales price less estimated costs of disposal. Otherwise, Host
assesses impairment of its real estate properties based on whether it is
probable that undiscounted future cash flows from such properties will be less
than their net book value. If a property is impaired, its basis is adjusted to
its fair market value. In the second quarter of 1995, Host made a
determination that its owned Courtyard and Residence Inn properties were held
for sale and recorded a $10 million charge to write down the carrying value of
five individual Courtyard and Residence Inn properties to their estimated net
sales values.
Capital Acquisitions, Additions and Improvements. Host seeks to grow
primarily through opportunistic acquisitions of full-service hotels. Host
believes that the upscale and luxury full-service hotel segments of the market
offer opportunities to acquire assets at attractive multiples of cash flow and
at discounts to replacement value, including under-performing hotels which can
be improved by conversion to the Marriott or Ritz-Carlton brands. During 1997,
Host acquired eight full-service hotels (3,600 rooms) and controlling
interests in nine additional full-service hotels (5,024 rooms) for an
aggregate purchase price of approximately $766 million (including the
assumption of approximately $418 million of debt). Host also completed the
acquisition of the 504-room New York Marriott Financial Center, after
acquiring the mortgage on the hotel for $101 million in late 1996. During
1996, Host acquired six full-service hotels (1,964 rooms) for an aggregate
purchase price of $189 million and controlling interests in 17 additional
full-service properties (8,917 rooms) for an aggregate purchase price of
approximately $1.1 billion (including the assumption of $696 million of debt).
During 1995, Host acquired nine hotels totaling approximately 3,900 rooms in
separate transactions for approximately $390 million ($141 million of which
was financed through first mortgage financing on four of the hotels).
In the first quarter of 1998, Host acquired a controlling interest in the
partnership that owns the 1,671-room Atlanta Marriott Marquis Hotel for $239
million, including the assumption of $164 million of mortgage debt. Host also
acquired a controlling interest in the partnership that owns the 359-room
Albany Marriott, the 350-room San Diego Marriott Mission Valley and the 320-
room Minneapolis Marriott Southwest for approximately $50 million. In the
second quarter of 1998, Host acquired the 289-room Park Ridge Marriott for $24
million and acquired the 281-room Ritz-Carlton, Phoenix for $75 million. Host
is continually engaged in discussions with respect to other potential
acquisition properties. In addition, Host acquired the 397-room Ritz-Carlton,
Tysons Corner, Virginia and the 487-room Torrance Marriott near Los Angeles,
California. In the third quarter of 1998, Host acquired the 308-room Ritz-
Carlton, Dearborn for approximately $65 million, the 336-room Ritz-Carlton,
San Francisco for approximately $161 million and the 404-room Memphis Marriott
(which was converted to the Marriott brand upon acquisition) for approximately
$16 million.
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On April 17, 1998, Host announced that it had reached a definitive agreement
with the Blackstone Entities to acquire interests in twelve world-class luxury
hotels and certain other assets. If the Blackstone Acquisition is consummated,
the Operating Partnership expects to pay approximately $862 million in cash
and assumed debt and to issue approximately 43.7 million OP Units (based upon
a negotiated value of $20.00 per OP Unit) and other consideration. The
Blackstone portfolio consists of two Ritz-Carltons, two Four Seasons, one
Grand Hyatt, three Hyatt Regencies and four Swissotel properties and the
mortgage on a third Four Seasons. These hotels are located in major urban and
convention/resort markets with significant barriers to new competition. The
Blackstone Acquisition is expected to close as part of, and is contingent
upon, the REIT Conversion. At that time, the Blackstone hotels and other
assets will be acquired by the Company. The hotels will be leased to Lessees
and will be managed on behalf of the Lessees under their existing management
contracts.
Under the terms of its hotel management agreements, Host is generally
required to spend approximately 5% of gross hotel sales to cover the capital
needs of the properties, including major guest room and common area
renovations which occur every five to six years.
Host completed the construction of the 1,200-room Philadelphia Marriott,
which opened on January 27, 1995. The construction costs of this hotel were
funded 60% through a loan from Marriott International which was repaid in the
fourth quarter of 1996. In March 1997, Host obtained a $90 million mortgage
which bears interest at a fixed rate of 8.49% and matures in 2009.
Construction of a second hotel in Philadelphia, the 419-room Philadelphia
Airport Marriott (the "Airport Hotel"), was completed and opened on November
1, 1995. The Airport Hotel was financed principally with $40 million of
proceeds from an industrial development bond financing. Host also completed
construction of a 300-room Residence Inn in Arlington, Virginia, which opened
in March 1996. Capital expenditures for these three hotels totaled $11 million
in 1996 and $64 million in 1995.
In November 1997, Host announced that it had committed to develop and
construct the 717-room Tampa Convention Center Marriott for a cost estimated
at approximately $88 million, net of an approximate $16 million subsidy
provided by the City of Tampa.
Host may also expand certain existing hotel properties where strong
performance and market demand exists. Expansions to existing properties
creates a lower risk to Host as the success of the market is generally known
and development time is significantly shorter than new construction. Host
recently committed to add approximately 500 rooms and an additional 15,000
square feet of meeting space to the 1,503-room Marriott's Orlando World
Center.
In 1997, Host acquired the outstanding common stock of the Forum Group from
Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott
International. Host purchased the Forum Group portfolio of 29 senior living
communities for approximately $460 million, including approximately $270
million in debt. The properties will continue to be operated by MSLS. In
addition, Host plans to add approximately 875 units to these communities for
approximately $88 million through an expansion plan which will be completed in
1999. In 1997, approximately $56 million (549 units) of the expansion plan had
been completed (including $33 million of debt financing provided by Marriott
International). Host also acquired 49% of the remaining 50% interest in the
venture which owned the 418-unit Leisure Park senior living community from
Marriott International for approximately $23 million, including approximately
$15 million of debt.
During the first quarter of 1998, Host acquired the Gables at Winchester in
suburban Boston, a 124-unit senior living community, for $21 million and
entered into conditional purchase agreements to acquire two Marriott Brighton
Gardens assisted living communities from the Summit Companies of Denver,
Colorado. After the anticipated completion of construction in the first
quarter of 1999, Host may acquire these two 160-unit properties located in
Denver and Colorado Springs, Colorado, for $35 million, if they achieve
certain operating performance criteria. All three of these communities will be
operated by MSLS under long-term operating agreements.
Under the terms of its senior living communities' management agreements,
Host is generally required to spend an amount of gross revenues to cover
certain routine repairs and maintenance and replacements and
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renewals to the communities' property and improvements. The amount Host is
required to spend will be 2.65% through fiscal year 2002, 2.85% for fiscal
years 2003 through 2007, and 3.5% thereafter. Host anticipates spending
approximately $6 million in 1998.
As part of the Initial E&P Distribution, Host REIT and the Operating
Partnership will distribute shares of Crestline common stock (which will own
the Forum Group portfolio and other senior living and assisted living
communities described above) to Host REIT's stockholders and the Blackstone
Entities.
Debt Payments. At January 2, 1998, Host and its subsidiaries had $1,585
million of senior notes, approximately $2.0 billion of non-recourse mortgage
debt secured by real estate assets and approximately $219 million of unsecured
and other debt.
Scheduled maturities over the next five years were $942 million as of
January 2, 1998, a significant portion of which represents the maturity of the
mortgage on the New York Marriott Marquis of approximately $270 million in
December 1998. Management anticipates that the mortgage will be refinanced by
the end of 1998 on comparable terms. Host's interest coverage, defined as
EBITDA divided by cash interest expense, improved to nearly 2.5 times in 1997
from 2.0 times in 1996.
At January 2, 1998, Host was party to an interest rate exchange agreement
with a financial institution (the contracting party) with an aggregate
notional amount of $100 million. Under this agreement, Host collects interest
based on specified floating interest rates of one month LIBOR (rate of 6% at
January 2, 1998) and pays interest at fixed rates (rate of 7.99% at January 2,
1998). This agreement expires in 1998, in conjunction with the maturity of the
mortgage on the New York Marriott Marquis. Also in 1997, Host was party to two
additional interest rate swap agreements with an aggregate notional amount of
$400 million. These agreements expired in May 1997. Host realized a net
reduction of interest expense of $1 million in 1997, $6 million in 1996 and $5
million in 1995 related to interest rate exchange agreements. Host monitors
the creditworthiness of its contracting parties by evaluating credit exposure
and referring to the ratings of widely accepted credit rating services. The
Standard and Poors' long-term debt ratings for the contracting party is A- for
its sole outstanding interest rate exchange agreement. Host is exposed to
credit loss equal to the accrued interest receivable on the notional amount of
interest rate exchange agreements outstanding ($0 at January 2, 1998) in the
event of non-performance by the contracting party to the interest rate swap
agreement; however, Host does not anticipate non-performance by the
contracting party.
Cash Flows. Host's cash flow from continuing operations in 1997, 1996 and
1995 totaled $464 million, $205 million and $110 million, respectively. Cash
flow from operations in the First Three Quarters 1998 and First Three Quarters
1997 totaled $278 million and $313 million, respectively.
Host's cash used in investing activities from continuing operations in 1997,
1996 and 1995 totaled $1,046 million, $504 million and $156 million,
respectively. Cash used in investing activities was $273 million and $497
million for the First Three Quarters 1998 and the First Three Quarters 1997,
respectively. Cash from investing activities primarily consists of net
proceeds from the sales of certain assets, offset by the acquisition of hotels
and other capital expenditures previously discussed, as well as the purchases
and sales of short-term marketable securities. Cash used in investing
activities was significantly impacted by the purchase of $354 million of
short-term marketable securities in 1997 and the net sale of $318 million of
short-term marketable securities in the First Three Quarters 1998.
Host's cash from financing activities from continuing operations was $389
million for 1997, $806 million for 1996 and $204 million for 1995. Cash from
financing activities was $23 million and $391 million, respectively, for the
First Three Quarters 1998 and First Three Quarters 1997. Host's cash from
financing activities primarily consists of the proceeds from debt and equity
offerings, the issuance of the Convertible Preferred Securities, mortgage
financing on certain acquired hotels and borrowings under the Line of Credit,
offset by redemptions and payments on senior notes, prepayments on certain
hotel mortgages and other scheduled principal payments.
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The ratio of earnings to fixed charges was 1.7 to 1.0, 1.4 to 1.0, 1.3 to
1.0, 1.0 to 1.0 and .7 to 1.0 for the First Three Quarters 1998, the First
Three Quarters 1997, 1997, 1996 and 1995, respectively. The deficiency of
earnings to fixed charges of $70 million for 1995 is largely the result of
depreciation and amortization of $122 million. In addition, the deficiency for
1995 was impacted by the $60 million pre-tax charge to write down the carrying
value of one undeveloped land parcel to its estimated sales value.
Comparative FFO. Host believes that Comparative Funds From Operations
("Comparative FFO," which represents Funds From Operations, as defined by
NAREIT, plus deferred tax expense) is a meaningful disclosure that will help
the investment community to better understand the financial performance of
Host, including enabling its stockholders and analysts to more easily compare
Host's performance to REITs. FFO is defined by NAREIT as net income computed
in accordance with GAAP, excluding gains or losses from debt restructurings
and sales of properties, plus real estate related depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. FFO should not be considered as an alternative to net income,
operating profit, cash flows from operations or any other operating or
liquidity performance measure prescribed by GAAP. FFO is also not an indicator
of funds available to fund Host's cash needs, including its ability to make
distributions. Host's method of calculating FFO may be different from methods
used by other REITs and, accordingly, is not comparable to such other REITs.
Comparative FFO increased $80 million, or 40%, to $282 million in the First
Three Quarters 1998. Comparative FFO increased $131 million, or 80%, to $295
million in 1997. The following is a reconciliation of Host's income (loss)
before extraordinary items to Comparative FFO (in millions):
<TABLE>
<CAPTION>
FIRST
THREE QUARTERS FISCAL YEAR
---------------- ------------
1998 1997 1997 1996
------- ------- ----- -----
<S> <C> <C> <C> <C>
Income before extraordinary items.......... $ 100 $ 38 $ 47 $ (13)
Real estate related depreciation and
amortization.............................. 184 158 240 168
Other real estate activities............... (53) 1 6 7
Partnership adjustments.................... (9) (6) (13) 1
REIT Conversion expenses................... 14 -- -- --
Deferred taxes............................. 46 11 15 1
------- ------- ----- -----
Comparative FFO............................ $ 282 $ 202 $ 295 $ 164
======= ======= ===== =====
</TABLE>
Host considers Comparative FFO to be an indicative measure of Host's
operating performance due to the significance of Host's long-lived assets and
because such data is considered useful by the investment community to better
understand Host's results, and can be used to measure Host's ability to
service debt, fund capital expenditures and expand its business; however, such
information should not be considered as an alternative to net income,
operating profit, cash from operations or any other operating or liquidity
performance measure prescribed by generally accepted accounting principles.
Cash expenditures for various long-term assets and income taxes have been, and
will be, incurred which are not reflected in the Comparative FFO presentation.
Partnership Activities. Host has general and limited partner interests in
numerous limited partnerships which own 240 hotels (including 20 full-service
hotels) as of the date hereof, managed by Marriott International. Debt of the
hotel limited partnerships is typically secured by first mortgages on the
properties and is generally nonrecourse to the partnership and the partners.
However, Host has committed to advance amounts to certain affiliated limited
partnerships, if necessary, to cover certain future debt service requirements.
Such commitments were limited, in the aggregate, to an additional $60 million
at January 2, 1998. Subsequent to year-end, this amount was reduced to $20
million in connection with the refinancing and acquisition of a controlling
interest in the partnership which owns the Atlanta Marriott Marquis. Amounts
repaid to the Company under these guarantees totaled $2 million and $13
million in 1997 and 1996, respectively. Fundings by Host under these
guarantees amounted to $10 million in 1997 and $8 million for 1995.
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Leases. Host leases certain property and equipment under noncancelable
operating leases, including the long-term ground leases for certain hotels,
generally with multiple renewal options. The leases related to the 53
Courtyard properties and 18 Residence Inn properties sold during 1995 and 1996
are nonrecourse to Host and contain provisions for the payment of contingent
rentals based on a percentage of sales in excess of stipulated amounts. Host
remains contingently liable on certain leases related to divested non-lodging
properties. Such contingent liabilities aggregated $110 million at January 2,
1998. However, management considers the likelihood of any substantial funding
related to these divested properties' leases to be remote.
Inflation. Host's hotel lodging properties are impacted by inflation through
its effect on increasing costs and on the managers' ability to increase room
rates. Unlike other real estate, hotels have the ability to change room rates
on a daily basis, so the impact of higher inflation generally can be passed on
to customers.
A substantial portion of Host's debt bears interest at fixed rates. This
debt structure largely mitigates the impact of changes in the rate of
inflation on future interest costs. However, Host currently is exposed to
variable interest rates through an interest rate exchange agreement with a
financial institution with an aggregate notional amount of $100 million. Under
this agreement, Host collects interest based on the specified floating rates
of one month LIBOR (rate of 6% at January 2, 1998) and pays interest at fixed
rates (rate of 7.99% at January 2, 1998). This agreement expires in 1998 in
conjunction with the maturity of the mortgage on the New York Marriott
Marquis. Host's Line of Credit and the mortgage on the San Diego Marriott
Hotel and Marina ($199 million at January 2, 1998) bears interest based on
variable rates. Accordingly, the amount of Host's interest expense under the
interest rate swap agreements and the floating rate debt for a particular year
will be affected by changes in short-term interest rates.
YEAR 2000 PROBLEM
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore do not properly recognize a year that begins with
"20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results. The following disclosure
provides information regarding the current status of the Company's Year 2000
compliance program.
The Company has adopted the compliance program because it recognizes the
importance of minimizing the number and seriousness of any disruptions that
may occur as a result of the Year 2000 issue. The Company's compliance program
includes an assessment of the Company's hardware and software computer systems
and embedded systems, as well as an assessment of the Year 2000 issues
relating to third parties with which the Company has a material relationship
or whose systems are material to the operations of the Company's hotel
properties. The Company's efforts to ensure that its computer systems are Year
2000 compliant have been segregated into two separate phases: in-house systems
and third-party systems. Following the REIT Conversion, Crestline, as the
Lessee of the Company's hotels, will deal directly with Year 2000 matters
material to the operation of the Hotels, and Crestline has agreed to adopt and
implement the program outlined below with respect to third-party systems for
all Hotels for which it is Lessee.
In-House Systems. Since the distribution of Marriott International on
October 8, 1993, the Company has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are
intended to enable the Company to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
the Company's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms and the Company has not delayed
any systems projects due to the Year 2000 issue. The Company is in the process
of engaging a third party to review its Year 2000 in-house compliance.
Management believes that future costs associated with Year 2000 issues for its
in-house systems will be insignificant and therefore not impact the Company's
business, financial condition and results of operations. The Company has not
developed, and does not plan to develop, a separate contingency plan for its
in-house systems due to their current Year 2000 compliance. However, the
Company does have
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detailed contingency plans for its in-house systems covering a variety of
possible events, including natural disasters, interruption of utility service
and similar events.
Third-Party Systems. The Company relies upon operational and accounting
systems provided by third parties, primarily the managers and operators of its
hotel and senior living properties, to provide the appropriate property-
specific operating systems (including reservation, phone, elevator, security,
HVAC and other systems) and to provide it with financial information. Based on
discussion with the third parties that are critical to the Company's business,
including the managers and operators of its hotels, the Company believes that
these parties are in the process of studying their systems and the systems of
their respective vendors and service providers and, in many cases, have begun
to implement changes, to ensure that they are Year 2000 compliant. To the
extent these changes impact property-level systems, the Company may be
required to fund capital expenditures for upgraded equipment and software. The
Company does not expect these charges to be material, but is committed to
making these investments as required. To the extent that these changes relate
to a third party manager's centralized systems (including reservations,
accounting, purchasing, inventory, personnel and other systems), the Company's
management agreements generally provide for these costs to be charged to the
Company's properties subject to annual limitations, which costs will be borne
by Crestline following the REIT Conversion. The Company and Crestline expect
that the third party managers will incur Year 2000 costs in lieu of costs for
its centralized systems related to system projects that otherwise would have
been pursued and therefore, its overall level of centralized systems charges
allocated to the properties will not materially increase as a result of the
Year 2000 compliance effort. The Company and Crestline believe that this
deferral of certain system projects will not have a material impact on its
future results of operations, although it may delay certain productivity
enhancements at its properties. The Company (and, following the REIT
Conversion, Crestline) will continue to monitor the efforts of these third
parties to become Year 2000 compliant and will take appropriate steps to
address any non-compliance issues. The Company believes that in the event of
material Year 2000 non-compliance, the Company will have the right to seek
recourse against the manager under its third party management agreements. The
management agreements, however, generally do not specifically address the Year
2000 compliance issue. Therefore, the amount of any recovery in the event of
Year 2000 non-compliance at a property, if any, is not determinable at this
time (and if the REIT Conversion occurs, only a portion of such recovery would
accrue to the Company, through increased lease rental payments from
Crestline).
The Company (and, following the REIT Conversion, Crestline) will work with
the third parties to ensure that appropriate contingency plans will be
developed to address the most reasonably likely worst case Year 2000
scenarios, which may not have been identified fully. In particular, the
Company has had extensive discussions regarding the Year 2000 problem with
Marriott International, the manager of a substantial majority of its hotel
properties and all of its senior living communities. Due to the significance
of Marriott International to the Company's business, a detailed description of
Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be
affected; (iii) Assessment: reviewing these components for Year 2000
compliance, and assessing the scope of Year 2000 issues; (iv) Planning:
defining the technical solutions and labor and work plans necessary for each
particular system; (v) Remediation/Replacement: completing the programming to
renovate or replace the problem software or hardware; (vi) Testing and
Compliance Validation: conducting testing, followed by independent validation
by a separate internal verification team; (vii) Implementation: placing the
corrected systems and technology back into the business environment; and
(viii) Quality Assurance: utilizing a dedicated audit team to review and test
significant projects for adherence to quality standards and program
methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications)--enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS")--systems that
have been initiated by an individual business unit, and
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<PAGE>
that are not supported by Marriott International's IR organization; and (iii)
Building Systems--non-IT equipment at properties that use embedded computer
chips, such as elevators, automated room key systems and HVAC equipment.
Marriott International is prioritizing its efforts based on how severe an
effect noncompliance would have on customer service, core business processes
or revenues, and whether there are viable, non-automated fallback procedures
(System Criticality).
Marriott International measures the completion of each phase based on
documented and quantified results, weighted for System Criticality. As of the
end of the 1998 third quarter, the awareness and inventory phases were
complete for IT Applications and nearly complete for BIS and Building Systems.
For IT Applications, the Assessment, Planning and Remediation/Replacement
phases were each over 80 percent complete, and Testing and Compliance
Validation had been completed for a number of key systems, with most of the
remaining work in its final stage. For BIS and Building Systems, Assessment
and Planning were in the mid-to-upper-range of completion, with a substantial
amount of work in process, while the progress level for
Remediation/Replacement and Testing and Compliance Validation had not yet been
documented and quantified. Quality Assurance is also in progress for IT
Applications and is scheduled to begin for BIS and Building Systems in the
near future. Marriott International's goal is to substantially complete the
Remediation/Replacement and Testing phases for its System Critical IT
Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted
for June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications
with its significant third party suppliers, vendors and business partners,
including its franchisees. Marriott International is focusing its efforts on
the business interfaces most critical to its customer service and revenues,
including those third parties that support the most critical enterprise-wide
IT Applications, franchisees generating the most revenues, suppliers of the
most widely used Building Systems and BIS, the top 100 suppliers, by dollar
volume, of non-IT products, and financial institutions providing the most
critical payment processing functions. Responses have been received from a
majority of the firms in this group.
Marriott International is also establishing a common approach for testing
and addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-
practices sharing system.
Risks. There can be no assurances that Year 2000 remediation by the Company
or third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on the Company, its business and its
financial condition. The Company cannot predict the actual effects to it of
the Year 2000 problem, which depends on numerous uncertainties such as: (i)
whether significant third parties properly and timely address the Year 2000
issue; and (ii) whether broad-based or systemic economic failures may occur.
Moreover, following the REIT Conversion, the Company will be reliant upon
Crestline to interface with third parties in addressing the Year 2000 issue at
the hotels leased by Crestline. The Company is also unable to predict the
severity and duration of any such failures, which could include disruptions in
passenger transportation or transportation systems generally, loss of utility
and/or telecommunications services, the loss or disruption of hotel
reservations made on centralized reservation systems and errors or failures in
financial transactions or payment processing systems such as credit cards. Due
to the general uncertainty inherent in the Year 2000 problem and the Company's
dependence on third parties (including Crestline following the REIT
Conversion), the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company.
The Company's Year 2000 compliance program, and Crestline's adoption thereof
following the REIT Conversion are expected to significantly reduce the level
of uncertainty about the Year 2000 problem and management believes that the
possibility of significant interruptions of normal operations should be
reduced.
Accounting Standards. Host adopted Statement of Financial Accounting
Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during 1995. Adoption of these statements
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did not have a material effect on Host's continuing operations. See the
discussion below for a discussion of the impact of the adoption of SFAS No.
121 on discontinued operations.
SFAS No. 121 requires that an impairment loss be recognized when the
carrying amount of an asset exceeds the sum of the undiscounted estimated
future cash flows associated with the asset. Under SFAS No. 121, Host reviewed
the impairment of its assets employed in its operating group business lines
(airport, toll plaza and sports and entertainment) on an individual operating
unit basis. For each individual operating unit determined to be impaired, an
impairment loss equal to the difference between the carrying value and the
fair market value of the unit's assets was recognized. Fair market value was
estimated to be the present value of expected future cash flows of the
individual operating unit, as determined by management, after considering such
factors as future air travel and toll-pay vehicle data and inflation. As a
result of the adoption of SFAS No. 121, Host recognized a non-cash, pre-tax
charge against earnings during the fourth quarter 1995 of $47 million, which
was reflected in discontinued operations.
In the fourth quarter of 1996, Host adopted SFAS No. 123, "Accounting for
Stock Based Compensation." The adoption of SFAS No. 123 did not have a
material effect on Host's financial statements.
During 1997, Host adopted SFAS No. 128, "Earnings Per Share," SFAS No. 129,
"Disclosure of Information About Capital Structure" and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
adoption of these statements did not have a material effect on Host's
consolidated financial statements and the appropriate disclosures required by
these statements have been incorporated herein.
In the First Quarter 1998, Host adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in financial statements.
The objective of SFAS No. 130 is to report a measure of all changes in equity
of an enterprise that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive income is the
total of net income and all other nonowner changes in equity.
Host's only component of other comprehensive income is the right to receive
up to 1.4 million shares of Host Marriott Services Corporation's common stock
or an equivalent cash value subsequent to exercise of the options held by
certain former and current employees of Marriott International. For the First
Three Quarters 1998 and First Three Quarters 1997, Host's other comprehensive
loss was $3 million and $8 million, respectively. As of September 11, 1998 and
January 2, 1998, Host's accumulated other comprehensive income was
approximately $7 million and $10 million, respectively.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus of EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
Host has considered the impact of EITF 97-2 on its financial statements and
has determined that EITF 97-2 requires the Company to include property-level
sales and operating expenses of its hotels and senior living communities in
its statements of operations. Host will adopt EITF 97-2 in the fourth quarter
of 1998, with retroactive effect in prior periods to conform to the new
presentation. Application of EITF 97-2 to the consolidated financial
statements for the First Three Quarters 1998, First Three Quarters 1997 and
Fiscal Years 1997, 1996 and 1995 would have increased both revenues and
operating expenses by approximately $1,501 million, $1,161 million, $1,713
million, $1,225 million and $878 million, respectively, and would have had no
impact on operating profit, net income or earnings per share.
EITF 98-9, "Accounting for Contingent Rent in Interim Financial Periods,"
was issued on May 21, 1998. EIFT 98-9 requires a lessor to defer recognition
of contingent rental income in interim periods until the specified target that
triggers the contingent rental income is achieved. EITF 98-9 has no impact on
Host prior to the REIT Conversion, but will impact the revenue recognized
under the Leases on a quarterly basis following the REIT Conversion.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF HOST REIT
The following table sets forth certain information with respect to persons
who will be Directors immediately after the completion of the Merger and the
other transactions comprising the REIT Conversion, and the executive officers
of Host REIT (or the Operating Partnership), all of whom are currently
directors, executive officers or key employees of Host.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH HOST REIT (OR THE OPERATING PARTNERSHIP)
---- --- ------------------------------------------------------
<S> <C> <C>
Richard E. Marriott(1).. 59 Chairman of the Board of Directors
J.W. Marriott, Jr.(1)... 66 Director
R. Theodore Ammon....... 48 Director
Robert M. Baylis........ 59 Director
Ann Dore McLaughlin..... 56 Director
Harry L. Vincent, Jr.... 79 Director
John G. Schreiber....... 52 Director
Terence C. Golden....... 53 Director, President and Chief Executive Officer
Robert E. Parsons,
Jr. ................... 42 Executive Vice President and Chief Financial Officer
Christopher J.
Nassetta............... 36 Executive Vice President and Chief Operating Officer
Christopher G.
Townsend............... 51 Senior Vice President, General Counsel and Corporate Secretary
Donald D. Olinger....... 39 Senior Vice President and Corporate Controller
</TABLE>
- --------
(1) Richard E. Marriott and J.W. Marriott, Jr. are brothers.
The following is a biographical summary of the experience of the persons who
will be Directors and executive officers of Host REIT after the REIT
Conversion:
Richard E. Marriott. Mr. Richard E. Marriott has been a Director of Host
since 1979 and is a Director of Marriott International, Inc., Host Marriott
Services Corporation, Potomac Electric Power Company and the Polynesian
Cultural Center, and he is Chairman of the Board of First Media Corporation.
He also serves as a Director of certain subsidiaries of Host and is a past
President of the National Restaurant Association. In addition, Mr. Marriott is
the President and a Trustee of the Marriott Foundation for People with
Disabilities. Mr. Marriott's term as a Director of Host REIT will commence at
or prior to the REIT Conversion and will expire at the 2001 annual meeting of
stockholders. Mr. Marriott joined Host in 1965 and has served in various
executive capacities. In 1984, he was elected Executive Vice President, and in
1986, he was elected Vice Chairman of the Board of Directors. In 1993, Mr.
Marriott was elected Chairman of the Board. Mr. Marriott also has been
responsible for management of Host's government affairs functions.
J.W. Marriott, Jr. Mr. J.W. Marriott, Jr. has been a Director of Host since
1964 and is Chairman of the Board and Chief Executive Officer of Marriott
International, Inc., and a Director of Host Marriott Services Corporation,
General Motors Corporation and the U.S.-Russia Business Council. He also
serves on the Boards of Trustees of the Mayo Foundation, Georgetown University
and the National Geographic Society. He is on the President's Advisory
Committee of the American Red Cross, the Executive Committee of the World
Travel & Tourism Council and is a member of the Business Council and the
Business Roundtable. Mr. Marriott's term as a Director of Host REIT will
commence at or prior to the REIT Conversion and will expire at the 1999 annual
meeting of stockholders.
R. Theodore Ammon. Mr. Ammon has been a Director of Host since 1992 and is a
private investor and Chairman of Big Flower Holdings, Inc. He was formerly a
General Partner of Kohlberg Kravis Roberts & Company (a New York and San
Francisco-based investment firm) from 1990 to 1992, and was an executive of
such firm prior to 1990. Mr. Ammon is also a member of the Board of Directors
of Samsonite Corporation and Culligan Water Technologies, Inc. In addition, he
serves on the Board of Directors of the New York YMCA, Jazz @ Lincoln Center
and the Institute of International Education and on the Board of Directors of
Bucknell
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University. Mr. Ammon's term as a Director of Host REIT will commence at or
prior to the REIT Conversion and will expire at the 2001 annual meeting of
stockholders.
Robert M. Baylis. Mr. Baylis has been a Director of Host since 1996 and is a
Director of The International Forum, an executive education program of the
Wharton School of the University of Pennsylvania. He was formerly Vice
Chairman of CS First Boston. Mr. Baylis also serves as a Director of New York
Life Insurance Company, Covance, Inc. and Gryphon Holdings, Inc. In addition,
he is an overseer of the University of Pennsylvania Museum of Archeology and
Anthropology. Mr. Baylis's term as a Director of Host REIT will commence at or
prior to the REIT Conversion and will expire at the 2000 annual meeting of
stockholders.
Ann Dore McLaughlin. Ms. McLaughlin has been a Director of Host since 1993
and currently is Chairman of the Aspen Institute. She formerly served as
President of the Federal City Council from 1990 until 1995. Ms. McLaughlin has
served with distinction in several U.S. Administrations in such positions as
Secretary of Labor and Under Secretary of the Department of the Interior. She
also serves as a Director of AMR Corporation, Fannie Mae, General Motors
Corporation, Kellogg Company, Nordstrom, Potomac Electric Power Company, Union
Camp Corporation, Donna Karan International, Inc., Vulcan Materials Company,
Harman International Industries, Inc. and Sedgwick Group plc. Ms. McLaughlin's
term as a Director of Host REIT will commence at or prior to the REIT
Conversion and will expire at the 2000 annual meeting of stockholders.
Harry L. Vincent, Jr. Mr. Vincent has been a Director of Host since 1969 and
is a retired Vice Chairman of Booz-Allen & Hamilton, Inc. He also served as a
Director of Signet Banking Corporation from 1973 until 1989. Mr. Vincent's
term as a Director of Host REIT will commence at or prior to the REIT
Conversion and will expire at the 1999 annual meeting of stockholders.
John G. Schreiber. Mr. Schreiber has been a Director of Host since 1998 and
is President of Schreiber Investments, Inc. and a Senior Advisor and Partner
of Blackstone Real Estate Advisors, L.P. Mr. Schreiber serves as a Trustee of
AMLI Residential Properties Trust and as a Director of Urban Shopping Centers,
Inc., JMB Realty Corporation and a number of mutual funds advised by T. Rowe
Price Associates, Inc. Prior to his retirement as an officer of JMB Realty
Corporation in 1990, Mr. Schreiber was Chairman and CEO of JMB/Urban
Development Company and an Executive Vice President of JMB Realty Corporation.
Mr. Schreiber's term as a Director of Host REIT will commence at or prior to
the REIT Conversion and will expire at the 1999 annual meeting of
stockholders.
Terence C. Golden. Mr. Golden has been a Director of Host since 1995 and was
named President and Chief Executive Officer of Host in 1995. Mr. Golden also
serves as a Director of certain subsidiaries of Host. He also serves as
Chairman of Bailey Realty Corporation and Bailey Capital Corporation and
various affiliated companies. In addition, Mr. Golden is Chairman of the
Washington Convention Center and a Director of Prime Retail, Inc., Cousins
Properties, Inc., The Morris and Gwendolyn Cafritz Foundation and the District
of Columbia Early Childhood Collaborative. He is also a member of the
Executive Committee of the Federal City Council. Mr. Golden will be President
and Chief Executive Officer of Host REIT commencing at or prior to the REIT
Conversion and his term as a Director of Host REIT will commence at or prior
to the REIT Conversion and will expire at the 2000 annual meeting of
stockholders. Prior to joining Host, Mr. Golden was Chairman of Bailey Realty
Corporation and prior to that had served as Chief Financial Officer of The
Oliver Carr Company. Before joining The Oliver Carr Company, he served as
Administrator of the General Services Administration and as Assistant
Secretary of Treasury, and he was co-founder and national managing partner of
Trammel Crow Residential Companies.
Robert E. Parsons, Jr. Mr. Parsons joined Host's Corporate Financial
Planning staff in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr.
Parsons was elected Senior Vice President and Treasurer of Host, and in 1995,
he was elected Executive Vice President and Chief Financial Officer of Host.
Since September 1998, Mr. Parsons has been President and an initial Director
of Host REIT but he will resign from such positions upon or prior to the REIT
Conversion. Mr. Parsons will be Executive Vice President and Chief Financial
Officer of Host REIT commencing at or prior to the REIT Conversion.
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<PAGE>
Christopher J. Nassetta. Mr. Nassetta joined Host in October 1995 as
Executive Vice President and was elected Chief Operating Officer of Host in
1997. Mr. Nassetta will be Executive Vice President and Chief Operating
Officer of Host REIT commencing at or prior to the REIT conversion. Prior to
joining Host, Mr. Nassetta served as President of Bailey Realty Corporation
from 1991 until 1995. He had previously served as Chief Development Officer
and in various other positions with The Oliver Carr Company from 1984 through
1991.
Christopher G. Townsend. Mr. Townsend joined Host's Law Department in 1982
as a Senior Attorney. In 1984, Mr. Townsend was made Assistant Secretary of
Host, and in 1986, he was made Assistant General Counsel. In 1993, Mr.
Townsend was elected Senior Vice President, Corporate Secretary and Deputy
General Counsel. In January 1997, he was elected General Counsel. Since
September 1998, Mr. Townsend has been Vice President and an initial Director
of Host REIT but he will resign from such positions upon or prior to the REIT
Conversion. Mr. Townsend will be Senior Vice President, General Counsel and
Secretary of Host REIT commencing at or prior to the REIT Conversion.
Donald D. Olinger. Mr. Olinger joined Host in 1993 as Director--Corporate
Accounting. Later in 1993, Mr. Olinger was promoted to Senior Director and
Assistant Controller. He was promoted to Vice President--Corporate Accounting
in 1995. In 1996, he was elected Senior Vice President and Corporate
Controller. Since September 1998, Mr. Olinger has been Vice President of Host
REIT but he will resign from such position at or prior to the REIT Conversion.
Mr. Olinger will be Senior Vice President and Corporate Controller of Host
REIT commencing at or prior to the REIT Conversion. Prior to joining Host, Mr.
Olinger was with the public accounting firm of Deloitte & Touche.
COMMITTEES OF THE BOARD OF DIRECTORS
Promptly following the consummation of the REIT Conversion, the Board of
Directors of Host REIT will establish the following committees:
Audit Committee. The Audit Committee will be comprised of five Directors who
are not employees of Host REIT, namely, R. Theodore Ammon (Chair), Harry L.
Vincent, Jr., Ann Dore McLaughlin, John G. Schreiber and Robert M. Baylis. The
Audit Committee will meet at least three times a year with the independent
auditors, management representatives and internal auditors; recommend to the
Board of Directors appointment of independent auditors; approve the scope of
audits and other services to be performed by the independent and internal
auditors; consider whether the performance of any professional service by the
auditors other than services provided in connection with the audit function
could impair the independence of the outside auditors; and review the results
of internal and external audits, the accounting principles applied in
financial reporting, and financial and operational controls.
Compensation Policy Committee. The Compensation Policy Committee will be
comprised of six Directors who are not employees of Host REIT, namely, Harry
L. Vincent, Jr. (Chair), R. Theodore Ammon, John G. Schreiber, Robert M.
Baylis, J.W. Marriott, Jr. and Ann Dore McLaughlin. The Compensation Policy
Committee's functions will include recommendations on policies and procedures
relating to senior officers' compensation and various employee stock plans,
and approval of individual salary adjustments and stock awards in those areas.
Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee will be comprised of six Directors who are not employees
of Host REIT, namely, Ann Dore McLaughlin (Chair), Harry L. Vincent, Jr., John
G. Schreiber, R. Theodore Ammon, J.W. Marriott, Jr. and Robert M. Baylis. It
will consider candidates for election as Directors and will be responsible for
keeping abreast of and making recommendations with regard to corporate
governance in general. In addition, the Nominating and Corporate Governance
Committee will fulfill an advisory function with respect to a range of matters
affecting the Board of Directors and its Committees, including the making of
recommendations with respect to qualifications of Director candidates,
compensation of Directors, the selection of committee chairs, committee
assignments and related matters affecting the functioning of the Board.
150
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Host REIT may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated
by the Board of Directors.
COMPENSATION OF DIRECTORS
Directors who are also officers of Host REIT will receive no additional
compensation for their services as Directors. Directors elected by the holders
of Host REIT Common Stock and who are not officers will receive an annual
retainer fee of $25,000 as well as an attendance fee of $1,250 for each
stockholders' meeting, meeting of the Board of Directors or meeting of a
committee of the Board of Directors, regardless of the number of meetings held
on a given day. The chair of each committee of the Board of Directors will
receive an additional annual retainer fee of $1,000, except for the chair of
the Compensation Policy Committee, Mr. Vincent, who will receive an annual
retainer fee of $6,000. (The higher annual retainer fee paid to the chair of
the Compensation Policy Committee relates to his additional duties which
include, among other things, the annual performance appraisal of the chief
executive officer on behalf of the Board, although the final appraisal is
determined by the Board.) Any individual Director receiving these fees may
elect to defer payment of all such fees or any portion thereof pursuant to the
Plans (to the extent such Director is eligible) and/or Host REIT's Non-
Employee Directors' Deferred Stock Compensation Plan. Directors also will be
reimbursed for travel expenses and other out-of-pocket costs incurred in
attending meetings or in visiting hotels or other properties controlled by
Host REIT or by Marriott International.
In 1997, the following Directors of the Company received special one-time
awards of Company common stock in the amounts indicated: Mr. Ammon, 4,000
shares; Mr. Baylis, 7,000 shares; Ms. McLaughlin, 7,000 shares and Mr.
Vincent, 7,000 shares. The special one-time awards of Company common stock
vest at the rate of 10% per year of a Directors service on the Board, with
credit given for each year of service already completed, and will also become
fully vested upon the death or disability of the Directors.
EXECUTIVE COMPENSATION
The table below sets forth a summary of the compensation paid by Host for
the last three fiscal years to the Chief Executive Officer and the four
additional most highly compensated executive officers of Host for Host's
fiscal year 1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ------------ -------
RESTRICTED
NAME AND FISCAL OTHER ANNUAL STOCK LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1)(2) BONUS(3) COMPENSATION AWARDS(4)(5) PAYOUTS COMPENSATION(6)
- ------------------ ------ ------------ -------- ------------ ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard E. Marriott..... 1997 $271,449 $108,580 $110,789(7) $ 0 $0 $ 22,668(8)
Chairman of the Board 1996 262,951 105,180 114,969(7) 0 0 21,439(8)
1995 250,554 100,000 107,463(7) 0 0 12,634
Terence C. Golden(9).... 1997 619,045 557,141 58,783(10) 354,693 0 66,105
President and Chief 1996 600,017 480,013 0 10,476,603 0 560,827(11)
Executive Officer 1995 190,656 152,152 0 0 0 0
Robert E. Parsons, Jr... 1997 338,889 254,167 0 0 0 36,231
Executive Vice 1996 328,447 263,490 0 3,658,277 0 26,273
President and Chief 1995 213,767 123,649 0 0 0 10,951
Financial Officer
Christopher J.
Nassetta(9)............ 1997 338,889 254,167 0 0 0 36,231
Executive Vice 1996 328,447 263,490 0 3,647,513 0 119,168(11)
President and Chief 1995 78,000 50,700 0 0 0 0
Operating Officer
Christopher G.
Townsend............... 1997 202,962 111,629 0 1,015,800 0 18,405
Senior Vice President, 1996 186,232 102,428 0 0 0 15,891
General Counsel 1995 156,375 93,825 0 0 0 7,658
</TABLE>
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<PAGE>
- --------
(1) Fiscal year 1996 base salary earnings were for 53 weeks.
(2) Salary amounts include base salary earned and paid in cash during the
fiscal year, the amount of base salary deferred at the election of the
executive officer under the Host Marriott Corporation Executive Deferred
Compensation Plan and the increase in base salary for the period October
1, 1997 through the end of the fiscal year which was paid in 1998.
(3) Bonus includes the amount of cash bonus earned pursuant to Host's
Performance-Based Annual Incentive Bonus Plan (which was approved by the
stockholders in 1996) and to the named individual's performance-based
bonus plan during the fiscal year, which is either paid subsequent to the
end of each fiscal year or deferred under the Host Marriott Corporation
Executive Deferred Compensation Plan.
(4) During 1997, the Compensation Policy Committee (the "Committee") of the
Board of Directors approved the grant of restricted stock to certain key
employees of Host, including Mr. Townsend. In 1996, the Committee
approved similar grants of restricted stock to certain key employees of
Host, including Messrs. Golden, Parsons and Nassetta. Mr. Golden also
received grants of restricted stock on November 6, 1997 and on August 1,
1996 which were pursuant to the terms of his restricted stock agreement
with Host. Messrs. Golden, Parsons and Nassetta each received awards
which vest over a five-year period, and Mr. Townsend received an award
which vests over a three-year period. All such awards consist of shares
subject to restrictions relating primarily to continued employment
("General Restrictions") and shares subject to annual performance
objectives such as financial performance of Host ("Performance
Restrictions"). Performance objectives are established by the Committee
and are subject to annual review and revision. Sixty percent of the
shares awarded to each executive officer have annual Performance
Restrictions, and forty percent of the shares awarded have General
Restrictions conditioned upon continued employment. In addition, Messrs.
Parsons and Nassetta each received an award of restricted stock which
vests sixty percent on December 31, 1998 and forty percent on December
31, 2000, subject to the attainment of certain performance criteria and
to the named individual's continued employment ("Special Team Awards").
All Special Team Awards are presented above as "Restricted Stock Awards,"
and the value stated above is the fair market value on the date of the
grant. At Mr. Golden's request and in order to motivate the management
team to enhance stockholder value, the Committee issued these Special
Team Awards of the shares of restricted stock to key executives of Host
in connection with Mr. Golden's joining Host. The dollar value of those
awards has been reflected in the Restricted Stock Awards column of the
table for the Named Executive Officers. In the event that the executives
to whom restricted stock was granted do not continue in the employ of
Host or do not meet the performance criteria set by the Committee, those
shares will be forfeited, and the Committee has retained the right to
grant any forfeited restricted shares to Mr. Golden.
(5) The aggregate number and value of shares of deferred stock and restricted
stock subject to "General Restrictions" and "Performance Restrictions"
(see footnote 4 above) held by each Named Executive Officer as of the end
of fiscal year 1997 are as follows: Mr. R.E. Marriott, 264,000 shares
valued at $5,071,440; Mr. Golden, 655,231 shares valued at $12,586,987;
Mr. Nassetta, 240,267 shares valued at $4,615,529; Mr. Parsons, 261,531
shares valued at $5,073,335; and Mr. Townsend, 56,321 shares valued at
$1,078,485. During the period in which any restrictions apply, holders of
restricted stock are entitled to receive all dividends or other
distributions paid with respect to such stock. Under the terms of certain
restricted stock award agreements granted under the long-term incentive
plan, each share of restricted stock vests upon a change in control of
Host. The stock bonus awards granted by Host are generally derived based
on dividing 20% of each individual's annual cash bonus award by the
average of the high and low trading prices for a share of common stock on
the last trading day of the fiscal year. No voting rights or dividends
are attributed to award shares until such award shares are distributed.
Stock bonus awards may be denominated as current awards or deferred
awards. A current award is distributed in 10 annual installments
commencing one year after the award is granted. A deferred award is
distributed in a lump sum or in up to 10 annual installments following
termination of employment. Deferred award shares contingently vest pro
rata in annual installments commencing one year after the stock bonus
award is granted to the employee. Awards are not subject to forfeiture
once the employee reaches age 55 with 10 years of service with Host or
upon (i) retirement after 20 years of service, (ii) disability or (iii)
death.
(6) Amounts included in "All Other Compensation" represent total matching
Host contribution amounts received under the Host Marriott Corporation
(HMC) Retirement and Savings Plan and the Host Marriott Corporation
Executive Deferred Compensation Plan. In 1997, the amounts attributable
to the Host Marriott Corporation (HMC) Retirement and Savings Plan
account for each Named Executive Officer were as follows: Mr. R.E.
Marriott, $9,024; Mr. Golden, $7,939; Mr. Nassetta, $9,024; Mr. Parsons,
$9,500; and Mr. Townsend, $8,448. The amounts attributable to the Host
Marriott Corporation Executive Deferred Compensation Plan for each named
executive officer were as follows: Mr. R.E. Marriott, $13,644; Mr.
Golden, $58,166; Mr. Nassetta, $27,207; Mr. Parsons, $26,731; and Mr.
Townsend, $9,957.
(7) Amount includes $92,000 in 1997, $86,700 in 1996, and $86,200 in 1995 for
the allocation of Host personnel for non-Host business.
(8) Effective beginning in 1996, Mr. R.E. Marriott waived (i) payments due to
be made to him under the Host Marriott Corporation Executive Deferred
Compensation Plan following his retirement and (ii) common stock due to
be distributed to him under the Host Marriott Corporation 1997
Comprehensive Stock Incentive Plan (formerly called the Host Marriott
Corporation 1993 Comprehensive Stock Incentive Plan) following his
retirement. In connection with this waiver, Host entered into an
arrangement to purchase life insurance policies for the benefit of a
trust established by Mr. R.E. Marriott. The cost of the life insurance
policies to Host has been actuarially determined and will not exceed the
projected after-tax cost Host expected to incur in connection with the
payments under the Host Marriott Corporation Executive Deferred
Compensation Plan and the stock distributions under the Host Marriott
Corporation 1997 Comprehensive Stock Incentive Plan (formerly called the
Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan) that
were waived by Mr. R.E. Marriott.
(9) Mr. Golden joined Host as President and Chief Executive Officer on
September 1, 1995. Mr. Nassetta joined Host as Executive Vice President
on October 1, 1995.
(10) Amount represents reimbursement of travel expenses of Mr. Golden's spouse
when she accompanies him on Host business trips.
(11) As part of their restricted stock agreements with Host, Messrs. Golden
and Nassetta were awarded 44,910 and 8,421 shares of Host common stock,
respectively, on February 1, 1996. The value of the shares was $516,465
for Mr. Golden and $96,842 for Mr. Nassetta.
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<PAGE>
AGGREGATED STOCK OPTION EXERCISES AND YEAR-END VALUE
The table below sets forth, on an aggregated basis, (i) information
regarding the exercise during fiscal year 1997 of options to purchase Host
Common Stock (and shares of the common stock of other companies which Host has
previously spun off) by each of the executive officers listed on the Executive
Compensation table above, and (ii) the value on January 2, 1998 of all
unexercised options held by such individuals. Host did not grant any options
to the executive officers listed on Table I in fiscal year 1997. Terence C.
Golden and Christopher J. Nassetta do not have any options to purchase stock
in any of the companies listed in the following table.
AGGREGATED STOCK OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
NUMBER OF SHARES THE
UNDERLYING UNEXERCISED MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END (2)
(#) ($)
----------------------------------- -------------------------
SHARES
ACQUIRED ON VALUE
EXERCISE REALIZED
NAME COMPANY(1) (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------- ----------- -------- --------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. E. Marriott.......... HM 35,000 421,379 55,700(3) 0 944,307 0
HMS 0 0 11,140 0 145,741 0
MI 0 0 55,700 0 3,198,557 0
TOTAL 35,000 421,379 122,540 0 4,288,605 0
R. E. Parsons, Jr....... HM 2,500 40,825 20,225 0 311,837 0
HMS 500 5,993 4,045 0 49,212 0
MI 0 0 1,625 0 85,423 0
TOTAL 3,000 46,819 25,895 0 446,472 0
C. G. Townsend.......... HM 0 0 6,975 0 110,745 0
HMS 0 0 1,395 0 17,354 0
MI 0 0 0 0 0 0
TOTAL 0 0 8,370 0 128,100 0
</TABLE>
- --------
(1) "HM" represents options to purchase Host Common Stock ("Host Options").
"HMS" represents options to purchase HM Services common stock. "MI"
represents options to purchase Marriott International common stock. In
connection with Host's issuance on December 29, 1995 of a special dividend
(the "HMS Special Dividend") of HM Services common stock to Host's
stockholders, and pursuant to the Host Marriott Corporation 1997
Comprehensive Stock Incentive Plan (formerly called the Host Marriott
Corporation 1993 Comprehensive Stock Incentive Plan), all Host Options
held by employees of Host were adjusted to reflect the HMS Special
Dividend by providing each option holder with the option to purchase one
share of HM Services common stock for every option to purchase five shares
of Host Common Stock held as of the close of business on December 29,
1995. The exercise price of the HM Services options was set, and the price
of Host Options was adjusted, so that the economic value of Host Options
prior to the HMS Special Dividend was preserved and not increased or
decreased as a result of the HMS Special Dividend. In addition, in
connection with Host's issuance on October 8, 1993 of a special dividend
(the "MI Special Dividend") of Marriott International common stock to
Host's stockholders, and pursuant to the Host Marriott Corporation 1997
Comprehensive Stock Incentive Plan (formerly called the Host Marriott
Corporation 1993 Comprehensive Stock Incentive Plan), all Host Options
held by employees of Host were adjusted to reflect the MI Special Dividend
by providing each option holder with the option to purchase one share of
Marriott International common stock for every option to purchase one share
of Host Common Stock held as of the close of business on October 8, 1993.
The exercise price of the Marriott International options was set, and the
price of Host Options was adjusted, so that the economic value of Host
Options prior to the MI Special Dividend was preserved and not increased
or decreased as a result of the MI Special Dividend.
(2) Based on a per share price for Host Common Stock of $19.21, a per share
price for HM Services common stock of $14.43, and a per share price for
Marriott International common stock of $68.56. These prices reflect the
average of the high and low trading prices on the New York Stock Exchange
on January 2, 1998.
(3) In order to facilitate the REIT Conversion, Mr. Marriott has agreed to the
cancellation of such options upon consummation of the Merger in exchange
for a grant of an equal number of stock appreciation rights payable in
cash that are economically equivalent to the options that are canceled.
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<PAGE>
LONG-TERM INCENTIVE PLAN
The table below sets forth the number of shares of Host Common Stock awarded
under a long-term incentive plan on February 1, 1996 to Messrs. Parsons and
Nassetta and on January 22, 1997 to Mr. Townsend.
Richard E. Marriott and Terence C. Golden did not receive any of the type of
awards reported in the following table. These awards represent the number of
restricted shares of Host Common Stock that may vest during or at the end of a
three-year period, subject to the satisfaction of certain time and performance
restrictions established by the Compensation Policy Committee of the Board of
Directors. The vesting provisions governing these awards are subject to review
and revision by the Compensation Policy Committee. The performance criteria
are set in advance of the completion of the performance year, and if the time
and performance criteria are not achieved, the full number of shares will be
forfeited.
The shares may be paid in full if either of the following two formulas is
met:
. Prior to November 1, 1998, the average price of Host Common Stock traded
on the NYSE during any consecutive 60-day period shall increase to 172.8%
of the price of Host Common Stock on November 2, 1995; or
. The average of the high and low prices of Host Common Stock traded on the
NYSE for each of the first five days of trading prior to November 1, 1998
is 172.8% of the price of Host Common Stock on November 2, 1995.
The price of Host Common Stock on November 2, 1995 was determined to be
$11.08 (which reflects an adjustment for the distribution of the common stock
of Host Marriott Services Corporation to Host's stockholders on December 29,
1995), and therefore the target price under the two formulas is $19.146 (i.e.,
172.8% of $11.08). This increase represents a 20% compounded annual growth
rate in the price of Host Common Stock.
LONG-TERM INCENTIVE PLAN
AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR OTHER PERIOD
NAME NUMBER OF SHARES UNTIL MATURITY OR PAYOUT
- ---- ---------------- ---------------------------
<S> <C> <C>
Robert E. Parsons, Jr. ............ 84,206 3 years
Christopher J. Nassetta............ 84,206 3 years
Christopher G. Townsend............ 20,000 3 years
</TABLE>
EMPLOYMENT AGREEMENTS
The Operating Partnership expects to have employment agreements with certain
of its executive officers but there is no assurance that this will be the
case. The terms of such agreements currently are under negotiation and are not
expected to be finalized until the Effective Date.
1998 EMPLOYEE BENEFITS ALLOCATION AGREEMENT
As part of the REIT Conversion, Host, the Operating Partnership and
Crestline expect to enter into the 1998 Employee Benefits Allocation Agreement
which is expected to govern the allocation of responsibilities with respect to
various compensation, benefits and labor matters. Under the 1998 Employee
Benefits Allocation Agreement, Crestline is expected to assume from Host
certain liabilities relating to covered benefits and labor matters with
respect to individuals who are employed by Host REIT or its affiliates on or
before the Effective Date who will be employed by Crestline or its affiliates
("Transferred Employees") and the Operating Partnership is expected to assume
from Host certain other liabilities relating to employee benefits and labor
matters. The 1998 Employee Benefits Allocation Agreement also is expected to
govern the treatment of awards under the Host Marriott Corporation 1997
Comprehensive Stock Incentive Plan, formerly called the Host Marriott
Corporation 1993 Comprehensive Stock Incentive Plan (the "Comprehensive Stock
Incentive Plan"),
154
<PAGE>
as part of the REIT Conversion. The 1998 Employee Benefits Allocation
Agreement is expected to require Crestline to establish the Crestline Capital
Corporation 1998 Comprehensive Stock Incentive Plan. Additionally, the 1998
Employee Benefits Allocation Agreement is expected to provide that the
Operating Partnership will adopt the Comprehensive Stock Incentive Plan.
COMPREHENSIVE STOCK INCENTIVE PLAN
Host sponsors the Comprehensive Stock Incentive Plan for purposes of
attracting and retaining highly qualified employees. Host has reserved
44,442,911 shares of Host Common Stock for issuance pursuant to the
Comprehensive Stock Incentive Plan. As part of the REIT Conversion, the
Comprehensive Stock Incentive Plan is expected to be adopted by the Operating
Partnership. Outstanding awards of Host Common Stock issued or reserved under
the Comprehensive Stock Incentive Plan are expected to be exchanged for Host
REIT Common Stock and Crestline common stock, according to the terms of the
1998 Employee Benefits Allocation Agreement.
Under the terms of the Comprehensive Stock Incentive Plan, an eligible full-
time employee may receive an award of (i) options to purchase Host Common
Stock, (ii) deferred shares of Host Common Stock, (iii) restricted shares of
Host Common Stock, (iv) stock appreciation rights, (v) special recognition
awards or (vi) other equity-based awards, including but not limited to,
phantom shares of Host Common Stock, performance shares of Host Common Stock,
bonus shares of Host Common Stock, dividend equivalent units or similar
securities or rights. After the REIT Conversion, all awards under the
Comprehensive Stock Incentive Plan will be for Host REIT Common Stock.
Options granted to officers and key employees will have an exercise price of
not less than the fair market value on the date of grant. Incentive stock
options granted under the Comprehensive Stock Incentive Plan expire no later
than 10 years after the date of grant and non-qualified stock options expire
no later than 15 years after the date of grant.
Under the terms of the Comprehensive Stock Incentive Plan, an eligible full-
time employee may receive an award of deferred shares of Host Common Stock.
Deferred shares may be granted as part of a bonus award or deferred stock
agreement. After the REIT Conversion, an award of deferred shares under the
Comprehensive Stock Incentive Plan will be for Host REIT Common Stock.
Deferred shares generally vest over ten years in annual installments
commencing one year after the date of grant.
The Comprehensive Stock Incentive Plan also provides for the issuance of
restricted shares of Host Common Stock to officers and key executives to be
distributed over the next three or five years in annual installments based on
continued employment and the attainment of certain performance criteria. After
the REIT Conversion, an award of restricted shares under the Comprehensive
Stock Incentive Plan will be for Host REIT Common Stock.
Under the terms of the Comprehensive Stock Incentive Plan, an eligible full-
time employee may receive a bonus award. Bonus awards may be part of a
management incentive program which pays part of the annual performance bonus
awarded to managers and other key employees in shares of Host Common Stock. A
bonus award entitles the holder to receive a distribution of Host's Common
Stock in accordance with the underlying agreement. Holders of bonus awards
vest in the shares covered by their award over ten years in annual
installments commencing one year after grant. Unless the holder of a bonus
award elects otherwise, vested shares are distributed in 10 consecutive,
approximately equal, annual installments. After the REIT Conversion, all bonus
awards will be for shares of Host REIT Common Stock.
The Comprehensive Stock Incentive Plan authorizes the grant of stock
appreciation rights ("SARs") to eligible full-time employees. SARs awarded
under the Comprehensive Stock Incentive Plan give the holder the right to an
amount equal to the appreciation in the value of the Host Common Stock over a
specified price. SARs may be paid on the Host Common Stock, cash or other form
or combination form of payout. After the REIT Conversion, SARs awarded under
the Comprehensive Stock Incentive Plan will be tied to the appreciation in the
value of Host REIT Common Stock.
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<PAGE>
Under the Comprehensive Stock Incentive Plan, an eligible full-time employee
may receive a Special Recognition Award. Special Recognition Awards may be
paid in the form of Host Common Stock or an option to purchase Host Common
Stock at an amount not less than fair market value on the date of grant. After
the REIT Conversion, Special Recognition Awards will be for Host REIT Common
Stock.
STOCK PURCHASE PLAN
Host sponsors the Host Marriott Corporation Employee Stock Purchase Plan
(the "Stock Purchase Plan"). Under the terms of the Stock Purchase Plan, an
individual who is: (i) an active eligible employee on the last day of the
prior plan year, (ii) working more than 20 hours per week and (iii)
customarily employed more than five months in a calendar year may, on the
first day of the plan year, purchase Host Common Stock through contributions
or payroll deductions at the lower of the fair market value on the first or
last day of such plan year. The Stock Purchase Plan is expected to be adopted
by the Operating Partnership as part of the REIT Conversion.
401(K) PLAN
Host sponsors the Host Marriott Corporation (HMC) Retirement and Saving Plan
(the "401(k) Plan"). The 401(k) Plan has received a favorable ruling from the
Internal Revenue Service ("IRS") as to its tax-qualified status. The 401(k)
Plan is expected to be adopted by the Operating Partnership as part of the
REIT Conversion. The 401(k) Plan is available to all eligible employees
immediately upon their date of hire. A participant may elect to contribute
from 1% to 15% of his compensation to the 401(k) Plan. Each year, Host makes a
fixed matching contribution equal to 50% of the first 6% of the compensation
contributed to the 401(k) Plan by employees. In addition, Host may make a
discretionary contribution, in an amount, if any, determined annually by the
Board, to the 401(k) Plan for the benefit of eligible employees.
Under the terms of the 401(k) Plan, participants may elect to invest part or
all of their plan benefits in Host Common Stock. As part of the Merger, all
shares of Host Common Stock held under the 401(k) Plan are expected to be
converted to Host REIT Common Stock and shares of Crestline common stock. It
is expected that after the REIT Conversion, 401(k) Plan participants will be
able to elect to invest all or part of their plan benefits in Host REIT Common
Stock.
NON-EMPLOYEE DIRECTOR PLAN
Host sponsors the Host Marriott Corporation Non-Employee Directors' Deferred
Stock Compensation Plan (the "Non-Employee Director Plan") for purposes of
attracting and retaining qualified non-employee Directors. Under the terms of
the Non-Employee Director Plan, a non-employee Director may elect to defer
payment of part or all of his Directors' fees from Host until such individual
is no longer a member of the Board. In addition, the Non-Employee Director
Plan provides for: (i) a special one time grant of Host Common Stock to
participants who were directors of Host on May 1, 1997; and (ii) annual grants
of 750 shares of Host Common Stock effective on May 14, 1997 and at each
annual meeting thereafter. Currently, fees that are deferred under the Non-
Employee Director Plan are treated as if invested in shares of Host Common
Stock using the fair market value of such shares on the date of deferral.
After the REIT Conversion, Host REIT intends to treat Directors' fees deferred
under the Non-Employee Director Plan as if invested in Host REIT Common Stock.
Non-Employee Directors may elect to receive payment of their benefits under
the Non-Employee Director Plan in Host Common Stock in lump sum or installment
payments. After the REIT Conversion, Host REIT expects to allow participants
of the Non-Employee Director Plan to elect to receive their benefits in Host
REIT Common Stock in lump sum or installment payments.
DEFERRED COMPENSATION PLAN
Host maintains the Host Marriott Corporation Executive Deferred Compensation
Plan (the "Deferred Compensation Plan") for the benefit of select executives
and directors. A participant may elect to defer part of
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his compensation or director's fees in the case of non-employee directors
pursuant to the Deferred Compensation Plan. The Deferred Compensation Plan
will be adopted by the Operating Partnership as part of the REIT Conversion.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Host REIT Charter and Host REIT Bylaws contain provisions limiting the
liability of Host REIT's present and former directors and officers to the
corporation and its stockholders and obligating Host REIT to indemnify present
and former directors and officers all in accordance with Maryland law. See
"The Restructuring Transactions--Limitation of Liability and Indemnification
of Directors and Officers."
INDEMNIFICATION AGREEMENTS
Host REIT intends to enter into indemnification agreements with each of its
directors and officers. The indemnification agreements will require, among
other things, that Host REIT indemnify its directors and officers to the
fullest extent permitted by law and advance to its directors and officers all
related expenses, subject to reimbursement if it is subsequently determined
that indemnification is not permitted.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP BETWEEN HOST AND MARRIOTT INTERNATIONAL
Host and Marriott International, prior to October 8, 1993, were operated as
a single consolidated company. On October 8, 1993 in connection with the
issuance of a special dividend (the "Marriott International Distribution"),
the consolidated company's businesses were split between Host and Marriott
International. Thereafter, Host retained the capital intensive lodging real
estate business (the "Ownership Business") and the airport/tollroad
concessions business (the "Host/Travel Plazas Business"), while Marriott
International took over the management of the lodging and service management
businesses (the "Lodging/Service Management Business"). (On December 29, 1995,
Host distributed the Host/Travel Plazas Business to the stockholders of HM
Services; see "--Relationship between Host and Host Marriott Services
Corporation" below.) On the date of the Marriott International Distribution,
Host and its subsidiaries and Marriott International and its subsidiaries
entered into certain contractual arrangements governing their relationship
following the Marriott International Distribution.
J.W. Marriott, Jr. and Richard E. Marriott beneficially own approximately
10.6% and 10.2%, respectively, of the outstanding shares of common stock of
Marriott International. By reason of their ownership of such shares of common
stock of Marriott International and their positions as Chairman and a
Director, respectively, of Marriott International, J.W. Marriott, Jr. and
Richard E. Marriott, who will also be a Director and Chairman, respectively,
of Host REIT, could be deemed in control of Marriott International within the
meaning of the federal securities laws. Other members of the Marriott family
might also be deemed control persons of Marriott International by reason of
their ownership of shares of Marriott International and/or their relationship
to other family members.
Prior to the Marriott International Distribution, Host and Marriott
International entered into a Distribution Agreement (the "Marriott
International Distribution Agreement"), which provided for, among other
things, (i) the division between Host and Marriott International of certain
liabilities and (ii) certain other agreements governing the relationship
between Host and Marriott International following the Marriott International
Distribution.
Subject to certain exceptions, the Marriott International Distribution
Agreement provided for, among other things, assumptions of liabilities and
cross-indemnities designed to allocate, effective as of the Marriott
International Distribution, financial responsibility for the liabilities
arising out of or in connection with the Lodging/Service Management Business
to Marriott International and its subsidiaries, and financial responsibility
for the liabilities arising out of or in connection with the Ownership
Business and Host/Travel Plazas Business, along with the consolidated
company's liabilities under a substantial portion of its pre-existing
financing and long-term debt obligations, to Host and its retained
subsidiaries. The agreements executed in connection with the Marriott
International Distribution Agreement also set forth certain specific
allocations of liabilities between Host and Marriott International.
Under the Marriott International Distribution Agreement, Marriott
International obtained the Marriott International Purchase Right which
provided Marriott International with the right, until June 2017, to purchase
up to 20% of each class of Host's voting stock (determined after assuming full
exercise of the right) at its then fair market value (based on an average of
trading prices during a specified period), upon the occurrence of certain
specified events generally involving a change in control of Host. The Marriott
International Purchase Right could be exercised for a 30-day period following
the date a person or group of affiliated persons has (i) become the beneficial
owner of 20% or more of the total voting power of the then outstanding shares
of Host's voting stock or (ii) announced a tender offer for 30% more of the
total voting power of the then outstanding shares of Host's common stock. The
purchase price for the common stock to be purchased upon the exercise of the
Marriott International Purchase Right is determined by taking the average of
the closing sale price of the common stock during the 30 consecutive trading
days preceding the date the Marriott International Purchase Right becomes
exercisable. The Marriott International Purchase Right will continue in effect
with respect to Host REIT after the
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Merger as to the Host REIT Common Stock, subject to the following limitations
intended to protect the REIT status of Host REIT. The Marriott International
Purchase Right will be exercisable only to the extent that neither (i)
Marriott International, or any entity in which it has a direct or indirect
interest (and which would be deemed, under the applicable attribution rules,
to own the shares of Host REIT owned by Marriott International), would, as a
result of such exercise, own, taking into account the applicable attribution
rules, more than 9.8% of both Host REIT and Crestline, any subsidiary of
Crestline or any other tenant of Host REIT nor (ii) any owners of direct or
indirect interests in Marriott International would, as a result of such
exercise, own, taking into account the applicable attribution rules, more than
9.8% of both Host REIT and Crestline, any subsidiary of Crestline or any other
tenant of Host REIT. In addition to the foregoing limitation, in the event the
Operating Partnership is or would be considered a "publicly traded
partnership" within the meaning of the Code, the Marriott International
Purchase Right will be exercisable only if such acquisition and ownership of
Host REIT Common Stock would not cause the Operating Partnership to be
considered to own, directly or by attribution, 10% or more of Crestline, any
subsidiary of Crestline or any other tenant of Host REIT (taking into account
the applicable attribution rules and any stock of Crestline that the Operating
Partnership is deemed to own under the attribution rules by reason of the
ownership of an interest in the Operating Partnership by the Blackstone
Entities).
The Marriott International Purchase Right will have an antitakeover effect
to the extent that any person considering acquiring a substantial or
controlling block of Host REIT Common Stock will face the possibility that its
ability to exercise control would be impaired by the exercise of the Marriott
International Purchase Right. In addition, the exercise price of the Marriott
International Purchase Right could be lower than the price at which a
potential acquiror might be willing to purchase a 20% block of Host REIT
Common Stock because the purchase price for the Marriott International
Purchase Right is based on the average trading price during a 30-day period
which may be prior to the announcement of a takeover event. This potential
price differential might have a further antitakeover effect by discouraging
potential acquirors of Host REIT.
For the purpose of governing certain of the ongoing relationships between
Host and Marriott International after the Marriott International Distribution,
Host and Marriott International have entered into other agreements. Host
believes that the agreements are fair to both parties and contain terms which
are generally comparable to those which would have been reached in arm's-
length negotiations with unaffiliated parties. Among such other agreements
between Host and Marriott International are:
(i) Lodging Management and Franchise Agreements. Marriott International
and certain of its subsidiaries have entered into management agreements
with Host and certain of its subsidiaries to manage for fees the Marriott
Hotels, Resorts and Suites, Ritz-Carlton hotels, Courtyard hotels and
Residence Inns owned or leased by Host and its subsidiaries. Marriott
International has also entered into franchise agreements with Host and
certain of its subsidiaries to allow Host to use the Marriott brand,
associated trademarks, reservation systems and other related items in
connection with Host's operation of ten Marriott hotels not managed by
Marriott International.
Each of those management and franchise agreements reflects market terms
and conditions and is substantially similar to the terms of management and
franchise agreements with other third-party owners regarding lodging
facilities of a similar type. In 1997, Host paid to Marriott International
fees of $166 million from the managed and franchised lodging properties
owned or leased by Host.
In addition, Host or one of its subsidiaries is a partner in several
unconsolidated partnerships (some of which will be consolidated in
connection with the REIT Conversion) that, at the end of 1997, owned 241
lodging properties operated by Marriott International or certain of its
subsidiaries under long-term agreements. In such cases, Host or its
subsidiary typically serves as the general partner. In 1997, these
unconsolidated partnerships paid to Marriott International fees of $119
million pursuant to such agreements. The partnerships also paid $23 million
in rent to Marriott International in 1997 for land leased from Marriott
International upon which certain of the limited service partnerships'
hotels are located.
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In connection with the REIT Conversion, these management and franchise
agreements will be assigned to the Lessees for the term of the applicable
Leases (but the Operating Partnership will remain obligated in the event
the Lessees fail to perform their obligations).
(ii) Credit Agreement. In 1995, Marriott International and a subsidiary
of Host entered into a Credit Agreement pursuant to which the subsidiary
had the right to borrow up to $225 million from Marriott International. In
1997, however, Host entered into a revolving line of credit agreement with
third parties, and as a result, Host terminated the revolving line of
credit under the Credit Agreement with Marriott International. Host remains
subject to various covenants and guaranty reimbursement obligations under
the Credit Agreement.
(iii) Tax Sharing Agreement. Host and Marriott International have entered
into a tax sharing agreement that defines the parties' rights and
obligations with respect to deficiencies and refunds of federal, state and
other income or franchise taxes relating to Host's businesses for tax years
prior to the Marriott International Distribution and with respect to
certain tax attributes of Host after the Marriott International
Distribution. Host and Marriott International have agreed to cooperate with
each other and to share information in preparing tax returns and in dealing
with other tax matters.
(iv) Noncompetition Agreements. Host and Marriott International entered
into a noncompetition agreement that defines the parties' rights and
obligations with respect to certain businesses operated by Marriott
International and Host. In general, under the noncompetition agreements,
Host and its subsidiaries are prohibited from entering into or acquiring
any business that competes with the hotel management business as conducted
by Marriott International until October 8, 2000. See "--Senior Living
Communities Acquisitions."
(v) Administrative Services Agreements. Marriott International and Host
have entered into a number of agreements pursuant to which Marriott
International has agreed to provide certain continuing administrative
services to Host and its subsidiaries. Such services are provided on market
terms and conditions. In general, the administrative services agreements
can be kept in place at least through the end of 1998.
(vi) Marriott International Guarantees. In connection with the Marriott
International Distribution, Host and Marriott International entered into
agreements pursuant to which Marriott International has agreed to guarantee
Host's performance in connection with certain partnership, real estate and
project loans and other Host obligations. Such guarantees are limited in an
aggregate principal amount of up to $107 million at June 19, 1998. Marriott
International has not been required to make any payments pursuant to the
guarantees.
In addition to the foregoing agreements, Host and Marriott International
have had occasion to enter into other agreements in the ordinary course of
business. Host believes that such agreements are fair to both parties and
contain terms which are generally comparable to those which would have been
reached in arm's-length negotiations with unaffiliated parties. Among such
other agreements between Host and Marriott International are:
(a) Hotel Acquisitions. Marriott International has provided, and Host
expects that Marriott International in the future will provide, financing
to Host for a portion of the cost of acquiring properties to be operated or
franchised by Marriott International. In 1997, Marriott International did
not provide any new acquisition financing, although Host remained indebted
to Marriott International for acquisition financing from prior years.
Marriott International provided Host with $70 million of mortgage financing
in 1995 for the acquisition of three full-service hotels at an average
interest rate of 8.5%. Marriott International subsequently sold one of the
loans in 1996. In 1996, Marriott International and Host formed a joint
venture (which will be owned by a Non-Controlled Subsidiary) and Marriott
International provided Host with $29 million in debt financing at an
average interest rate of 12.7% and with $28 million in preferred equity,
for the acquisition of two full-service hotels in Mexico City.
(b) Senior Living Communities Acquisitions. On June 21, 1997, Host
acquired the outstanding common stock of Forum Group, Inc. (the "Forum
Group") from Marriott Senior Living Services, Inc., a subsidiary of
Marriott International. Host purchased the Forum Group portfolio of 29
premier senior living
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communities for approximately $460 million, including approximately $270
million in debt ($59 million of which was provided by Marriott
International). In 1997, Host had completed $56 million of the
approximately $107 million expansion plan to add approximately 1,060 units
to these communities. As a result, an additional $33 million of debt
financing has been provided by Marriott International and Marriott
International may provide additional financing as the expansion plan is
completed. The properties will continue to be managed by Marriott
International. From the date of acquisition through the end of 1997, Host
paid to Marriott International management fees of $6 million from the
senior living properties owned by Host. In connection with the acquisition,
Host and Marriott International entered into a noncompetition agreement
that defines the parties' rights and obligations with respect to the
operation of senior living services by Marriott International and Host. In
general, under the noncompetition agreement, Host and its subsidiaries are
prohibited from entering into or acquiring any business that competes with
the senior living management business as conducted by Marriott
International until 2007. In 1997, Host also acquired all but 1% of the
remaining 50% interest in the joint venture which owned the 418-unit
Leisure Park senior living community from Marriott International for
approximately $23 million, including approximately $15 million of mortgage
debt assumed by Host. Shares of Crestline, which will own the senior living
communities business, will be distributed to Host's stockholders as part of
the Initial E&P Distribution in connection with the REIT Conversion.
(c) 1993 Employee Benefits Allocation Agreement. Host and Marriott
International have entered into an Employee Benefits and Other Employment
Matters Allocation Agreement ("1993 Employee Benefits Allocation
Agreement") that provides for the allocation of certain responsibilities
with respect to employment compensation, benefit and labor matters. The
1993 Employee Benefits Allocation Agreement was amended as of March 27,
1998 to: (i) reflect various conversions and redenominations that were
necessary as a result of the spin-off and acquisitions described in
Marriott International's February 12, 1998 Proxy, and to add New Marriott
MI, Inc. (renamed Marriott International, Inc.) as a party to the 1993
Employee Benefits Allocation Agreement. In general, the 1993 Employee
Benefits Allocation Agreement provides that Host retained all employee
liabilities for employees who on or after the Marriott International
Distribution were employees of Host, and that old Marriott International,
Inc., which was renamed Sodexho Marriott Services, Inc., in 1998, retained
all liabilities for employees who on or after the Marriott Distribution
were employees of Marriott International. Pursuant to the 1993 Employee
Benefits Allocation Agreement, and in connection with the Marriott
Distribution, Host also adjusted outstanding awards under the Host employee
benefit plans. The 1993 Employee Benefits Allocation Agreement is expected
to be amended as part of the REIT Conversion to add the Operating
Partnership and Crestline as parties to the agreement and to reflect the
1998 Employee Benefits Allocation Agreement.
RELATIONSHIP BETWEEN HOST AND HOST MARRIOTT SERVICES CORPORATION
On December 29, 1995, Host issued a special dividend (the "HMSC
Distribution") which split Host's businesses between Host and HM Services.
Prior to December 29, 1995, HM Services was a wholly-owned subsidiary of Host.
Thereafter, Host retained the capital intensive lodging real estate business
(the "Ownership Business"), while HM Services took over the airport/tollroad
concessions business (the "Host/Travel Plazas Business"). Host and its
subsidiaries and HM Services and its subsidiaries have entered into certain
relationships following the HMSC Distribution.
Richard E. Marriott and J.W. Marriott, Jr. beneficially own approximately
6.75% and 6.88%, respectively, of the outstanding shares of common stock of HM
Services. By reason of their ownership of such shares of common stock of HM
Services and their positions as Directors of HM Services, Richard E. Marriott
and J.W. Marriott, Jr., who are also Chairman and a Director, respectively, of
Host, could be deemed in control of HM Services within the meaning of the
federal securities laws. Other members of the Marriott family might also be
deemed control persons of HM Services by reason of their ownership of shares
of HM Services and/or their relationship to other family members.
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Prior to the HMSC Distribution, Host and HM Services entered into a
Distribution Agreement (the "HMSC Distribution Agreement"), which provided
for, among other things, (i) certain asset transfers to occur prior to the
HMSC Distribution, (ii) the HMSC Distribution, (iii) the division between Host
and HM Services of certain liabilities and (iv) certain other agreements
governing the relationship between Host and HM Services following the HMSC
Distribution.
Subject to certain exceptions, the HMSC Distribution Agreement provides for,
among other things, assumptions of liabilities and cross-indemnities designed
to allocate, effective as of the HMSC Distribution, financial responsibility
for the liabilities arising out of or in connection with the Host/Travel
Plazas Business to HM Services and its subsidiaries and financial
responsibility for the liabilities arising out of or in connection with the
Ownership Business to Host and its retained subsidiaries. The agreements
executed in connection with the HMSC Distribution Agreement also set forth
certain specific allocations of liabilities between Host and HM Services. The
HMSC Distribution Agreement also provides that HM Services will assume its
proportionate share of Host's current obligation for certain employee benefit
awards denominated in Host common stock currently held by employees of
Marriott International.
For the purpose of governing certain of the ongoing relationships between
Host and HM Services after the HMSC Distribution, Host and HM Services have
entered into other agreements. Host believes that the agreements are fair to
both parties and contain terms which are generally comparable to those which
would have been reached in arm's-length negotiations with unaffiliated
parties. Among such other agreements between Host and HM Services are:
(i) Tax Sharing Agreement. Host and HM Services have entered into a tax
sharing agreement that defines the parties' rights and obligations with
respect to deficiencies and refunds of federal, state and other income or
franchise taxes relating to Host's businesses for tax years prior to the
HMSC Distribution and with respect to certain tax attributes of Host after
the HMSC Distribution. Host and HM Services have agreed to cooperate with
each other and to share information in preparing tax returns and in dealing
with other tax matters.
(ii) Guarantees of Concession Agreements. Host and HM Services have
entered into agreements pursuant to which Host has agreed to guarantee HM
Services' performance in connection with certain tollroad concessions
operated by HM Services. Host has not been required to make any payment
pursuant to the guarantees and does not anticipate making any such payment
in 1998.
(iii) 1995 Employee Benefits Allocation Agreement. Host and HM Services
have entered into an Employee Benefits and Other Employment Matters
Allocation Agreement (the "1995 Employee Benefits Allocation Agreement")
that provides for the allocation of certain responsibilities with respect
to employee compensation, benefits and labor matters. In general, the 1995
Employee Benefits Allocation Agreement provides that Host retain all
employee liabilities for employees who on or after the HMSC Distribution
were employees of Host, and that HM Services retain all employee
liabilities for employees who on or after the HMSC Distribution were
employees of HM Services. Pursuant to the 1995 Employee Benefits Allocation
Agreement, and in connection with the HMSC Distribution, Host also adjusted
outstanding awards under Host employee benefit plans. The 1995 Employee
Benefits Allocation Agreement is expected to be amended as part of the REIT
Conversion to add the Operating Partnership and Crestline as parties to the
agreement and to reflect the 1998 Employee Benefits Allocation Agreement.
RELATIONSHIP BETWEEN HOST AND CRESTLINE CAPITAL CORPORATION AFTER THE INITIAL
E&P DISTRIBUTION
For the purposes of governing certain of the ongoing relationships between
Crestline and Host after the Initial E&P Distribution and to provide
mechanisms for an orderly transition, Crestline and Host will enter into, in
addition to the Leases, various agreements, as described below. The
descriptions of such agreements are qualified in their entirety by reference
to the agreements, copies of the form of which are included as exhibits to the
Registration Statement of which this Prospectus is a part.
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Distribution Agreement
Prior to the Initial E&P Distribution, Crestline and Host will enter into a
distribution agreement (the "Distribution Agreement"), which will provide for,
among other things, (i) the distribution of shares of Crestline in connection
with the Initial E&P Distribution; (ii) the division between Crestline and
Host of certain assets and liabilities; (iii) the contribution to Crestline of
Host's 3% general partnership interest in Boynton Beach Limited Partnership,
which owns a senior living community located in Boynton Beach; (iv) the
transfer to Crestline of the 25% interest in the Swissotel management company
to be acquired in the Blackstone Acquisition; (v) the return to Crestline of
those shares of Crestline common stock held for delivery to the Blackstone
Entities in the Blackstone Acquisition if that transaction does not occur; and
(vi) certain other agreements governing the relationship between Crestline and
Host following the Initial E&P Distribution.
Subject to certain exceptions, the Distribution Agreement will provide for,
among other things, assumptions of liabilities and cross-indemnities designed
to allocate to Crestline, effective as of the date of the Initial E&P
Distribution, financial responsibilities for liabilities arising out of or in
connection with the business of the senior living communities.
Tax Sharing Agreement
Crestline and Host will enter into a tax sharing agreement (the "Tax Sharing
Agreement") which will define each party's rights and obligations with respect
to deficiencies and refunds of federal, state and other income or franchise
taxes relating to Crestline's business for taxable years prior to the Initial
E&P Distribution and with respect to certain tax attributes of Crestline after
the Initial E&P Distribution. Generally, Host will be responsible for filing
consolidated returns and paying taxes for periods through the date of the
Initial E&P Distribution, and Crestline will be responsible for filing returns
and paying taxes for subsequent periods.
Asset Management Agreement
Crestline, Host and at least one of the Non-Controlled Subsidiaries will
enter into an asset management agreement (the "Asset Management Agreement"),
pursuant to which Crestline will agree to provide review and advice on the
management and operation of the hotels. Generally, Crestline will provide the
following consulting services: (i) review of operating and financial results
(including site visits) and meet with Host and the Non-Controlled
Subsidiaries, as applicable, at least quarterly, to review such results of the
hotels; (ii) review of financial statements and budgets, including periodic
accounting statements, annual operating budgets, FF&E budgets and management
analysis reports; (iii) review of revenue and capital spending projections;
(iv) administration of hotel mortgages; (v) advice relating to any changes to
the hotel management agreements; (vi) review of market conditions and
competition for each of the hotels; (vii) monitoring and negotiating with
governmental agencies in connection with any condemnation proceedings against
the hotels; and (viii) monitoring and negotiating with insurance companies and
contractors following a casualty at a hotel. Crestline will be paid a fee not
to exceed $4.5 million for each fiscal year for its consulting services under
the Asset Management Agreement, which will be allocated between Host REIT and
the Non-Controlled Subsidiary. The Asset Management Agreement will have a term
of two years with an automatic one year renewal, unless terminated earlier by
either party in accordance with the terms thereof. This contract will prohibit
Crestline from providing similar services, except where Crestline is the
lessee with respect to full-service hotels (but not limited-service hotels)
that are in the same geographic vicinity as the Host REIT hotels that are
leased to Crestline.
Corporate Transitional Services Agreement
Crestline and Host will, prior to the date of the Initial E&P Distribution,
enter into a transitional services agreement (the "Corporate Transitional
Services Agreement") pursuant to which Crestline and Host will provide certain
limited services to each other for a fee. Among other things, Host will
provide centralized administrative and computer systems services to Crestline.
Such services will be provided, as needed, at cost (including a reasonable
overhead allocation) on a time and materials basis. The charges associated
with such services are not expected to be material.
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Non-Competition Agreement
Crestline and Host will enter into a non-competition agreement that limits
the respective parties' future business opportunities. See "Business and
Properties--Noncompetition Agreements."
1998 Employee Benefits and Other Employment Matters Allocation Agreement
As part of the REIT Conversion, Host, the Operating Partnership and
Crestline expect to enter into the 1998 Employee Benefits Allocation Agreement
relating to various compensation, benefits and labor matters. See
"Management--1998 Employee Benefits Allocation Agreement."
Guarantee and Pooling Agreements
Crestline and certain of its subsidiaries will enter into guarantees of the
Lease obligations of each Lessee. See "Business and Properties--The Leases."
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 31, 1998, the beneficial
ownership of Host REIT Common Stock and OP Units of (i) each person who is
expected to hold more than a 5% interest in Host REIT or the Operating
Partnership, (ii) directors of Host REIT, (iii) the Chief Executive Officer
and the four most highly compensated executive officers of Host REIT and (iv)
the directors and executive officers of Host REIT as a group. Unless otherwise
indicated in the footnotes, all of such interests are owned directly and the
indicated person or entity has sole voting and investment power.
The "Percent of All Common Stock and OP Units" represents the number of
shares of Host REIT Common Stock and OP Units the person is expected to hold
immediately after the REIT Conversion, as a percentage of the total number of
shares of Host REIT Common Stock and OP Units expected to be outstanding
immediately after the REIT Conversion (excluding OP Units held by Host REIT
and its subsidiaries). The information in this table assumes that all
transactions comprising the REIT Conversion are consummated as currently
expected. The address of each beneficial owner is 10400 Fernwood Road,
Bethesda, Maryland 20817 unless otherwise indicated.
<TABLE>
<CAPTION>
NUMBER OF PERCENT PERCENT OF
PERCENT OF SHARES OF PERCENT OF OF ALL ALL COMMON
NUMBER OF ALL OP COMMON COMMON COMMON STOCK AND
NAME OP UNITS UNITS(1) STOCK(2) STOCK(3) STOCK(4) OP UNITS(5)
---- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. Theodore Ammon....... 0 * 15,500 * * *
Robert M. Baylis........ 0 * 13,500 * * *
Terence C. Golden(6).... 0 * 781,684 * * *
J.W. Marriott,
Jr.(6)(7)(8)........... 18,135 * 13,275,014 6.50% 6.51% 4.85%
Richard E.
Marriott(6)(8)(9)...... 15,314 * 13,203,209 6.47 6.47 4.82
Ann Dore McLaughlin..... 0 * 9,500 * * *
John G. Schreiber(11)... 875,000 1.25% 0 * * *
Harry L. Vincent, Jr.... 0 * 25,100 * * *
Christopher J.
Nassetta(6)............ 0 * 356,201 * * *
Robert E. Parsons,
Jr.(6)................. 0 * 404,244 * * *
Christopher G.
Townsend(6)............ 0 * 109,417 * * *
Blackstone
Entities(12)........... 43,700,000 62.31 0 * 17.63 15.93
Dresdner RCM Global
Investors LLC(13)...... 0 * 13,595,975 6.66 6.66 4.96
FMR Corp.(14)........... 0 * 22,532,574 11.03 11.03 8.21
Southeastern Asset
Management, Inc.(15)... 0 * 36,758,000 18.00 18.00 13.40
ALL DIRECTORS AND
EXECUTIVE OFFICERS AS A
GROUP (11
PERSONS)(6)(10)........ 908,449 1.30% 24,209,204 11.86% 12.25% 9.16%
</TABLE>
- --------
* less than 1%
(1) Represents the number of OP Units held by the person as a percentage of
the total number of OP Units to be issued to persons other than Host REIT
and its subsidiaries in the REIT Conversion (70.1 million OP Units),
assuming a value of $12.50 per OP Unit.
(2) Consists of Host REIT Common Stock received in the REIT Conversion as a
result of ownership of Host.
(3) Represents the number of shares of Host REIT Common Stock held by the
person as a percentage of the total number of shares of Host REIT Common
Stock expected to be outstanding immediately following the REIT
Conversion (204.2 million shares of Host REIT Common Stock).
(4) Assumes that all OP Units held by the person are redeemed for Host REIT
Common Stock. The total number of shares of Host REIT Common Stock
outstanding used in calculating this percentage (204.2 million shares of
Host REIT Common Stock plus the number of OP Units beneficially owned by
the person) assumes that none of the OP Units held by other persons are
redeemed for Host REIT Common Stock.
(5) Assumes that all OP Units held by the person are redeemed for Host REIT
Common Stock. The total number of shares of Host REIT Common Stock and OP
Units outstanding used in calculating this percentage (274.3 million)
assumes that all of the OP Units held by other persons also are redeemed
for Host REIT Common Stock.
(6) Includes (i) the shares of unvested restricted stock granted under Host's
Comprehensive Stock Incentive Plan, which are voted by the holder thereof
and (ii) the following number of shares which could be acquired by the
named persons through the exercise of stock options within 60 days of
July 31, 1998: for J.W. Marriott, Jr., 810,447 shares; for Richard E.
Marriott, 55,700 shares; for Mr. Parsons, 15,225 shares; for Mr.
Townsend, 6,975 shares; and for all directors and executive officers as a
group, 913,147 shares. Does not include any other shares reserved,
contingently vested or awarded under the above-named Plan. In order to
facilitate the REIT Conversion, J.W. Marriott, Jr. and Richard E.
Marriott have agreed to the cancellation of 326,568 options and 55,700
options held by them, respectively, upon consummation of the Merger in
exchange for a grant of an equal number of stock appreciation rights
payable in cash that are economically equivalent to the options that are
canceled.
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(7) Host REIT Common Stock includes: (i) 1,977,450 shares held in trust for
which J.W. Marriott, Jr. is the trustee or a co-trustee; (ii) 68,426
shares held by the wife of J.W. Marriott, Jr.; (iii) 704,555 shares held
in trust for which the wife of J.W. Marriott, Jr. is the trustee or a co-
trustee; (iv) 2,451,787 shares held by the J. Willard Marriott Foundation
of which J.W. Marriott, Jr. is a co-trustee; (v) 2,707,590 shares held by
a limited partnership whose general partner is a corporation of which
J.W. Marriott, Jr. is the controlling stockholder; and (vi) 80,000 shares
held by a limited partnership whose general partner is J.W. Marriott,
Jr.; does not include shares held by the adult children of J.W. Marriott,
Jr.; J.W. Marriott, Jr. disclaims beneficial ownership of all such
shares.
(8) By virtue of their ownership of shares of Host Common Stock and their
positions as Chairman and Director, respectively, Richard E. Marriott and
J.W. Marriott, Jr. could be deemed in control of Host within the meaning
of the federal securities laws. Other members of the Marriott family
might also be deemed control persons by reason of their ownership of
shares and/or their relationship to other family members. J.W. Marriott,
Jr., Richard E. Marriott, their mother Alice S. Marriott and other
members of the Marriott family and various trusts established by members
of the Marriott family owned beneficially an aggregate of 25,179,933
shares, or 12.31% of the total shares outstanding of Host Common Stock as
of July 31, 1998.
(9) Host REIT Common Stock includes: (i) 1,874,709 shares held in trust for
which Richard E. Marriott is the trustee or a co-trustee; (ii) 68,219
shares held by the wife of Richard E. Marriott; (iii) 603,828 shares held
in trust for which the wife of Richard E. Marriott is the trustee or a
co-trustee; (iv) 2,451,787 shares held by the J. Willard Marriott
Foundation of which Richard E. Marriott is a co-trustee; and (v)
2,302,729 shares held by a corporation of which Richard E. Marriott is
the controlling stockholder; does not include shares held by the adult
children of Richard E. Marriott; Richard E. Marriott disclaims beneficial
ownership of all such shares.
(10) Host REIT Common Stock includes the total number of shares held by
trusts for which both J.W. Marriott, Jr. and Richard E. Marriott are co-
trustees. Beneficial ownership of such shares is attributable to each of
J.W. Marriott, Jr. and Richard E. Marriott in the table above under the
Director subheading, but such shares are included only once in reporting
the total number of shares owned by all directors and executive officers
as a group. All directors and executive officers as a group (other than
members of the Marriott family) owned beneficially an aggregate of
1,757,788 shares, or 0.86%, of the total shares outstanding as of July
31, 1998. In addition, the Host Marriott Corporation (HMC) Retirement and
Savings Plan owned 65,257 shares, or 0.03% of the total shares
outstanding as of July 31, 1998.
(11) OP Units include only John G. Schreiber's proportionate share of OP Units
to be received by the Blackstone Entities in the Blackstone Acquisition;
John G. Schreiber disclaims beneficial ownership of all other OP Units to
be acquired by the Blackstone Entities.
(12) The Blackstone Entities constitute a series of affiliated partnerships.
Initially, a majority of the OP Units received pursuant to the Blackstone
Acquisition will be held by such affiliated partnerships, but eventually
will be distributed by such affiliated partnerships to their partners.
(13) Represents shares of Host Common Stock held by Dresdner RCM Global
Investors LLC ("Dresdner RCM") and its affiliates, RCM Limited L.P. ("RCM
Limited") and RCM General Corporation ("RCM General"), and by Dresdner
Bank AG, of which Dresdner RCM is a wholly owned subsidiary. Dresdner RCM
has reported in a Schedule 13G under the Exchange Act, filed with the
Commission, sole dispositive power over 12,943,675 shares and shared
dispositive power over 282,000 shares. Of these shares, Dresdner RCM has
reported sole voting power over 8,854,200 shares and does not share
voting power with respect to any shares. In addition, Dresdner Bank AG
has reported in a separate Schedule 13G under the Exchange Act, filed
with the Commission, sole dispositive and voting power over 370,300
shares of Host Common Stock, and such shares are included in the number
reported in this table. The principal business address of Dresdner RCM,
RCM Limited and RCM General is Four Embarcadero Center, San Francisco,
California 94111. The principal business address of Dresdner Bank AG is
Jurgen Ponto-Platz 1, 60301 Frankfurt, Germany.
(14) Represents shares of Host Common Stock held by FMR Corp. ("FMR") and its
subsidiaries, Fidelity Management Trust Company ("FMT") and Fidelity
Management & Research Company ("FM&R"). FMR has reported in a Schedule
13G under the Exchange Act, filed with the Commission, that FMR, through
its control of FM&R and certain investment funds for which FM&R acts as
an investment adviser, has sole power to dispose of 22,474,835 shares of
Host Common Stock owned by such investment funds, including the
15,610,500 shares of Host Common Stock (or 7.64% of the total shares
outstanding of Host Common Stock as of July 31, 1998) held by the
Fidelity Magellan Fund. FMR has no power to vote or direct the voting of
the shares of Host Common Stock owned by the investment funds, which
power resides with the Board of Directors of such investment funds. FMR,
through its control of FMT and certain institutional accounts for which
FMT serves as investment manager, has sole dispositive power over 57,739
shares, the sole power to vote or direct the voting of 44,301 shares, and
no power to vote or direct the voting of 13,438 shares of Host Common
Stock owned by the institutional accounts. The principal business address
for FMR, FMT and FM&R is 82 Devonshire Street, Boston, Massachusetts
02109.
(15) Represents shares of Host Common Stock held by Southeastern Asset
Management, Inc. ("SAM"). SAM has reported in a Schedule 13G under the
Exchange Act, filed with the Commission, sole dispositive power over
21,730,700 shares and shared dispositive power over 14,968,300 shares. Of
these shares, SAM has reported sole voting power over 18,338,100 shares,
shared voting power over 14,968,300 shares and no power to vote 3,451,600
shares. The principal business address of SAM is 6075 Poplar Avenue,
Suite 900, Memphis, Tennessee 38119.
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DESCRIPTION OF HOST REIT CAPITAL STOCK
The summary description of the capital stock of Host REIT set forth below
does not purport to be complete and is subject to and qualified in its
entirety by reference to the Host REIT Charter and Host REIT Bylaws, to be
effective upon completion of the Merger, attached as Exhibits B and C,
respectively, to the Agreement, which is attached to this Proxy
Statement/Prospectus as Appendix A.
GENERAL
The Host REIT Charter provides that the total number of shares of stock of
all classes which Host REIT has authority to issue is 800,000,000 shares of
stock, initially consisting of 750,000,000 shares of Host REIT Common Stock
and 50,000,000 shares of Host REIT Preferred Stock. The Board of Directors is
authorized, without a vote of stockholders, to classify or reclassify any
unissued shares of capital stock and to establish the preferences and rights
of any preferred or other class or series of capital stock to be issued. At
November 5, 1998, 100 shares of Host REIT Common Stock were issued and
outstanding.
HOST REIT COMMON STOCK
Subject to the preferential rights of any other classes or series of shares
of capital stock and to the provisions of the Host REIT Charter regarding
restrictions on transfers of shares of capital stock, holders of Host REIT
Common Stock are entitled to receive distributions if, as and when authorized
and declared by the Board of Directors, out of assets legally available
therefor and to share ratably in the assets of Host REIT legally available for
distribution to its stockholders in the event of its liquidation, dissolution
or winding-up after payment of, or adequate provision for, all known debts and
liabilities of Host REIT. Host REIT currently intends to pay regular quarterly
distributions.
Subject to the provisions of the Host REIT Charter regarding restrictions on
the transfer of shares of capital stock, each outstanding share of Host REIT
Common Stock entitles the holder to one vote on all matters submitted to a
vote of stockholders, including the election of directors, and, except as
provided with respect to any other class or series of shares of Host REIT
capital stock, the holders of shares of Host REIT Common Stock will possess
the exclusive voting power. There is no cumulative voting in the election of
directors, which means that the holders of a majority of the outstanding Host
REIT Common Stock can elect all of the directors then standing for election.
Holders of shares of Host REIT Common Stock have no preferences, conversion,
sinking fund, redemption rights or preemptive rights to subscribe for any
securities of Host REIT. Subject to the provisions of the Host REIT Charter
regarding restrictions on transfer of capital stock, shares of Host REIT
Common Stock have equal distribution, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, consolidate, effect a share exchange or transfer its assets
within the meaning of the MGCL unless approved by the Board of Directors and
by stockholders holding at least two-thirds of the shares entitled to vote on
the matter (unless a greater or lesser percentage (but not less than a
majority of all the votes entitled to be cast) is set forth in the
corporation's charter. Under the Host REIT Charter, any merger, consolidation,
share exchange or transfer of its assets must be approved (i) by the Board of
Directors in the manner provided in the MGCL and (ii) by stockholders to the
extent required under the MGCL. The Host REIT Charter generally provides for
stockholder approval of such transactions by a two-thirds vote of all the
votes entitled to be cast, except that any merger of Host REIT with or into a
trust organized for the purpose of changing Host REIT's form of organization
from a corporation to a trust will require the approval of stockholders of
Host REIT by the affirmative vote only of a majority of all the votes entitled
to be cast on the matter. In addition, under the MGCL, certain mergers may be
accomplished without a vote of stockholders. For example, no stockholder vote
is required for a merger of a subsidiary of a Maryland corporation into its
parent, provided the parent owns at least 90 percent of the subsidiary. In
addition, a merger need not be approved by stockholders of a Maryland
successor corporation if the merger does not reclassify or change the
outstanding shares or otherwise amend the charter, and the number
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of shares to be issued or delivered in the merger is not more than 20 percent
of the number of its shares of the same class or series outstanding
immediately before the merger becomes effective. A share exchange need be
approved by a Maryland successor only by its Board of Directors. Any
amendments to the provisions contained in the Host REIT Charter relating to
restrictions on transferability of stock, the classified Board and fixing the
size of the Board within the range set forth in the Host REIT Charter, as well
as the provisions relating to removal of directors, the filling of Board
vacancies and the exclusive authority of the Board of Directors to amend the
Bylaws will require the approval of the Board of Directors and stockholders by
the affirmative vote of the holders of not less than two-thirds of the votes
entitled to be cast on the matter. Other amendments to the Host REIT Charter
may be effected by requisite action of the Board of Directors and approval by
stockholders by the affirmative vote of not less than a majority of the votes
entitled to be cast on the matter.
The Host REIT Charter will authorize the Board of Directors to reclassify
any unissued shares of Host REIT Common Stock into other classes or series of
capital stock, including preferred stock, and to establish the number of
shares in each class or series and to set the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications or terms or conditions of redemption for
each such class or series.
PREFERRED STOCK
The Host REIT Charter initially will authorize the Board of Directors to
issue 50 million shares of Host REIT Preferred Stock and to classify or
reclassify any unissued preferred shares into one or more classes or series of
capital stock, including Host REIT Common Stock. Prior to issuance of shares
of any class or series of stock other than Host REIT Common Stock, the Board
of Directors is required, under the MGCL, to set, subject to the provisions of
the Host REIT Charter regarding the restriction on transfer of capital stock,
the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such class or
series. Thus, the Board of Directors could authorize the issuance of preferred
shares or other capital stock with terms and conditions which could have the
effect of delaying, deferring or preventing a transaction or a change in
control of Host REIT that might involve a premium price for holders of shares
of Host REIT Common Stock or otherwise be in their best interest. As of the
date hereof, no shares other than Host REIT Common Stock are outstanding, but
Host REIT may issue preferred shares or other capital stock in the future,
including as a result of the issuance of preferred stock by Host prior to the
REIT Conversion. Although the Board of Directors has no intention at the
present time of doing so (other than in connection with the proposed
Stockholders Rights Plan), it could authorize Host REIT to issue a class or
series of shares that could, depending upon the terms of such class or series,
delay, defer or prevent a transaction or a change in control of Host REIT that
might involve a premium price for holders of shares of Host REIT Common Stock
or otherwise be in their best interest.
POWER TO ISSUE ADDITIONAL HOST REIT COMMON STOCK AND PREFERRED STOCK
Host REIT believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Host REIT Common Stock or Host
REIT Preferred Stock and to classify or reclassify unissued Host REIT Common
Stock or Host REIT Preferred Stock and thereafter to cause Host REIT to issue
such classified or reclassified shares of capital stock in one or more classes
or series will provide Host REIT with increased flexibility in structuring
possible future financings and acquisitions and in meeting other needs which
might arise. The additional classes or series, as well as the Host REIT Common
Stock, will be available for issuance without further action by Host REIT's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which Host REIT's
securities may be listed or traded.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For Host REIT to qualify as a REIT under the Code, no more than 50% in value
of its outstanding shares of stock may be owned, actually or constructively,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year (other than the first year
for which an election to be treated
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as a REIT has been made) or during a proportionate part of a shorter taxable
year. In addition, if Host REIT, or one or more owners (actually or
constructively) of 10% or more of Host REIT, actually or constructively owns
10% or more of a tenant of Host REIT (or a tenant of any partnership in which
Host REIT is a partner), the rent received by Host REIT (either directly or
through any such partnership) from such tenant will not be qualifying income
for purposes of the REIT gross income tests of the Code. A REIT's shares also
must be beneficially owned by 100 or more persons during at least 335 days of
a taxable year of twelve months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be treated as
a REIT has been made).
Primarily because the Board of Directors believes it is desirable for Host
REIT to qualify as a REIT, the Host REIT Charter, subject to certain
exceptions, provides that no person or persons acting as a group may own, or
be deemed to own by virtue of the attribution provisions of the Code, more
than (i) 9.8% of the lesser of the number or value of shares of Host REIT
Common Stock outstanding or (ii) 9.8% of the lesser of the number or value of
the issued and outstanding preferred or other shares of any class or series of
Host REIT stock, subject to (a) an exception for a holder of shares of Host
REIT Common Stock solely by reason of the Merger in excess of the Ownership
Limit so long as such holder would not own, directly or by attribution under
the Code, more than 9.9% by value of the outstanding capital stock of Host
REIT as of the Special Merger Ownership Limit Effective Time, and (b) a
limitation on the application of the "group" limitation (but no other element
of the Ownership Limit) to any "group" that otherwise would exceed the
Ownership Limit at the Effective Time solely by reason of its status as a
"group." The Ownership Limit prohibits Marriott International and its
subsidiaries and affiliates (including members of the Marriott family) from
collectively owning shares of capital stock in excess of the Ownership Limit,
but Host REIT's Board of Directors will grant an exception (pursuant to the
applicable provisions of the Host REIT Charter) that will permit Marriott
International to exercise its right to purchase up to 20% of each class of
Host REIT's voting stock in connection with a change in control of Host REIT
(but only in the event that (i) Marriott International and its subsidiaries
and affiliates (including members of the Marriott family) do not own at such
time or thereafter, directly and by attribution, 10% or more of Crestline or
any of the Lessees and (ii) such ownership of Host REIT shares would not cause
the Operating Partnership to be considered to own, directly or by attribution,
10% or more of Crestline or any of the Lessees). See "Certain Relationships
and Related Transactions--Relationship Between Host and Marriott
International." The ownership attribution rules under the Code are complex and
may cause Host REIT Common Stock owned actually or constructively by a group
of related individuals and/or entities to be owned constructively by one
individual or entity. As a result, the acquisition of less than 9.8% of the
Host REIT Common Stock (or the acquisition or ownership of an interest in an
entity that owns, actually or constructively, Host REIT Common Stock) by an
individual or entity, could, nevertheless cause that individual or entity, or
another individual or entity, to own constructively in excess of 9.8% of the
outstanding Host REIT Common Stock and thus subject such Host REIT Common
Stock to the Ownership Limit. The Board of Directors may grant an exemption
from the Ownership Limit with respect to one or more persons who would not be
treated as "individuals" for purposes of the Code if it is satisfied, based
upon an opinion of counsel and such other evidence as is satisfactory to the
Board of Directors in its sole discretion, that such ownership will not cause
a person who is an individual to be treated as owning Host REIT Common Stock
in excess of the Ownership Limit, applying the applicable constructive
ownership rules, and will not otherwise jeopardize Host REIT's status as a
REIT (for example, by causing any tenant of the Operating Partnership or the
Partnerships (including but not limited to Crestline and the Lessees) to be
considered a "related party tenant" for purposes of the REIT qualification
rules). As a condition of such waiver, the Board of Directors may require
undertakings or representations from the applicant with respect to preserving
the REIT status of Host REIT. PURSUANT TO THE TERMS OF THE HOST REIT CHARTER,
THE OWNERSHIP LIMIT WILL BECOME EFFECTIVE TO ALL HOST REIT STOCKHOLDERS AS OF
THE EFFECTIVE TIME (SUBJECT TO THE LIMITED EXCEPTIONS DESCRIBED ABOVE).
The Board of Directors of Host REIT will have the authority to increase the
Ownership Limit from time to time, but will not have the authority to do so to
the extent that after giving effect to such increase, five beneficial owners
of Host REIT Common Stock could beneficially own in the aggregate more than
49.5% of the outstanding Host REIT Common Stock.
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The Host REIT Charter further prohibits (i) any person from actually or
constructively owning shares of beneficial interest of Host REIT that would
result in Host REIT being "closely held" under Section 856(h) of the Code or
otherwise cause Host REIT to fail to qualify as a REIT and (ii) any person
from transferring shares of Host REIT capital stock if such transfer would
result in shares Host REIT capital stock being owned by fewer than 100
persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of Host REIT capital stock that will or may
violate any of the foregoing restrictions on transferability and ownership is
required to give notice immediately to Host REIT and provide Host REIT with
such other information as Host REIT may request in order to determine the
effect of such transfer on Host REIT's status as a REIT.
If any purported transfer of shares of Host REIT capital stock or any other
event would otherwise result in any person violating the Ownership Limit or
the other restrictions in the Host REIT Charter, then any such purported
transfer will be void and of no force or effect with respect to the purported
transferee (the "Prohibited Transferee") as to that number of shares that
exceeds the Ownership Limit (referred to as "excess shares") and the
Prohibited Transferee shall acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to any such shares in excess of the Ownership Limit (the "Prohibited
Owner") shall cease to own any right or interest) in such excess shares. Any
such excess shares described above will be transferred automatically, by
operation of law, to a trust, the beneficiary of which will be a qualified
charitable organization selected by Host REIT (the "Beneficiary"). Such
automatic transfer shall be deemed to be effective as of the close of business
on the Business Day (as defined in the Host REIT Charter) prior to the date of
such violating transfer. Within 20 days of receiving notice from Host REIT of
the transfer of shares to the trust, the trustee of the trust (who shall be
designated by Host REIT and be unaffiliated with Host REIT and any Prohibited
Transferee or Prohibited Owner) will be required to sell such excess shares to
a person or entity who could own such shares without violating the Ownership
Limit, and distribute to the Prohibited Transferee an amount equal to the
lesser of the price paid by the Prohibited Transferee for such excess shares
or the sales proceeds received by the trust for such excess shares. In the
case of any excess shares resulting from any event other than a transfer, or
from a transfer for no consideration (such as a gift), the trustee will be
required to sell such excess shares to a qualified person or entity and
distribute to the Prohibited Owner an amount equal to the lesser of the fair
market value of such excess shares as of the date of such event or the sales
proceeds received by the trust for such excess shares. In either case, any
proceeds in excess of the amount distributable to the Prohibited Transferee or
Prohibited Owner, as applicable, will be distributed to the Beneficiary. Prior
to a sale of any such excess shares by the trust, the trustee will be entitled
to receive, in trust for the Beneficiary, all dividends and other
distributions paid by Host REIT with respect to such excess shares, and also
will be entitled to exercise all voting rights with respect to such excess
shares. Subject to Maryland law, effective as of the date that such shares
have been transferred to the trust, the trustee shall have the authority (at
the trustee's sole discretion and subject to applicable law) (i) to rescind as
void any vote cast by a Prohibited Transferee prior to the discovery by Host
REIT that such shares have been transferred to the trust and (ii) to recast
such vote in accordance with the desires of the trustee acting for the benefit
of the Beneficiary. However, if Host REIT has already taken irreversible
corporate action, then the trustee shall not have the authority to rescind and
recast such vote. Any dividend or other distribution paid to the Prohibited
Transferee or Prohibited Owner (prior to the discovery by Host REIT that such
shares had been automatically transferred to a trust as described above) will
be required to be repaid to the trustee upon demand for distribution to the
Beneficiary. If the transfer to the trust as described above is not
automatically effective (for any reason) to prevent violation of the Ownership
Limit, then the Host REIT Charter provides that the transfer of the excess
shares will be void.
In addition, shares of Host REIT stock held in the trust shall be deemed to
have been offered for sale to Host REIT, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust (or, in the case of a devise or gift,
the market value at the time of such devise or gift) and (ii) the market value
of such shares on the date Host REIT, or its designee, accepts such offer.
Host REIT will have the right to accept such offer until the trustee has sold
the shares held in the trust.
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Upon such a sale to Host REIT, the interest of the Beneficiary in the shares
sold will terminate and the trustee will distribute the net proceeds of the
sale to the Prohibited Owner.
TO AVOID THE ADVERSE EFFECTS OF THE OWNERSHIP LIMIT, ANY HOLDER OF HOST
COMMON STOCK WHO WOULD OWN SHARES OF HOST REIT COMMON STOCK IN EXCESS OF THE
OWNERSHIP LIMIT AT THE EFFECTIVE TIME SHOULD DISPOSE OF SUCH EXCESS SHARES
PRIOR TO THE EFFECTIVE TIME. SEE "THE RESTRUCTURING TRANSACTIONS--TERMS OF THE
MERGER." ANY SHARES OF HOST REIT COMMON STOCK HELD AT THE EFFECTIVE TIME AND
NOT SUBSEQUENTLY TRANSFERRED PRIOR TO THE SPECIAL MERGER OWNERSHIP LIMIT
EFFECTIVE TIME, OR ACQUIRED OR OTHERWISE HELD AT ANY TIME AFTER THE EFFECTIVE
TIME IN VIOLATION OF THE OWNERSHIP LIMIT WILL BE TRANSFERRED AUTOMATICALLY TO
A TRUST FOR THE BENEFIT OF A DESIGNATED CHARITABLE BENEFICIARY, AND THE PERSON
WHO ACQUIRED SUCH EXCESS SHARES OF HOST REIT COMMON STOCK WILL NOT BE ENTITLED
TO ANY DISTRIBUTIONS THEREON OR TO VOTE SUCH EXCESS SHARES OF HOST REIT COMMON
STOCK. THE HOLDER OF ANY SUCH EXCESS SHARES OF HOST REIT COMMON STOCK WILL
RECEIVE THE LESSER OF THE VALUE OF SUCH EXCESS SHARES AS OF THE EFFECTIVE TIME
OR THE CASH PROCEEDS OF THE SALE OF SUCH EXCESS SHARES OF HOST REIT COMMON
STOCK BY THE TRUSTEE OF THE TRUST.
The foregoing restrictions on transferability and ownership will not apply
if the Board of Directors determines that it is no longer in the best
interests of Host REIT to attempt to qualify, or to continue to qualify, as a
REIT.
All certificates representing shares of Host REIT capital stock will bear a
legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage between 1/2 of 1% and 5% as
provided in the rules and regulations promulgated under the Code) of the
lesser of the number or value of the outstanding shares of Host REIT capital
stock must give a written notice to the Company within 30 days after the end
of each taxable year. In addition, each stockholder will, upon demand, be
required to disclose to Host REIT in writing such information with respect to
the direct, indirect and constructive ownership of shares of Host REIT capital
stock as the Board of Directors deems reasonably necessary to comply with the
provisions of the Code applicable to a REIT, to comply with the requirements
of any taxing authority or governmental agency or to determine any such
compliance.
These ownership limitations could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of Host REIT Common Stock might receive a premium for their Host
REIT Common Stock over the then prevailing market price or which such holders
might believe to be otherwise in their best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Host REIT Common Stock will be First
Chicago Trust Company of New York.
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CERTAIN PROVISIONS OF MARYLAND LAW AND
THE HOST REIT CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the Host
REIT Charter and Host REIT Bylaws does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and the
forms of the Host REIT Charter and Host REIT Bylaws to be effective upon
completion of the Merger copies of which are attached as Exhibits B and C,
respectively, to the Agreement attached to this Proxy Statement/Prospectus as
Appendix A.
The Host REIT Charter and Host REIT Bylaws will contain certain provisions
that could make more difficult an acquisition or change in control of the
Company by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of Host REIT to negotiate first with the Board of Directors.
Host REIT believes that the benefits of these provisions outweigh the
potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms. See also "--Anti-Takeover Effect of Certain Provisions of Maryland Law
and the Host REIT Charter and Bylaws."
NUMBER OF DIRECTORS; CLASSIFICATION AND REMOVAL OF BOARD OF DIRECTORS; OTHER
PROVISIONS
The Host REIT Charter will provide that the Board of Directors initially
will consist of eight members and may thereafter be increased or decreased in
accordance with the Host REIT Bylaws, provided that the total number of
directors may not be fewer than three nor more than thirteen. Pursuant to the
Host REIT Bylaws, the number of directors shall be fixed by the Board of
Directors within the limits set forth in the Host REIT Charter. Further, the
Host REIT Charter will provide that the Board of Directors will be divided
into three classes of directors, with each class to consist as nearly as
possible of an equal number of directors. The term of office of the first
class of directors will expire at the 1999 annual meeting of stockholders; the
term of the second class of directors will expire at the 2000 annual meeting
of stockholders; and the term of the third class of directors will expire at
the 2001 annual meeting of stockholders. At each annual meeting of
stockholders, the class of directors to be elected at such meeting will be
elected for a three-year term, and the directors in the other two classes will
continue in office. Because stockholders will have no right to cumulative
voting for the election of directors, at each annual meeting of stockholders
the holders of a majority of the outstanding Host REIT Common Stock will be
able to elect all of the successors to the class of directors whose term
expires at that meeting.
The Host REIT Charter also will provide that, except for any directors who
may be elected by holders of a class or series of capital stock other than the
Host REIT Common Stock, directors may be removed only for cause only by the
affirmative vote of stockholders holding at least two-thirds of all the votes
entitled to be cast for the election of directors. Vacancies on the Board of
Directors may be filled by the concurring vote of a majority of the remaining
directors (except in the event of a vacancy on the Board of Directors among
the directors elected by a class or series of stock other than Host REIT
Common Stock, in which case such vacancy may be filled by a majority of the
remaining directors elected by that class or series, or by the stockholders of
that class or series unless otherwise provided in the articles supplementary
for that series) and, in the case of a vacancy resulting from the removal of a
director by the stockholders, by the stockholders by at least two-thirds of
all the votes entitled to be cast in the election of directors. Under Maryland
law, directors may fill any vacancy only until the next annual meeting of
stockholders. A vote of stockholders holding at least two-thirds of all the
votes entitled to be cast thereon is required to amend, alter, change, repeal
or adopt any provisions inconsistent with the foregoing classified board and
director removal provisions. These provisions may make it more difficult and
time-consuming to change majority control of the Board of Directors of Host
REIT and, thus, may reduce the vulnerability of Host REIT to an unsolicited
proposal for the takeover of Host REIT or the removal of incumbent management.
Because the Board of Directors will have the power, without a vote of
stockholders, to classify or reclassify any unissued shares of capital stock
and to establish the preferences and rights of any preferred or other class or
series of stock to be issued, the Board of Directors may afford the holders of
any class or series of senior shares of capital stock preferences, powers and
rights, voting or otherwise, senior to the rights of holders of Host REIT
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Common Stock. The issuance of any such senior shares of capital stock could
have the effect of delaying, deferring or preventing a change in control of
Host REIT.
See "The Restructuring Transactions--Limitation of Liability and
Indemnification of Directors and Officers" for a description of the
limitations on liability of directors and officers of Host REIT and the
provisions for indemnification of directors and officers provided for under
applicable Maryland law and the Host REIT Charter.
CHANGES IN CONTROL PURSUANT TO MARYLAND LAW
Maryland Business Combination Law. Under the MGCL, unless an exemption is
available, certain "business combinations" (including certain issuances of
equity securities) between a Maryland corporation and any Interested
Stockholder or an affiliate of the Interested Stockholder, are prohibited for
five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business combination
must be recommended by the board of directors and approved by the affirmative
vote of at least (i) 80% of all the votes entitled to be cast by holders of
the outstanding shares of voting stock and (ii) two-thirds of the votes
entitled to be cast by holders of voting stock other than voting stock held by
the Interested Stockholder who will (or whose affiliate will) be a party to
the business combination or any affiliate or associate of the Interested
Stockholder, voting together as a single voting group, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. A business combination that is approved by the board of directors
of a Maryland corporation at any time before an Interested Stockholder first
becomes an Interested Stockholder is not subject to the special voting
requirements. The Board of Directors of Host REIT has not opted out of the
business combination provisions of the MGCL. Consequently, the five-year
prohibition and the super-majority vote requirements will apply to a business
combination involving Host REIT; however, as permitted by the MGCL, Host
REIT's Board of Directors may elect to opt out of these provisions in the
future. The Board of Directors of Host REIT has adopted a resolution exempting
from the operation of the "business combination" statute the acquisition of
shares by Marriott International pursuant to the terms of the Marriott
International Purchase Right as well as any other transactions involving Host
REIT and Marriott International or their respective affiliates or associates,
provided that any such other transaction with Marriott International or its
affiliates or associates that is not in the ordinary course of business must
be approved by a majority of the directors of Host REIT present at a meeting
at which a quorum is present, including a majority of disinterested directors,
in addition to any vote of stockholders required by other provisions of the
MGCL.
Maryland Control Share Acquisition Law. Under the MGCL, "control shares"
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter, excluding shares owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares which, if aggregated with all other such shares previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority or (iii)
a majority or more of all voting power. Control shares do not include shares
the acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved)
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for fair value determined, without regard to the absence of voting rights for
the control shares, as of the date of the last control share acquisition by
the acquiror or of any meeting of stockholders at which the voting rights of
such shares are considered and not approved. If voting rights for control
shares are approved at a stockholders meeting and the acquiror becomes
entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to (i) shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (ii) acquisitions approved or exempted by the charter or
bylaws of the corporation. The Board of Directors of Host REIT has not opted
out of the control share provisions of the MGCL but, as permitted by the MGCL,
may elect to opt out of these provisions in the future. The Host REIT Bylaws
contain an exemption from the control share acquisition provisions for any
shares acquired by Marriott International pursuant to the Marriott
International Purchase Right, to the extent it is exercised.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Host REIT Bylaws provide that (i) with respect to an annual meeting of
stockholders, subject to the rights of holders of any class or series of stock
having a preference over the Host REIT Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, nominations of
persons for election to the Board of Directors and the proposal of business to
be considered by stockholders may be made only (A) pursuant to Host REIT's
notice of meeting, (B) by or at the direction of the Board of Directors or (C)
by a stockholder who was a stockholder of record both at the time of giving
notice provided for in the Host REIT Bylaws and at the time of the annual
meeting, and who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Host REIT Bylaws and (ii) with
respect to special meetings of the stockholders, only the business specified
in Host REIT's notice of meeting may be brought before the meeting of
stockholders and except as otherwise provided for or fixed by or pursuant to
the provisions of the Host REIT Charter relating to the rights of the holders
of any class or series of stock having a preference over the Host REIT Common
Stock as to dividends or upon liquidation to elect directors under specified
circumstances, nominations of persons for election to the Board of Directors
may be made only (X) pursuant to Host REIT's notice of the meeting, (Y) by or
at the direction of the Board of Directors or (Z) provided that the Board of
Directors has determined that directors shall be elected at such meeting, by a
stockholder who was a stockholder of record both at the time of giving notice
provided for in the Host REIT Bylaws and at the time of the special meeting,
and who is entitled to vote at the meeting and has complied with the advance
notice provisions set forth in the Host REIT Bylaws. The advance notice
provisions contained in the Host REIT Bylaws generally require nominations and
new business proposals by stockholders to be delivered to the Secretary of
Host REIT not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day before the date on which Host REIT
first mailed its proxy materials for the prior year's annual meeting of
stockholders.
MEETINGS OF STOCKHOLDERS; CALL OF SPECIAL MEETINGS; STOCKHOLDER ACTION IN LIEU
OF MEETING BY UNANIMOUS CONSENT
The Host REIT Bylaws provide that annual meetings of stockholders shall be
held on a date and at the time set by the Board of Directors during the month
of May each year (commencing in May 1999). Special meetings of the
stockholders may be called by the President or the Board of Directors. The
Secretary of Host REIT also is required to call a special meeting of the
stockholders on the written request of stockholders entitled to cast a
majority of all the votes entitled to be cast at the meeting. The Host REIT
Bylaws further provide that special stockholder meetings may be called by the
holders of any class or series of stock having a preference over the Host REIT
Common Stock as to dividends or upon liquidation in the manner specified in
articles supplementary filed as part of the Host REIT Charter. Pursuant to the
MGCL and the Host REIT Bylaws, any action required or permitted to be taken by
the stockholders must be effected at a duly called annual or special meeting
of stockholders and may not be effected by any consent in writing by
stockholders, unless such consent is unanimous.
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MERGER, CONSOLIDATION, SHARE EXCHANGE AND TRANSFER OF ASSETS OF HOST REIT
Pursuant to the Host REIT Charter, subject to the terms of any class or
series of stock at the time outstanding, Host REIT may merge with or into
another entity, may consolidate with one or more other entities, may
participate in a share exchange or may transfer its assets within the meaning
of the MGCL, but any such merger, consolidation, share exchange or transfer of
assets must be approved (i) by the Board of Directors in the manner provided
in the MGCL. In general, such transactions by a Maryland corporation, such as
Host REIT, must first be approved by a majority of the entire Board of
Directors and thereafter approved by stockholders by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter (unless the
charter provides for a greater or lesser stockholder vote but not less than a
majority of the number of votes entitled to be cast on the matter). The Host
REIT Charter generally provides for stockholder approval of such transactions
by a two-thirds vote of all votes entitled to be cast, except that any merger
of Host REIT with or into a trust organized for the purpose of changing Host
REIT's form of organization from a corporation to a trust will require the
approval of stockholders of Host REIT by the affirmative vote only of a
majority of all the votes entitled to be cast on the matter provided that (i)
the stockholders of the trust immediately following the merger are the same as
the stockholders of Host REIT immediately prior to the merger and (ii) the
trust's declaration of trust contains amendment provisions substantially
equivalent to those contained in specified provisions of the Host REIT Bylaws.
Under the MGCL, certain mergers may be accomplished without a vote of
stockholders. For example, no stockholder vote is required for a merger of a
subsidiary of a Maryland corporation into its parent, provided the parent owns
at least 90 percent of the subsidiary. In addition, a merger need not be
approved by stockholders of a Maryland successor corporation if the merger
does not reclassify or change the outstanding shares or otherwise amend the
charter, and the number of shares to be issued or delivered in the merger is
not more than 20% of the number of its shares of the same class or series
outstanding immediately before the merger becomes effective. A share exchange
need be approved by a Maryland successor only by its Board of Directors. Under
the MGCL, a "transfer of assets" is defined to mean any sale, lease, exchange
or other transfer of all or substantially all of the assets of the corporation
but does not include (i) a transfer of assets by a corporation in the ordinary
course of business actually conducted by it, (ii) a mortgage, pledge or
creation of any other security interest in any or all of the assets of the
corporation, whether or not in the ordinary course of its business, (iii) an
exchange of shares of stock through voluntary action under any agreement with
the stockholders, or (iv) a transfer of assets to one or more persons if all
the equity interests of the person or persons are owned, directly or
indirectly, by the corporation. Pursuant to the MGCL, a voluntary dissolution
of Host REIT also would require the affirmative vote of two-thirds of all the
votes entitled to be cast on the matter.
AMENDMENTS TO THE HOST REIT CHARTER AND BYLAWS
Under the MGCL, in order to amend the charter, the board of directors first
must adopt a resolution setting forth the proposed amendment and declaring its
advisability and direct that the proposed amendment be submitted to
stockholders for their consideration either at an annual or special meeting of
stockholders. Thereafter, the proposed amendment must be approved by
stockholders by the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter, unless a greater or lesser proportion of votes (but
not less than a majority of all votes entitled to be cast) is specified in the
charter. The provisions contained in the Host REIT Charter relating to
restrictions on transferability of Host REIT Common Stock, the classified
Board and fixing the size of the Board within the range set forth in the Host
REIT Charter, as well as the provisions relating to removal of directors and
the filling of Board vacancies may be amended only by a resolution adopted by
the Board of Directors and approved at an annual or special meeting of the
stockholders by the affirmative vote of the holders of not less than two-
thirds of the votes entitled to be cast on the matter. Other amendments to the
Host REIT Charter generally may be effected by requisite action of the Board
of Directors and approval by stockholders by the affirmative vote of not less
than a majority of the votes entitled to be cast on the matter. As permitted
under the MGCL, the Host REIT Bylaws provide that directors have the exclusive
right to amend the Host REIT Bylaws. Amendment of this provision of the
Charter also would require Board action and approval by holders of not less
than two-thirds of all votes entitled to be cast on the matter.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE HOST REIT
CHARTER AND BYLAWS
The business combination and control share provisions of the MGCL, the
provisions of the Host REIT Charter on the classification of the Board of
Directors, fixing the size of the Board of Directors within a specified
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range and removal of directors, the provisions authorizing the Board of
Directors, without a vote of stockholders, to classify or reclassify any
unissued shares of stock into one or more classes or series of stock, the
provisions relating to mergers, consolidations, share exchanges and transfers
of assets, the provisions for amending certain provisions of the Host REIT
Charter and for amending the Host REIT Bylaws, the advance notice provisions
of the Host REIT Bylaws and the limitations on the ability of stockholders to
call special meetings could delay, defer or prevent a transaction or a change
of control of Host REIT that might involve a premium price for holders of Host
REIT Common Stock or otherwise be in their best interests. The stock transfer
restrictions that will be contained in the Host REIT Charter, which are
intended to help Host REIT satisfy certain requirements under the Code to
qualify as a REIT for federal income tax purposes, could also delay, defer or
prevent a transaction or a change of control of Host REIT that might involve a
premium price for holders of Host REIT Common Stock or otherwise be in their
best interests.
MARRIOTT INTERNATIONAL PURCHASE RIGHT
In connection with Host's spin-off of Marriott International in 1993,
Marriott International obtained the Marriott International Purchase Right,
which entitles Marriott to purchase up to 20% of each class of Host's
outstanding voting shares at the then fair market value upon the occurrence of
certain change of control events involving Host. The Marriott International
Purchase Right will continue in effect after the Merger (until June 2017),
subject to certain limitations intended to help protect the REIT status of
Host REIT. The Marriott International Purchase Right may have the effect of
discouraging a takeover of Host REIT because any person considering acquiring
a substantial or controlling block of Host REIT Common Stock will face the
possibility that its ability to obtain or exercise control would be impaired
or made more expensive by the exercise of the Marriott International Purchase
Right.
STOCKHOLDER RIGHTS PLAN
Host currently has in effect a stockholder rights plan pursuant to the Host
Rights Agreement, and it has preferred stock purchase rights attached to its
common stock pursuant to such rights plan. Prior to the completion of the
Merger, the Board of Directors intends to adopt a Stockholder Rights Plan
pursuant to a rights agreement (the "Host REIT Rights Agreement") to replace
the existing Host Rights Agreement and declare a dividend of one Host REIT
Right, consisting of one preferred stock purchase right for each outstanding
share of Host REIT Common Stock. All shares of Host REIT Common Stock issued
by Host REIT between the date of adoption of the Host REIT Rights Agreement
and the Rights Distribution Date (as defined below), or the date, if any, on
which the Host REIT Rights are redeemed would have Host REIT Rights attached
to them. It is expected that the Host REIT Rights will expire ten years after
adoption of the Host REIT Rights Agreement, unless earlier redeemed or
exchanged. Each Host REIT Right, when exercisable, would entitle the holder to
purchase upon payment of the purchase price a fraction of a share of a newly
created series of junior participating preferred stock. Until a Host REIT
Right is exercised, the holder thereof, as such, would have no rights as a
stockholder of Host REIT including, without limitation, the right to vote or
to receive dividends.
The Host REIT Rights Agreement is expected to provide that the Host REIT
Rights initially attach to all certificates representing Host REIT Common
Stock then outstanding. The Host REIT Rights would separate from the Host REIT
Common Stock and a distribution of Host REIT Rights certificates would occur
(a "Rights Distribution Date") upon the earlier to occur of (i) ten days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding Host REIT
Common Stock (the "Stock Acquisition Date") or (ii) ten business days (or such
later date as the Board of Directors may determine) following the commencement
of a tender offer or exchange offer, the consummation of which would result in
the beneficial ownership by a person of 20% or more of the outstanding Host
REIT Common Stock. For the purposes of determining the 20% threshold amount,
shares of Host REIT Common Stock that can be acquired by Marriott
International pursuant to the Marriott International Purchase Right will be
deemed exempt shares under the Host REIT Rights Agreement and will not be
included in any determination of the number of shares of Host REIT
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Common Stock beneficially owned by Marriott International. Until the Rights
Distribution Date, the Host REIT Rights would be evidenced by the Host REIT
Common Stock certificates, and would be transferred with, and only with, the
Host REIT Common Stock certificates.
It is expected that, if a Person becomes the beneficial owner of 20% or more
of the then outstanding Host REIT Common Stock (except pursuant to an offer
for all outstanding Host REIT Common Stock which the directors by a two-thirds
vote determine to be fair to and otherwise in the best interests of Host REIT
and its stockholders), each holder of a Host REIT Right would, after the end
of a redemption period, have the right (subject to the Ownership Limit and the
other ownership restrictions contained in the Host REIT Charter) to exercise
the Host REIT Right by purchasing shares of Host REIT Common Stock (or, in
certain circumstances, cash, property or other securities of Host REIT) having
a value equal to two times the purchase price of the Host REIT Right, subject
to the Ownership Limit.
If at any time following the Stock Acquisition Date, (i) Host REIT is
acquired in a merger or other business combination transaction in which it is
not the surviving corporation (other than a merger which follows an offer
described in the preceding paragraph) or (ii) 50% or more of Host REIT's
assets or earning power is sold or transferred, each holder of a Host REIT
Right would have the right to receive, upon exercise, common shares of the
acquiring company having a value equal to two times the purchase price of the
Host REIT Right.
It is expected that, in general, the Board of Directors of Host REIT may
redeem the Host REIT Rights at a nominal price per Host REIT Right at any time
until ten days after an Acquiring Person has been identified as such. If the
decision to redeem the Host REIT Rights occurs after a person becomes an
Acquiring Person, the decision will require the concurrence of directors by a
two-thirds vote.
The Host REIT Rights would have certain anti-takeover effects. The Host REIT
Rights would cause substantial dilution to a person or group that attempts to
acquire Host REIT. The Host REIT Rights, however, would not interfere with any
merger or other business combination approved by the Board of Directors since
the Board may, at its option, at any time prior to any person becoming an
Acquiring Person, redeem all rights or amend the Host REIT Rights Agreement to
exempt the person from the Host REIT Rights Agreement.
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DESCRIPTION OF THE PARTNERSHIP AGREEMENT AND OP UNITS
The following is a summary of the material terms of the Partnership
Agreement and the OP Units to be issued in connection with the Partnership
Mergers and the REIT Conversion. Following the REIT Conversion, OP Units will
be owned by the following groups: Host REIT; the Blackstone Entities; the
Limited Partners who participate in the Partnership Mergers; and partners in
four Private Partnerships participating in the Private Partnership
Transactions. Following the REIT Conversion, Host REIT will be the sole
general partner of the Operating Partnership, and following consummation of
the other transactions comprising the REIT Conversion, the Operating
Partnership will carry on the business formerly conducted by Host. See "The
REIT Conversion."
GENERAL
Holders of OP Units (other than Host REIT in its capacity as general
partner) will hold a limited partnership interest in the Operating
Partnership, and all holders of OP Units (including Host REIT in its capacity
as general partner) will be entitled to share in cash distributions from, and
in the profits and losses of, the Operating Partnership. Because Host REIT
will hold a number of OP Units equal to the number of shares of Host REIT
Common Stock outstanding, each OP Unit generally will receive distributions in
the same amount paid on each share of Host REIT Common Stock. See
"Distribution and Other Policies--Distribution Policy."
Holders of OP Units will have the rights to which limited partners are
entitled under the Partnership Agreement and the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act"). The OP Units will not be listed
on any exchange or quoted on any national market system. The Partnership
Agreement imposes certain restrictions on the transfer of OP Units, as
described below.
FORMATION
The Operating Partnership was formed as a Delaware limited partnership under
the Delaware Act on April 15, 1998. Upon the consummation of the REIT
Conversion, Host REIT will be admitted to the Operating Partnership as the
sole general partner of the Operating Partnership. Following the REIT
Conversion, Host REIT is expected to hold a substantial amount of the
interests in the Operating Partnership. Of the interests in the Operating
Partnership allocated to Host REIT, a 0.1% interest in the Operating
Partnership will be held by Host REIT as the general partner of the Operating
Partnership, and the remaining OP Units allocated to Host REIT will be held by
Host REIT as a limited partner in the Operating Partnership.
PURPOSES, BUSINESS AND MANAGEMENT
The purpose of the Operating Partnership includes the conduct of any
business that may be lawfully conducted by a limited partnership formed under
the Delaware Act, except that the Partnership Agreement requires the business
of the Operating Partnership to be conducted in such a manner that will permit
Host REIT to qualify as a REIT under Section 856 of the Code, unless Host REIT
ceases to qualify as a REIT for reasons other than the conduct of the business
of the Operating Partnership. Subject to the foregoing limitation, the
Operating Partnership may enter into partnerships, joint ventures or similar
arrangements and may own interests directly or indirectly in any other entity.
Host REIT, as general partner of the Operating Partnership, has the
exclusive power and authority to conduct the business of the Operating
Partnership subject to the consent of the limited partners in certain limited
circumstances discussed below. No limited partner may take part in the
operation, management or control of the business of the Operating Partnership
by virtue of being a holder of OP Units.
In particular, the limited partners expressly acknowledge in the Partnership
Agreement that Host REIT is acting on behalf of the Operating Partnership's
limited partners and Host REIT's stockholders collectively, and is under no
obligation to consider the tax consequences to limited partners when making
decisions for the benefit of the Operating Partnership. Host REIT intends to
make decisions in its capacity as general partner of the
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Operating Partnership so as to maximize the profitability of Host REIT and the
Operating Partnership as a whole, independent of the tax effects on the
limited partners. Host REIT and the Operating Partnership will have no
liability to a limited partner as a result of any liabilities or damages
incurred or suffered by, or benefits not derived by, a limited partner as a
result of the act or omission of Host REIT as general partner of the Operating
Partnership unless Host REIT acted, or failed to act, in bad faith and the act
or omission was material to the loss, liability or benefit not derived.
HOST REIT MAY NOT ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
Host REIT, as general partner, may not conduct any business other than the
business of the Operating Partnership without the consent of limited partners
holding Percentage Interests that are more than 50% of the aggregate
Percentage Interests of the outstanding limited partnership interests entitled
to vote thereon, excluding any such interests held by Host REIT. Other persons
(including officers, directors, employees, agents and other affiliates of Host
REIT) will not be prohibited under the Partnership Agreement from engaging in
other business activities. However, Host REIT, on behalf of the Operating
Partnership, has adopted certain policies regarding noncompetition provisions
and avoidance of conflicts of interest. See "Distribution and Other Policies--
Conflicts of Interest Policies." In addition, the Partnership Agreement does
not prevent another person or entity that acquires control of Host REIT in the
future from conducting other businesses or owning other assets, even though
such businesses or assets may be ones that it would be in the best interests
of the limited partners for the Operating Partnership to own.
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
The Partnership Agreement provides for the quarterly distribution of
Available Cash (as determined in the manner provided in the Partnership
Agreement), to Host REIT and the limited partners as holders of OP Units in
proportion to their Percentage Interests. "Available Cash" is generally
defined as net income plus depreciation and amortization and any reduction in
reserves and minus interest and principal payments on debt, capital
expenditures and any additions to reserves and other adjustments. At the time
of the REIT Conversion, neither Host REIT nor the limited partners will be
entitled to any preferential or disproportionate distributions of Available
Cash (except to the extent that Host REIT receives preferred units in the
Operating Partnership with economic rights that mirror the economic rights of
any preferred stock that Host has outstanding at the time of the REIT
Conversion).
BORROWING BY THE OPERATING PARTNERSHIP
Host REIT is authorized to cause the Operating Partnership to borrow money
and to issue and guarantee debt as it deems necessary for the conduct of the
activities of the Operating Partnership, including financing and refinancing
the assets of the Operating Partnership. Such debt may be secured by
mortgages, deeds of trust, liens or encumbrances on properties of the
Operating Partnership. Host REIT also may cause the Operating Partnership to
borrow money to enable the Operating Partnership to make distributions,
including distributions to holders of OP Units, including Host REIT, in an
amount sufficient to permit Host REIT, as long as it qualifies as a REIT, to
avoid the payment of any federal income tax. See "Distribution and Other
Policies--Financing Policies."
REIMBURSEMENT OF HOST REIT; TRANSACTIONS WITH HOST REIT AND ITS AFFILIATES
Host REIT will not receive any compensation for its services as general
partner of the Operating Partnership. Host REIT, however, as a partner in the
Operating Partnership, has the same right to allocations and distributions as
other partners in the Operating Partnership. In addition, the Operating
Partnership will pay all expenses relating to the Operating Partnership's
organization, the REIT Conversion, the acquisition and ownership of its assets
and its operations. The Operating Partnership will be responsible for and will
pay (or reimburse) all expenses and liabilities of any nature that Host REIT
may incur (including expenses and liabilities arising out of the REIT
Conversion and expenses related to the ongoing operations of Host REIT and to
the management and administration of any subsidiaries of Host REIT permitted
under the Partnership Agreement).
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The Operating Partnership also will be responsible for paying any and all
taxes incurred by Host REIT, except that the Operating Partnership will not be
responsible for any taxes that Host REIT would not have been required to pay
if it qualified as a REIT for federal income tax purposes or any taxes imposed
on Host REIT by reason of its failure to distribute to its stockholders an
amount equal to its taxable income. The Operating Partnership, however, will
not be responsible for expenses or liabilities incurred by Host REIT that are
excluded from the scope of the indemnification provisions of the Partnership
Agreement.
Except as expressly permitted by the Partnership Agreement, Host REIT and
its affiliates will not engage in any transactions with the Operating
Partnership, except on terms that are determined in good faith by the general
partner to be fair and reasonable and no less favorable to the Operating
Partnership than would be obtained from an unaffiliated third party.
LIABILITY OF HOST REIT AND LIMITED PARTNERS
Host REIT, as general partner of the Operating Partnership, will be liable
for all general recourse obligations of the Operating Partnership to the
extent not paid by the Operating Partnership. Host REIT will not be liable for
the nonrecourse obligations of the Operating Partnership.
The limited partners of the Operating Partnership will not be required to
make additional capital contributions to the Operating Partnership. Assuming
that a limited partner does not take part in the control of the business of
the Operating Partnership and otherwise acts in conformity with the provisions
of the Partnership Agreement, the liability of a limited partner for
obligations of the Operating Partnership under the Partnership Agreement and
the Delaware Act will be limited, subject to certain exceptions, generally to
the loss of such limited partner's investment in the Operating Partnership
represented by his OP Units. Under the Delaware Act, a limited partner may not
receive a distribution from the Operating Partnership if, at the time of the
distribution and after giving effect thereto, the liabilities of the Operating
Partnership, other than liabilities to parties on account of their interests
in the Operating Partnership and liabilities for which recourse is limited to
specified property of the Operating Partnership, exceed the fair value of the
Operating Partnership's assets, other than the fair value of any property
subject to nonrecourse liabilities of the Operating Partnership, but only to
the extent of such liabilities. The Delaware Act provides that a limited
partner who receives a distribution knowing at the time that it violates the
foregoing prohibition is liable to the Operating Partnership for the amount of
the distribution. Unless otherwise agreed, such a limited partner will not be
liable for the return of such distribution after the expiration of three years
from the date of such distribution.
The Operating Partnership expects to qualify to conduct business in various
states in which the conduct of its business requires such qualification.
Maintenance of limited liability may require compliance with certain legal
requirements of those jurisdictions and certain other jurisdictions.
Limitations on the liability of a limited partner for the obligations of a
limited partnership have not been clearly established in many jurisdictions.
Accordingly, if it were determined that the right, or exercise of the right by
the limited partners, to make certain amendments to the Partnership Agreement
or to take other action pursuant to the Partnership Agreement constituted
"control" of the Operating Partnership's business for the purposes of the
statutes of any relevant jurisdiction, the limited partners might be held
personally liable for the Operating Partnership's obligations. The Operating
Partnership will operate in a manner Host REIT deems reasonable, necessary and
appropriate to preserve the limited liability of the limited partners.
EXCULPATION AND INDEMNIFICATION OF HOST REIT
The Partnership Agreement generally provides that Host REIT, as general
partner of the Operating Partnership, will incur no liability to the Operating
Partnership or any limited partner for losses sustained, liabilities incurred
or benefits not derived as a result of errors in judgment or mistakes of fact
or law or of any act or omission, unless Host REIT acted, or failed to act, in
bad faith and the act or omission was material to the loss, liability or
benefit not derived. In addition, Host REIT is not responsible for any
misconduct or negligence on the part of its agents, provided Host REIT
appointed such agents in good faith. Host REIT may consult with
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legal counsel, accountants, appraisers, management consultants, investment
bankers and other consultants and advisors, and any action it takes or omits
to take in reliance upon the opinion of such persons, as to matters that Host
REIT reasonably believes to be within their professional or expert competence,
shall be conclusively presumed to have been done or omitted in good faith and
in accordance with such opinion.
The Partnership Agreement also provides for indemnification of Host REIT,
the directors and officers of Host REIT and such other persons as Host REIT
may from time to time designate against any judgments, penalties, fines,
settlements and reasonable expenses actually incurred by such person in
connection with the proceeding unless it is established that: (i) the act or
omission of the indemnified person was material to the matter giving rise to
the proceeding and either was committed in bad faith or was the result of
active and deliberate dishonesty; (ii) the indemnified person actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the indemnified person had reasonable
cause to believe that the act or omission was unlawful. The Operating
Partnership is obligated to advance to an indemnified person reasonable
expenses incurred or expected to be incurred by such indemnified person if
such indemnified person certifies to the Operating Partnership that his
conduct has met the standards for indemnification and that he will repay any
amounts received if it is determined subsequently that his conduct did not
meet such standards. To the extent that the indemnification provisions purport
to include indemnification for liabilities arising under the Securities Act,
in the opinion of the Commission, such indemnification is contrary to public
policy and therefore unenforceable.
SALES OF ASSETS
Under the Partnership Agreement, Host REIT generally has the exclusive
authority to determine whether, when and on what terms the assets of the
Operating Partnership (including the Hotels) will be sold. In addition, Host
REIT is not required to take into account the tax consequences to the limited
partners in deciding whether to cause the Operating Partnership to undertake a
specific transaction. A sale of all or substantially all of the assets of the
Operating Partnership (or a merger of the Operating Partnership with another
entity) requires an affirmative vote of limited partners holding Percentage
Interests that are more than 50% of the aggregate Percentage Interests of the
outstanding limited partnership interests entitled to vote thereon (including
Percentage Interests held by Host REIT).
REMOVAL OR WITHDRAWAL OF HOST REIT; TRANSFER OF HOST REIT'S INTERESTS
The Partnership Agreement provides that the limited partners may not remove
Host REIT as general partner of the Operating Partnership with or without
cause (unless neither Host REIT nor its parent entity is a "public company,"
in which case Host REIT may be removed with or without cause by limited
partners holding Percentage Interests that are more than 50% of the aggregate
Percentage Interests of the outstanding limited partnership interests entitled
to vote thereon, including any such interests held by the general partner). In
addition, Host REIT may not transfer any of its interests as general or
limited partner of the Operating Partnership or withdraw as a general partner,
except, in each case, in connection with a merger or sale of all or
substantially all of its assets, provided that (i) the limited partners of the
Operating Partnership either will receive, or will have the right to receive,
substantially the same consideration as holders of Host REIT Common Stock,
(ii) following such merger or other consolidation, substantially all of the
assets of the surviving entity consist of OP Units and (iii) such transaction
has been approved by partners holding Percentage Interests that are more than
50% of the aggregate Percentage Interests of the outstanding interests in the
Operating Partnership entitled to vote thereon (including any such interests
held by Host REIT). Host REIT initially will hold a majority of the OP Units
and thus would control the outcome of this vote. See "--Sales of Assets."
Although Host REIT cannot transfer its partnership interests except in a
transaction in which substantially all of the assets of the surviving entity
consist of OP Units, the Partnership Agreement does not prevent a transaction
in which another entity acquires control (or all of the shares of capital
stock) of Host REIT and that other entity owns assets and conducts businesses
outside of the Operating Partnership.
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CERTAIN VOTING RIGHTS OF HOLDERS OF OP UNITS DURING THE FIRST YEAR FOLLOWING
THE EFFECTIVE DATE OF THE PARTNERSHIP MERGERS
During the first year following the effective date of the Partnership
Mergers, if a vote of the stockholders of Host REIT is required, then (i) a
sale of all or substantially all of the assets of the Operating Partnership,
(ii) a merger involving the Operating Partnership and (iii) any issuance of OP
Units in connection with an issuance of Host REIT Common Stock representing
20% or more of the outstanding Host REIT Common Stock which would require
stockholder approval under the rules of the NYSE, would require the approval
of a majority of all outstanding OP Units (or, in the case of clause (iii), a
majority of the OP Units that are voted, provided that at least a majority of
the OP Units are voted), including OP Units held by Host REIT, voting as a
single class with Host REIT voting its OP Units in the same proportion as its
stockholders vote. In addition, during the one-year period following the
effective date of the Partnership Mergers, any taxable sale or sales of Hotels
representing more than 10% of the aggregate appraised value (as determined by
an independent hotel valuation and financial advisory firm) of the Hotels
previously owned by any Partnership would require, in addition to any other
approval requirements, the approval of a majority of all outstanding OP Units
held by persons who formerly were Limited Partners of such Partnership, voting
as a separate class.
RESTRICTIONS ON TRANSFERS OF INTERESTS BY LIMITED PARTNERS
The Partnership Agreement provides that no limited partner shall, without
the prior written consent of Host REIT (which consent may be withheld in Host
REIT's sole and absolute discretion), sell, assign, distribute or otherwise
transfer all or any portion of his interest in the Operating Partnership,
except that a limited partner may transfer, without the consent of Host REIT,
all or a portion of its limited partnership interest (i) in the case of a
limited partner who is an individual, to a member of his immediate family, any
trust formed for the benefit of himself and/or members of his immediate
family, or any partnership, limited liability company, joint venture,
corporation or other business entity comprised only of himself and/or members
of his immediate family and entities the ownership interests in which are
owned by or for the benefit of himself and/or members of his immediate family,
(ii) in the case of a limited partner which is a trust, to the beneficiaries
of such trust, (iii) in the case of a limited partner which is a partnership,
limited liability company, joint venture, corporation or other business entity
to which OP Units were transferred pursuant to (i) above, to its partners,
owners, or stockholders, as the case may be, who are members of the immediate
family of or are actually the person(s) who transferred OP Units to it
pursuant to (i) above, (iv) in the case of a limited partner which acquired OP
Units as of the closing of the Partnership Mergers and which is a partnership,
limited liability company, joint venture, corporation or other business
entity, to its partners, owners, stockholders or Affiliates thereof, as the
case may be, or the Persons owning the beneficial interests in any of its
partners, owners or stockholders or Affiliates thereof (it being understood
that this clause (iv) will apply to all of each Person's partnership interests
whether the OP Units relating thereto were acquired on the date hereof or
hereafter), (v) in the case of a limited partner which is a partnership,
limited liability company, joint venture, corporation or other business entity
other than any of the foregoing described in clause (iii) or (iv), in
accordance with the terms of any agreement between such limited partner and
the Operating Partnership pursuant to which such partnership interest was
issued, (vi) pursuant to a gift or other transfer without consideration, (vii)
pursuant to applicable laws of descent or distribution, (viii) to another
limited partner and (ix) pursuant to a grant of security interest or other
encumbrance effected in a bona fide transaction or as a result of the exercise
of remedies related thereto. All of the foregoing transfers are subject to the
provisions of the Partnership Agreement which require compliance with
securities laws, prohibit transfers affecting the tax status of the Operating
Partnership or the qualification of Host REIT as a REIT for tax purposes,
prohibit transfers to holders of nonrecourse liabilities of the Operating
Partnership and are also subject to the rules on substitution of limited
partners. In addition, Limited Partners will be permitted to dispose of their
OP Units following the first anniversary of the effective date of the
Partnership Mergers by exercising their Unit Redemption Right. See "--Unit
Redemption Right" below.
The right of any permitted transferee of OP Units to become a substitute
limited partner is subject to the consent of Host REIT, which consent Host
REIT may withhold in its sole and absolute discretion. If Host REIT does not
consent to the admission of a transferee of OP Units as a substitute limited
partner, the transferee will
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succeed to all economic rights and benefits attributable to such OP Units
(including the Unit Redemption Right), but will not become a limited partner
or possess any other rights of limited partners (including the right to vote).
Transfers of OP Units may be effected only by means of entries in the record
of the Operating Partnership, and Host REIT will require evidence satisfactory
to it of compliance with all transfer restrictions prior to recording any
transfer.
UNIT REDEMPTION RIGHT
Subject to certain limitations, holders of OP Units (other than Host REIT)
may exercise the Unit Redemption Right by providing notice to the Operating
Partnership at any time commencing one year after the effective date of the
Partnership Mergers. Unless Host REIT elects to assume and perform the
Operating Partnership's obligation with respect to the Unit Redemption Right,
as described below, the redeeming holder of OP Units will receive cash from
the Operating Partnership in an amount equal to the market value of the OP
Units to be redeemed. The market value of an OP Unit for this purpose will be
equal to the average of the daily market price of a share of Host REIT Common
Stock on the NYSE for the ten consecutive trading days before the day on which
the redemption notice was given. The market price for each such trading day
shall be the closing price, regular way, on such day, or if no such sales take
place on such day, the average of the closing bid and asked prices on such
day. In lieu of the Operating Partnership's acquiring the OP Units for cash,
Host REIT will have the right (except as described below, if the Host REIT
Common Stock are not publicly traded) to elect to acquire the OP Units
directly from a holder of OP Units exercising the Unit Redemption Right, in
exchange for either cash or Host REIT Common Stock, and, upon such
acquisition, Host REIT will become the owner of such OP Units. In either case,
acquisition of such OP Units by Host REIT will be treated as a sale of the OP
Units to Host REIT for federal income tax purposes. Upon exercise of the Unit
Redemption Right, the right of the holder of OP Units to receive distributions
for the OP Units so redeemed or exchanged will cease. At least 1,000 OP Units
(or all remaining OP Units owned by the holder of OP Units if less than 1,000
OP Units) must be redeemed each time the Unit Redemption Right is exercised.
The redemption generally will occur on the tenth business day after notice of
the exercise of the Unit Redemption Right by a holder of OP Units is given to
the Operating Partnership, except that no redemption or exchange can occur if
delivery of Host REIT Common Stock would be prohibited either under the
provisions of the Host REIT Charter relating to restrictions on ownership and
transfer of Host REIT Common Stock or under applicable federal or state
securities laws as long as the Host REIT Common Stock are publicly traded. See
"Description of Host REIT Capital Stock--Restrictions on Ownership and
Transfer."
In the event that the Host REIT Common Stock are not publicly traded but
another entity whose stock is publicly traded owns more than 50% of the shares
of capital stock of Host REIT (referred to as the "Parent Entity"), the Unit
Redemption Right will be determined by reference to the publicly traded shares
of the Parent Entity and the general partner will have the right to elect to
acquire the OP Units to be redeemed for publicly traded stock of the Parent
Entity. In the event that the Host REIT Common Stock are not publicly traded
and there is no Parent Entity with publicly traded stock, the Unit Redemption
Right would be based upon the fair market value of the Operating Partnership's
assets at the time the Unit Redemption Right is exercised (as determined in
good faith by Host REIT), and, unless otherwise agreed by the redeeming
limited partner, Host REIT and the Operating Partnership would be obligated to
satisfy the Unit Redemption Right in cash, payable on the thirtieth business
day after notice to the Operating Partnership of exercise of the Unit
Redemption Right.
NO WITHDRAWAL BY LIMITED PARTNERS
No limited partner has the right to withdraw from or reduce his capital
contribution to the Operating Partnership, except as a result of the
redemption, exchange or transfer of OP Units pursuant to the terms of the
Partnership Agreement.
ISSUANCE OF LIMITED PARTNERSHIP INTERESTS
Host REIT is authorized, without the consent of the limited partners, to
cause the Operating Partnership to issue additional OP Units to Host REIT, to
the limited partners or to other persons for such consideration and
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upon such terms and conditions as Host REIT deems appropriate. The Operating
Partnership also may issue to any of the foregoing persons or entities
partnership interests in different series or classes, which may be senior to
the OP Units, including with respect to distributions and upon liquidation. If
additional OP Units or partnership interests in different series or classes of
equity securities are issued to Host REIT, then Host REIT must issue
additional Host REIT Common Stock or securities having substantially similar
rights to such partnership interests, and must contribute the proceeds
received by Host REIT from such issuance to the Operating Partnership.
Consideration for additional partnership interests may be cash or any property
or other assets permitted by the Delaware Act. No limited partner has
preemptive, preferential or similar rights with respect to capital
contributions to the Operating Partnership or the issuance or sale of any
partnership interests therein.
MEETINGS; VOTING
Meetings of the limited partners may be called only by Host REIT, on its own
motion or upon written request of limited partners owning at least 25% of the
then outstanding OP Units (including those held by Host REIT). Limited
partners may vote either in person or by proxy at meetings. Any action that is
required or permitted to be taken by the limited partners may be taken either
at a meeting of the limited partners or without a meeting if consents in
writing setting forth the action so taken are signed by limited partners
holding Percentage Interests which are not less than the minimum Percentage
Interest that would be necessary to authorize or take such action at a meeting
of the limited partners at which all limited partners entitled to vote on such
action were present. On matters as to which limited partners are entitled to
vote, each limited partner (including Host REIT to the extent it holds limited
partnership interests) will have a vote equal to its Percentage Interest. A
transferee of OP Units who has not been admitted as a substituted limited
partner with respect to such OP Units will have no voting rights with respect
to such OP Units, even if such transferee holds other OP Units as to which it
has been admitted as a limited partner. The Partnership Agreement does not
provide for annual meetings of the limited partners, and Host REIT does not
anticipate calling such meetings.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed by Host REIT or by
limited partners owning at least 25% of the then outstanding OP Units.
Generally, the Partnership Agreement may be amended with the approval of Host
REIT, as general partner, and limited partners (including Host REIT) holding
Percentage Interests that are more than 50% of the aggregate Percentage
Interests of the outstanding limited partnership interests entitled to vote
thereon. Certain provisions regarding, among other things, the rights and
duties of Host REIT as general partner (e.g., restrictions on Host REIT's
power to conduct businesses other than owning OP Units, the dissolution of the
Operating Partnership or the rights of limited partners), may not be amended
without the approval of limited partners (excluding Host REIT) holding
Percentage Interests that are more than 50% of the aggregate Percentage
Interests of the outstanding limited partnership interests entitled to vote
thereon. Notwithstanding the foregoing, Host REIT, as general partner, will
have the power, without the consent of the limited partners, to amend the
Partnership Agreement as may be required to (i) add to the obligations of Host
REIT as general partner or surrender any right or power granted to Host REIT
as general partner, (ii) reflect the admission, substitution, termination or
withdrawal of partners in accordance with the terms of the Partnership
Agreement, (iii) establish the rights, powers, duties and preferences of any
additional partnership interests issued in accordance with the terms of the
Partnership Agreement, (iv) reflect a change that does not materially
adversely affect any limited partner, or cure any ambiguity, correct or
supplement any provisions of the Partnership Agreement not inconsistent with
law or with other provisions of the Partnership Agreement, or make other
changes concerning matters under the Partnership Agreement that are not
otherwise inconsistent with the Partnership Agreement or applicable law or (v)
satisfy any requirements of federal, state or local law.
Certain amendments that would, among other things, (i) convert a limited
partner's interest into a general partner's interest, (ii) modify the limited
liability of a limited partner, (iii) alter the interest of a partner in
profits or losses, or the rights to receive any distributions (except as
permitted under the Partnership Agreement with respect to the admission of new
partners or the issuance of additional OP Units (including partnership
interests in a different class or series to the extent otherwise authorized
under the Partnership Agreement), which actions
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will have the effect of changing the percentage interests of the partners and
thus altering their interests in profits, losses and distributions), (iv)
amend the limited partners' right to transfer or (v) alter the Unit Redemption
Right, must be approved by Host REIT and each limited partner that would be
adversely affected by such amendment.
BOOKS AND REPORTS
Host REIT is required to keep the Operating Partnership's books and records
at the principal office of the Operating Partnership. The books of the
Operating Partnership are required to be maintained for financial and tax
reporting purposes on an accrual basis. The limited partners will have the
right to receive copies of the most recent Commission filings by Host REIT and
the Operating Partnership, the Operating Partnership's federal, state and
local income tax returns, a list of limited partners, the Partnership
Agreement, the partnership certificate and all amendments thereto and certain
information about the capital contributions of the partners. Host REIT may
keep confidential from the limited partners any information that Host REIT
believes to be in the nature of trade secrets or other information the
disclosure of which Host REIT in good faith believes is not in the best
interests of the Operating Partnership or which the Operating Partnership is
required by law or by agreements with unaffiliated third parties to keep
confidential.
Host REIT will furnish to each limited partner, no later than the date on
which Host REIT mails its annual report to its stockholders, an annual report
containing financial statements of the Operating Partnership (or Host REIT, if
it prepares consolidated financial statements including the Operating
Partnership) for each fiscal year, including a balance sheet and statements of
operations, cash flow, partners' equity and changes in financial position. The
financial statements will be audited by a nationally recognized firm of
independent public accountants selected by Host REIT. In addition, if and to
the extent that Host REIT mails quarterly reports to its stockholders, Host
REIT will furnish to each limited partner, no later than the date on which
Host REIT mails such reports to its stockholders, a report containing
unaudited financial statements of the Operating Partnership (or Host REIT, if
it prepares consolidated financial statements including the Operating
Partnership) as of the last day of the calendar quarter and such other
information as may be required by applicable law or regulation or as Host REIT
deems appropriate.
Host REIT will use reasonable efforts to furnish to each limited partner,
within 90 days after the close of each taxable year, the tax information
reasonably required by the limited partners for federal and state income tax
reporting purposes.
POWER OF ATTORNEY
Pursuant to the terms of the Partnership Agreement, each limited partner and
each assignee appoints Host REIT, any liquidator and the authorized officers
and attorneys-in-fact of each, as such limited partner's or assignee's
attorney-in-fact to do the following: execute, swear to, acknowledge, deliver,
file and record in the appropriate public offices various certificates,
documents and other instruments (including, among other things, the
Partnership Agreement and the certificate of limited partnership and all
amendments or restatements thereof) that Host REIT deems appropriate or
necessary to effectuate the terms or intent of the Partnership Agreement. The
Partnership Agreement provides that such power of attorney is irrevocable,
will survive the subsequent incapacity of any limited partner and the transfer
of all or any portion of such limited partner's or assignee's OP Units and
will extend to such limited partner's or assignee's heirs, successors, assigns
and personal representatives.
DISSOLUTION, WINDING UP AND TERMINATION
The Operating Partnership will continue until December 31, 2098, unless
sooner dissolved and terminated. The Operating Partnership will be dissolved
prior to the expiration of its term and its affairs wound up upon the
occurrence of the earliest of: (i) the withdrawal of Host REIT as general
partner without the permitted transfer of Host REIT's interest to a successor
general partner (except in certain limited circumstances); (ii) an election to
dissolve the Operating Partnership prior to December 31, 2058 made by Host
REIT with the consent of the
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limited partners who hold 90% of the OP Units (including OP Units held by Host
REIT), (iii) the sale of all or substantially all of the Operating
Partnership's assets and properties for cash or for marketable securities;
(iv) the entry of a decree of judicial dissolution of the Operating
Partnership pursuant to the provisions of the Delaware Act; (v) the entry of a
final non-appealable order for relief in a bankruptcy proceeding of the
general partner, or the entry of a final non-appealable judgment ruling that
the general partner is bankrupt or insolvent (except that, in either such
case, in certain circumstances the limited partners (other than Host REIT) may
vote to continue the Operating Partnership and substitute a new general
partner in place of Host REIT); or (vi) an election by Host REIT in its sole
and absolute discretion on or after December 31, 2058. Upon dissolution, Host
REIT, as general partner, or any liquidator will proceed to liquidate the
assets of the Operating Partnership and apply the proceeds therefrom in the
order of priority set forth in the Partnership Agreement.
OWNERSHIP LIMITATION
In order to help the Operating Partnership avoid being treated as a
corporation for federal income tax purposes, the Partnership Agreement
expressly provides that no Person (other than Host REIT and the wholly owned
subsidiaries (direct and indirect) thereof) or Persons acting as a group may
own, actually or constructively, more than 4.9% by value of any class of
interests in the Operating Partnership. The Partnership Agreement contains
self-executing mechanisms intended to enforce this prohibition. For a
description of the consequences of the Operating Partnership being treated as
a corporation for federal income tax purposes, see "Federal Income Tax
Consequences--Tax Aspects of Host REIT's Ownership of OP Units." As general
partner of the Operating Partnership, Host REIT, in its sole and absolute
discretion, may waive or modify this ownership limitation if it is satisfied
that ownership in excess of this limit will not cause the Operating
Partnership to be treated as a corporation for federal income tax purposes.
Host has agreed to grant The Blackstone Group an exception to this prohibition
subject to the condition that neither The Blackstone Group, nor any person or
entity that would be considered to own OP Units owned by The Blackstone Group,
may own, directly or by attribution, 9.8% or more of the stock of Crestline or
the equity of any of the Lessees.
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ERISA CONSIDERATIONS
STATUS OF HOST REIT AND THE OPERATING PARTNERSHIP UNDER ERISA
This section discusses the extent to which the fiduciary requirements of
ERISA and the prohibited transaction provisions of ERISA and the Code would
apply to Host REIT or the Operating Partnership because one or more investors
in Host REIT or the Operating Partnership is an ERISA Plan or Other Plan.
If the underlying assets of Host REIT are deemed to be assets of an
investing ERISA Plan and Other Plan ("Plan Assets"), (i) the prudence
standards and other provisions of Part 4 of Title I of ERISA and the
prohibited transaction provisions of ERISA and the Code would be applicable to
any transactions involving Host REIT's assets, and (ii) persons who exercise
any authority or control over Host REIT's assets, or who provide investment
advice to Host REIT for a fee or other compensation, would be (for purposes of
ERISA and the Code) fiduciaries of ERISA Plans and Other Plans that acquire
Host REIT Common Stock of Host REIT. Similarly, if the underlying assets of
the Operating Partnership are deemed to be Plan Assets, (i) the prudence
standards and other provisions of Part 4 of Title I of ERISA and the
prohibited transaction provisions of ERISA and the Code would be applicable to
any transactions involving the Operating Partnership's assets, and (ii)
persons who exercise any authority or control over the Operating Partnership's
assets, or who provide investment advice to the Operating Partnership for a
fee or other compensation, would be (for purposes of ERISA and the Code)
fiduciaries of ERISA Plans and Other Plans that acquire Host REIT Common Stock
of Host REIT.
The United States Department of Labor ("DOL"), which has certain
administrative responsibility over ERISA Plans and certain Other Plans, has
issued a regulation defining plan assets for certain purposes ("DOL
Regulation"). The DOL Regulation generally provides that when an ERISA Plan or
Other Plan acquires a security that is an equity interest in an entity and
that security is neither a "publicly offered security" nor a security issued
by an investment company registered under the 1940 Act, the assets of the
ERISA Plan or Other Plan include both the equity interest and an undivided
interest in each of the underlying assets of the entity, unless it is
established either that the entity is an "operating company" (as defined in
the DOL Regulation) or that equity participation in the entity by "benefit
plan investors" is not "significant."
The DOL Regulation defines a "publicly offered security" as a security that
is "widely-held," "freely transferable," and either part of a class of
securities registered under the Exchange Act, or sold pursuant to an effective
registration statement under the Securities Act (provided the securities are
registered under the Exchange Act within 120 days, or such later time as may
be allowed by the Commission (the "Registration Period"), after the end of the
fiscal year of the issuer during which the offering occurred). Host REIT
anticipates that the Host REIT Common Stock will be considered "publicly
offered securities," and therefore the underlying assets of Host REIT would
not be deemed to be Plan Assets of any ERISA Plan or Other Plan that invests
in the Host REIT Common Stock.
The DOL Regulation defines "benefit plan investors" to consist of any
employee benefit plan as defined in section 3(3) of ERISA, any Other Plan, or
any entity whose underlying assets include Plan Assets by reason of an
employee benefit plan's investment in the entity. Equity participation in an
entity by "benefit plan investors" is deemed "significant" if, immediately
after the most recent acquisition of any equity interest in the entity, 25% or
more of the value of any class of equity interest is held by "benefit plan
investors." Furthermore, for purposes of determining the percentage interest
in a class of equity held by "benefit plan investors," the value of interests
held by persons who either have discretionary authority or control over the
entity's assets, or who provide investment advice for a fee, or are affiliates
of such persons, is disregarded.
Based upon the value of the interests in the Partnerships owned by "benefit
plan investors" relative to the value of the interests in the Partnerships
owned by other Partnership investors, the expected Exchange Value for each of
the Partnerships, and the percentage of the Operating Partnership that the
Blackstone Entities will own immediately following the REIT Conversion, the
Operating Partnership believes that immediately following the REIT Conversion
"benefit plan investors" will not own a "significant" percentage of OP Units,
and, thus, the underlying assets of the Operating Partnership will not
constitute Plan Assets of any ERISA Plan or Other Plan that owns OP Units.
Furthermore, the Partnership Agreement will restrict ownership of OP Units by
benefit plan investors to less than 25%.
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FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION
The following discussion summarizes the federal income tax consequences
reasonably anticipated to be material to a Host stockholder in connection with
the Merger, the Initial E&P Distribution, the OP Contribution, and the
ownership and disposition of Host REIT Common Stock. The following discussion
is intended to address only those federal income tax consequences that are
generally relevant to all Host stockholders. Accordingly, it does not discuss
all aspects of federal income taxation that might be relevant to a specific
Host stockholder in light of his particular investment or tax circumstances.
Therefore, it is imperative that a Host stockholder review the following
discussion and consult with his own tax advisors to determine the interaction
of his individual tax situation with the anticipated tax consequences of the
Merger, the Initial E&P Distribution, the OP Contribution, and the subsequent
ownership and disposition of Host REIT Common Stock.
The following discussion provides general information only, is not
exhaustive of all possible tax considerations and is not intended to be (and
should not be construed as) tax advice. For example, this summary does not
give a detailed description of any state, local or foreign tax considerations.
In addition, the discussion does not purport to deal with all aspects of
taxation that may be relevant to a Host stockholder subject to special
treatment under the federal income tax laws, including, without limitation,
insurance companies, financial institutions or broker-dealers, tax-exempt
organizations (except to the extent discussed under the headings "Federal
Income Tax Consequences of the Initial E&P Distribution--Tax Consequences of
the Initial E&P Distribution to Tax-Exempt Host Stockholders" and "Taxation of
Tax-Exempt Stockholders of Host REIT") or foreign corporations and persons who
are not citizens or residents of the United States (except to the extent
discussed under the headings "Federal Income Tax Consequences of the Initial
E&P Distribution--Tax Consequences of the Initial E&P Distribution to Non-U.S.
Stockholders" and "Taxation of Non-U.S. Stockholders").
The information in this section is based on the Code, current, temporary and
proposed Treasury Regulations thereunder, the legislative history of the Code,
current administrative interpretations and practices of the IRS (including its
practices and policies as endorsed in private letter rulings, which are not
binding on the IRS), and court decisions, all as of the date hereof. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and court decisions will not significantly
change the current law or adversely affect existing interpretations of current
law. Any such change could apply retroactively to transactions preceding the
date of the change. No assurance can be provided that the statements set forth
herein (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged. Except as described
under "--Federal Income Tax Consequences of the OP Contribution," neither Host
nor Host REIT has requested or plans to request any rulings from the IRS
concerning the tax consequences of the OP Contribution, the Merger, the
Initial E&P Distribution, and the subsequent ownership and disposition of Host
REIT Common Stock.
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to Host, Host REIT and
the Operating Partnership, has delivered to Host and Host REIT an opinion to
the effect that the discussion herein under the heading "Federal Income Tax
Consequences," to the extent that it contains descriptions of applicable
federal income tax law, is correct in all material respects (see Appendix C
for this opinion). The opinion, however, does not purport to address the tax
consequences of the Merger, the Initial E&P Distribution, the OP Contribution,
and the subsequent ownership and disposition of Host REIT Common Stock to any
particular Host stockholder in light of his particular circumstances, nor does
it purport to predict whether, and the extent to which, future events and
transactions, only some of which may be within the control of Host REIT will
have a material adverse impact on the income tax positions of Host REIT
stockholders. The opinion is based on the Code and Treasury Regulations in
effect on the date hereof, current administrative interpretations and
positions of the IRS and existing court decisions. No assurance can be given
that future legislation, Treasury Regulations, administrative interpretations
and court decisions will not significantly change the law or the above
conclusions reached by counsel. In addition, any such change could apply
retroactively to transactions preceding the date of change.
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Moreover, opinions of counsel merely represent counsel's best judgment with
respect to the probable outcome on the merits and are not binding on the IRS
or the courts. Accordingly, even if there is no change in applicable law, no
assurance can be provided that such opinion (which does not bind the IRS or
the courts) will not be challenged by the IRS or will be sustained by a court
if so challenged.
The following discussion is not intended to be, and should not be construed
by a Host stockholder as, tax advice. THE SPECIFIC TAX ATTRIBUTES OF A
PARTICULAR HOST STOCKHOLDER COULD HAVE A MATERIAL IMPACT ON THE TAX
CONSEQUENCES OF THE MERGER, THE INITIAL E&P DISTRIBUTION, THE OP CONTRIBUTION
AND/OR THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF HOST REIT COMMON STOCK.
THEREFORE, IT IS ESSENTIAL THAT EACH HOST STOCKHOLDER CONSULT WITH HIS OWN TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
STOCKHOLDER'S PERSONAL TAX SITUATION, AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. THE
FOLLOWING DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Code, and the federal income tax consequences summarized below are
based on the assumption that the Merger will so qualify. Hogan & Hartson,
counsel for Host and Host REIT, has delivered to Host and Host REIT an opinion
to the effect that the Merger will be treated for federal income tax purposes
as a reorganization under Section 368(a) of the Code (see Appendix C for this
opinion). The opinion, however, does not purport to address the tax
consequences of the Merger to any particular Host REIT stockholder in light of
his particular circumstances. It is based on (i) certain factual assumptions
and representations made by Host and Host REIT, and (ii) the Code and Treasury
Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and court decisions will not significantly
change the law or the above conclusions reached by counsel. In addition, any
such change could apply retroactively to transactions preceding the date of
change. Moreover, opinions of counsel merely represent counsel's best judgment
with respect to the probable outcome on the merits and are not binding on the
IRS or the courts. Accordingly, even if there is no change in applicable law,
no assurance can be provided that such opinion (which does not bind the IRS or
the courts) will not be challenged by the IRS or will be sustained by a court
if so challenged. No ruling will be sought from the IRS regarding the Merger.
Because the Merger will qualify as a reorganization under the Code, no gain
or loss will be recognized by Host or Host REIT as a result of the Merger. In
addition, no gain or loss will be recognized by a Host stockholder (other than
certain Host stockholders who are not considered "U.S. persons" for purposes
of the Code and who own (or have owned) in excess of 5% of Host Common Stock)
upon the conversion of such holder's shares of Host Common Stock into Host
REIT Common Stock pursuant to the Merger. The initial tax basis of the Host
REIT Common Stock received by such a former Host stockholder pursuant to the
Merger should be the same as the stockholder's adjusted tax basis in the
shares of Host Common Stock being converted pursuant to the Merger (subject to
any adjustment resulting from the Initial E&P Distribution). The holding
period of the Host REIT Common Stock received by such a former Host
stockholder pursuant to the Merger should include the holder's holding period
with respect to the shares of Host Common Stock being converted pursuant to
the Merger, provided that such Host Common Stock is held as a capital asset as
of the Effective Time. See also "Federal Income Tax Consequences of the
Initial E&P Distribution."
Certain Host stockholders that are nonresident alien individuals, foreign
corporations, foreign partnerships or foreign estates or trusts (collectively,
"Non-U.S. Stockholders") could recognize gain or loss pursuant to the Merger.
In particular, because Host is a "U.S. real property holding company" for the
purposes of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), but Host REIT anticipates qualifying as a "domestically controlled
REIT" for purposes of FIRPTA, a Non-U.S. Stockholder who at any time during
the
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five-year period ending on the Effective Date owned more than 5% of the Host
Common Stock would recognize gain to the extent that the fair market value of
the Host REIT Common Stock he receives in the Merger exceeds his adjusted tax
basis in his Host Common Stock. Any such Non-U.S. Stockholder would be subject
to regular United States income tax with respect to such gain in the same
manner as a "U.S. person" for purposes of the Code (subject to any applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of a 30% branch
profits tax in the case of foreign corporations). See "Taxation of Non-U.S.
Stockholders--Sales of Host REIT Common Stock" for a related discussion of the
impact of the application of FIRPTA.
FEDERAL INCOME TAX CONSEQUENCES OF THE INITIAL E&P DISTRIBUTION
As described more fully above in "The REIT Conversion--The Initial E&P
Distribution," Host stockholders will receive in the Initial E&P Distribution
Crestline common stock and cash or other consideration. Host currently
contemplates that such other consideration will be in the form of the Special
Dividend, which is payable, at each Host stockholder's election, in cash or
Host Common Stock (or, if the Merger has occurred, Host REIT Common Stock).
Although no assurance can be provided that such other consideration will take
this form, the following discussion is based on the assumption that it will.
The Initial E&P Distribution will assist Host REIT to meet the requirement
that it distribute to its stockholders its accumulated pre-REIT E&P. For a
detailed discussion of this requirement, see "--Federal Income Taxation of
Host REIT Following the Merger--Requirements for Qualification," below.
Tax Consequences of the Initial E&P Distribution to U.S. Stockholders. As
used herein, the term "U.S. Stockholder" means a Host stockholder who (for
United States federal income tax purposes) is (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source, or (iv) a
trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
A U.S. Stockholder will include the fair market value of his share of the
Initial E&P Distribution in gross income as ordinary income to the extent that
the Initial E&P Distribution is made out of the U.S. Stockholder's share of
the portion of the current and accumulated E&P of Host and Host REIT allocable
to the Initial E&P Distribution. The income attributable to the distribution
of the Crestline stock will be recognized when the Host stockholders become
the owners of that stock, which is currently anticipated to occur in 1998. In
addition, although the law is not entirely clear, Host intends to take the
position that the income attributable to the Special Dividend will be
recognized in 1999 when it is determined what a Host stockholder will receive
(i.e., cash or stock, and if stock, the value thereof) and such cash or stock
is payable to the Host stockholders. Under this approach, the fair market
value of a U.S. Stockholder's share of the Initial E&P Distribution would
equal the sum of (i) the fair market value (on the distribution date, which
currently is expected to be in 1998) of the Crestline common stock that he
receives in the Initial E&P Distribution, (ii) the amount of cash he receives
in lieu of fractional shares of Crestline common stock, (iii) the amount of
cash or the fair market value of the stock he receives pursuant to the Special
Dividend, plus (iv) the amount of any other cash and fair market value of any
other consideration he receives in the Initial E&P Distribution. Thus, insofar
as a U.S. Stockholder receives cash pursuant to the Special Dividend, the
income recognized would include the amount of the cash he so receives. With
respect to a U.S. Stockholder that receives Host (or Host REIT) stock pursuant
to the Special Dividend, the law is not entirely clear, but Host intends to
take the position that the fair market value of the consideration he receives
will equal the sum of (i) fair market value of the stock as of the end of the
period during which the election under the Special Dividend can be made, plus
(ii) the amount of any cash he receives in lieu of fractional shares of such
stock. No assurance can be provided, however, that the IRS would not challenge
this position regarding the taxation of the cash or stock received pursuant to
the Special Dividend (for example, contending that the ability to make the
election provided for under the Special Dividend is property that must be
valued as of the record date of the Special Dividend or possibly the date on
which notice of the Special Dividend is distributed to the Host stockholders)
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and included in income on such date, which currently is expected to be in
1998), or that such an IRS challenge would not be sustained by a court. In
determining whether the Initial E&P Distribution is made out of the current
and accumulated E&P of Host and Host REIT, such E&P will be allocated pursuant
to complex rules under the Code in the following order: first, to the portion
of the Initial E&P Distribution that is distributed on the distribution date
(which Host intends to take the position consists only of the Crestline common
stock), and second, to the portion of the Initial E&P Distribution that is
distributed after the distribution date (which, although the law is not
entirely clear, Host intends to take the position will include the cash and
stock distributed pursuant to the Special Dividend).
Host currently estimates that the Initial E&P Distribution will be
approximately $2.10 to $2.50 per share of Host Common Stock (of which
approximately $0.80 to $1.20 per share would be attributable to the Special
Dividend, assuming that a Host stockholder were to elect to receive cash). No
assurance can be provided, however, that this estimate will be accurate. If
the value of the Initial E&P Distribution is greater than Host's current
estimate (for example, because the value of the Crestline common stock
received is higher than currently estimated or because a stockholder receives
stock pursuant to the Special Dividend and the value of such stock is higher
than the dollar amount of the cash that could have been received pursuant
thereto), then a U.S. Stockholder will include such additional amount in gross
income as ordinary income to the extent of the U.S. Stockholder's share of the
portion of the current and accumulated E&P of Host and Host REIT allocable to
the Initial E&P Distribution.
A U.S. Stockholder will have a basis in the Crestline common stock he
receives in the Initial E&P Distribution equal to the fair market value of
such stock on the distribution date and his holding period in such stock will
begin on the day after the distribution date. Although the law is not entirely
clear, consistent with the approach outlined in the preceding paragraph, Host
intends to take the position that a U.S. Stockholder who elects to receive
Host REIT Common Stock pursuant to the Special Dividend would have a basis in
such stock equal to the fair market value of such stock on the day after the
final day of the election period under the Special Dividend, and his holding
period in such stock would begin on that day.
Host currently believes that the substantial majority, if not all, of the
Initial E&P Distribution will be considered made out of the portion of Host
and Host REIT's current and accumulated E&P allocable to the Initial E&P
Distribution. The calculation of such E&P, however, will be very complex. The
amount will include (i) the allocated consolidated E&P of Host (including each
of its predecessors) accumulated from 1929, the first year that the
predecessor of Host was a "C" corporation, through and including Host's 1998
taxable year, (ii) the current E&P of Host and Host REIT in 1998, and (iii) to
the extent the Initial E&P Distribution occurs in 1999, the current E&P of
Host and Host REIT in 1999. In addition, the calculation depends upon a number
of factual and legal interpretations related to the activities and operations
of Host and its corporate affiliates during its entire corporate existence and
is subject to review and challenge by the IRS. There can be no assurance that
Host and Host REIT's calculation of this E&P will be respected by the IRS or
that a challenge to such calculations by the IRS would not be sustained by a
court. Hogan & Hartson will express no opinion as to the amount of the current
and accumulated E&P of Host and Host REIT.
To the extent that the sum of the amount of the Initial E&P Distribution
received by a U.S. Stockholder exceeds his share of the portion of Host and
Host REIT's current and accumulated E&P allocable to the Initial E&P
Distribution, it will be treated first as a tax-free return of capital to such
U.S. Stockholder, reducing the adjusted basis in his Host Common Stock by the
amount of such excess (but not below zero) and then, if such basis is reduced
to zero and there is remaining excess, as capital gain to the extent of such
remaining excess (provided that such Host Stockholder has held the Host Common
Stock as a capital asset).
Backup Withholding for the Initial E&P Distribution. Under the backup
withholding rules, a U.S. Stockholder may be subject to backup withholding at
the rate of 31% with respect to the Initial E&P Distribution paid unless such
holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. See "--Taxation of Non-U.S. Stockholders."
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Tax Consequences of the Initial E&P Distribution to Tax-Exempt Host
Stockholders. Provided that a tax-exempt Host stockholder (except certain tax-
exempt Host stockholders described in the following sentence) has not held its
Host Common Stock as "debt financed property" within the meaning of the Code
and such Host Common Stock is not otherwise used in a trade or business, the
Initial E&P Distribution will not constitute unrelated business taxable income
("UBTI"). For a tax-exempt Host stockholder that is a social club, voluntary
employee benefit association, supplemental unemployment benefit trust or
qualified group legal services plan exempt from federal income taxation under
Code Sections 501 (c)(7), (c)(9), (c)(17) or (c)(20), respectively, the
Initial E&P Distribution will constitute UBTI unless the organization is
properly able to deduct amounts set aside or placed in reserve for certain
purposes so as to offset the income generated by its investment in Host. Such
Host stockholders should consult their own tax advisors concerning these "set
aside" and reserve requirements.
Tax Consequences of the Initial E&P Distribution to Non-U.S. Stockholders. A
Non-U.S. Stockholder will treat the fair market value of the Initial E&P
Distribution as ordinary income to the extent of the Non-U.S. Stockholder's
share of the current and accumulated E&P of Host REIT allocable to the Initial
E&P Distribution. For a discussion regarding the fair market value of the
Initial E&P Distribution and the extent to which the Initial E&P Distribution
will be attributable to such E&P, see "--Tax Consequences of the Initial E&P
Distribution to U.S. Stockholders" above.
For Non-U.S. Stockholders, the Initial E&P Distribution will be subject to
withholding of United States federal income tax on a gross basis (that is,
without allowance of deductions) at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless it is treated as
effectively connected with the conduct by the Non-U.S. Stockholder of a United
States trade or business. Certain certification and disclosure requirements
must be satisfied to be exempt from withholding under the effectively
connected income exemption. If the Initial E&P Distribution is effectively
connected with such a trade or business, a Non-U.S. Stockholder will be
subject to tax on the Initial E&P Distribution on a net basis (that is, after
allowance of deductions) at graduated rates, in the same manner as U.S.
Stockholders are taxed with respect to the Initial E&P Distribution, and
generally will not be subject to withholding. A Non-U.S. Stockholder that is a
corporation may also be subject to an additional branch profits tax on the
Initial E&P Distribution at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty. See "--Taxation of Non-U.S. Stockholders,"
below.
To the extent that the sum of the fair market value of the Initial E&P
Distribution received by a Non-U.S. Stockholder exceeds his share of the
portion of Host and Host REIT's current and accumulated E&P allocable to the
Initial E&P Distribution, it will be treated first as a tax-free return of
capital to such Non-U.S. Stockholder, reducing the adjusted basis in his Host
Common Stock (or Host REIT Common Stock, to the extent the Initial E&P
Distribution occurs after the Merger) by the amount of such excess (but not
below zero). If such basis is reduced to zero and there is remaining excess,
the Initial E&P Distribution will give rise to gain from the sale or exchange
of such stock. For a discussion of the federal income tax consequences of a
sale or exchange of Host REIT Common Stock by a Non-U.S. Stockholder, see "--
Taxation of Non-U.S. Stockholders--Sales of Host REIT Common Stock," below.
As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that Host would be required to withhold 10%
of any distribution in excess of Host and Host REIT's current and accumulated
E&P. Consequently, although Host currently intends to withhold at a rate of
30% on the entire amount of any distribution (or a lower applicable treaty
rate), to the extent that Host does not do so, any portion of the Initial E&P
Distribution not subject to withholding at a rate of 30% (or a lower
applicable treaty rate) will be subject to withholding at a rate of 10%.
However, a Non-U.S. Stockholder may seek a refund of such amounts from the IRS
if it subsequently determined that the Initial E&P Distribution was, in fact,
in excess of such E&P, and the amount withheld exceeded the Non-U.S.
Stockholder's United States tax liability, if any, with respect to the Initial
E&P Distribution.
To the extent that withholding tax is owed with respect to any Non-U.S.
Stockholder with respect to Crestline common stock received in the Initial E&P
Distribution and any Host (or Host REIT) stock received pursuant to exercise
of the Election Rights, Host anticipates that the transfer agent would sell in
the market a
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portion of the shares of stock distributable to such Non-U.S. Stockholder to
pay such withholding taxes and the actual number of shares of Crestline common
stock and any Host (or Host REIT) stock received pursuant to exercise of the
Election Rights would be net of any shares sold to pay such withholding taxes.
Tax Consequences to Host of the Distribution of Crestline Common
Stock. Generally, a corporation that distributes property (other than its own
stock) to its shareholders will recognize any gain realized on that
distribution, but will not recognize any loss realized. Accordingly, Host
would recognize gain on the distribution of the Crestline common stock to the
extent that the fair market value of the Crestline common stock were to exceed
Host's adjusted basis in the stock. Conversely, Host would not be able to
recognize any loss if the fair market value of the Crestline common stock were
to be less than Host's adjusted tax basis in that stock. Based on its current
estimate of the fair market value of the Crestline common stock, which
estimate is described above, Host currently believes that it will not
recognize gain on the distribution of the Crestline common stock, but that it
may realize a loss, which loss cannot be recognized for federal income tax
purposes. Similar considerations apply with respect to the delivery of
Crestline common stock to the Blackstone Entities. Host will not recognize any
gain or loss in connection with any distribution of Host Common Stock, Host
REIT Common Stock or cash as part of the Special Dividend.
FEDERAL INCOME TAX CONSEQUENCES OF THE OP CONTRIBUTION
As described more fully above in "The Restructuring Transactions--The OP
Contribution," Host will contribute certain of its assets (excluding the
Crestline common stock, cash and other consideration to be distributed
pursuant to the Initial E&P Distribution and certain other de minimis assets)
to the Operating Partnership in exchange for OP Units, preferred partnership
interests in the Operating Partnership (if Host has outstanding any preferred
stock), and the assumption by the Operating Partnership of all liabilities of
Host (other than liabilities of Crestline). Host has obtained an opinion of
Hogan & Hartson to the effect that the discussion in this section, to the
extent it contains descriptions of federal income tax law, is correct in all
material respects, but Host is not obtaining an opinion of outside counsel as
to the actual tax consequences to it of the OP Contribution.
Section 721 of the Code provides that no gain or loss is recognized in the
case of a contribution of property to a partnership in exchange for an
interest in the partnership. Accordingly, Section 721 generally would apply to
prevent the recognition of gain by Host in the OP Contribution. However, there
are several potential exceptions to the availability of nonrecognition
treatment under Section 721 that could result in Host recognizing gain in
connection with the OP Contribution.
First, the assumption by the Operating Partnership of Host liabilities would
result in a deemed distribution of cash to Host in an amount equal to the
excess, if any, of such liabilities over Host's share of the liabilities of
the Operating Partnership immediately after the OP Contribution and the
Partnership Mergers. To the extent any such deemed distribution of cash
exceeds Host's adjusted tax basis in the assets it transfers to the Operating
Partnership, Host will recognize gain in the OP Contribution. However, based
upon the amount of its liabilities outstanding and the adjusted tax basis of
its various assets, Host currently believes that immediately after the OP
Contribution and the Partnership Mergers it will not be deemed to have
received a deemed cash distribution that would result in the recognition of
gain in the OP Contribution.
Second, the OP Contribution would not be tax free to Host to the extent that
it were treated as a "disguised sale" of all or a portion of the assets Host
contributes to the Operating Partnership under the Code or Treasury
Regulations. Section 707 of the Code and the Treasury Regulations thereunder
(the "Disguised Sale Regulations") generally provide that, unless one of
certain prescribed exceptions is applicable, a partner's contribution of
property to a partnership and a simultaneous transfer of money or other
consideration (other than an interest in the partnership) from the partnership
to the partner will be treated as a sale, in whole or in part, of such
property by the partner to the partnership. For purposes of these rules,
assumptions of certain liabilities are treated as transfers of money or other
property from the partnership to the partner which may give rise to a
disguised sale. In addition, the Disguised Sale Regulations provide generally
that transfers of money or other
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consideration between a partnership and a partner that are made within two
years of each other are presumed to be a sale unless the facts and
circumstances clearly establish that either the transfers do not constitute a
sale or an exception to disguised sale treatment applies.
One exception to "disguised sale" treatment in the Disguised Sale
Regulations relates to the assumption of "qualified liabilities" in connection
with a contribution of property to a partnership. A second exception to
"disguised sale" treatment relates to distributions of "operating cash flow,"
which are presumed not to be a part of a sale of property to a partnership
unless the facts and circumstances clearly establish that such distributions
are part of a sale. A third exception to "disguised sale" treatment relates to
distributions made to partners to reimburse them for certain "preformation"
capital expenditures. The application of these and other exceptions to the
Disguised Sale Regulations are highly complex and depend on a number of
factual determinations and other outside events which may or may not occur,
but Host currently believes that even if a portion of the OP Contribution were
treated as a disguised sale under the Disguised Sale Regulations, Host would
not recognize a material amount of gain in the OP Contribution.
Third, if the OP Contribution were considered to be a transfer to an
"investment company," as defined in the Treasury Regulations, gain would be
recognized on such transfer under Section 721 of the Code. In the case of a
transfer of property to a partnership, the Code and the Treasury Regulations
provide that such transfer would be treated as having been made to an
investment company if the transfer results in a diversification of the
interests of two or more transferors, and the transferee is a partnership more
than 80% of the value of whose assets are "stock and securities." Although the
OP Contribution (when considered together with the Partnership Mergers) will
result in the diversification of the interests of two or more transferors, no
significant portion of the Operating Partnership's assets will constitute
"stock and securities" as defined in the Code. Accordingly, Host currently
believes that the transfers to the Operating Partnership will not constitute
transfers to an "investment company," as defined in the current Treasury
Regulations. It should be noted in this regard, however, that the Operating
Partnership might not meet the IRS's guidelines for obtaining an advance
ruling with respect to this issue.
Although the application of the foregoing exceptions to nonrecognition
treatment is extremely complex, Host currently believes that such application
will not result in the recognition by Host of a material amount of gain in
connection with the OP Contribution. However, even if Host does not recognize
material gain in the OP Contribution, there are a variety of subsequent events
and transactions including (i) the sale or other taxable disposition of
appreciated assets contributed by Host to the Operating Partnership in the OP
Contribution (including one or more of the Hotels contributed by Host), (ii)
the refinancing or repayment of certain liabilities secured by one or more of
the Hotels contributed to the Operating Partnership by Host in the OP
Contribution, (iii) the issuance of additional OP Units, including in
connection with the acquisition of additional properties by the Operating
Partnership in exchange for OP Units or other equity interests in the
Operating Partnership, (iv) an increase to the basis of one or more of the
Hotels contributed to the Operating Partnership by Host in the OP Contribution
resulting from capital expenditures and (v) the elimination over time of the
disparity between the current tax basis of one or more of the Hotels
contributed to the Operating Partnership by Host in the OP Contribution and
the "book basis" of such assets (based upon their fair market value at the
time of the OP Contribution) that could cause Host REIT to recognize part or
all of the taxable gain that otherwise has been deferred pursuant to the OP
Contribution. It should be noted that Host REIT, as general partner of the
Operating Partnership, will have control over whether the Operating
Partnership will undertake specific transactions.
FEDERAL INCOME TAXATION OF HOST REIT FOLLOWING THE MERGER
General. Host REIT plans to make an election to be taxed as a REIT under
Sections 856 through 859 of the Code, effective for its first taxable year
commencing after the REIT Conversion (which Host currently expects to be the
year beginning January 1, 1999, but which might not be until the year
beginning January 1, 2000). (This election is made with the filing of Host
REIT's federal income tax return for the first taxable year for which the
election is effective.) Host REIT intends that, commencing with such first
taxable year, it will be organized and will operate in such a manner as to
qualify for taxation as a REIT under the Code, and Host REIT
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intends to continue to operate in such a manner, but no assurance can be given
that it in fact will continue to operate in such a manner so as to qualify or
remain qualified.
The sections of the Code and the corresponding Treasury Regulations that
govern the federal income tax treatment of a REIT and its stockholders are
highly technical and complex. The following sets forth a summary of the
material aspects of these rules, which summary, however, is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
Hogan & Hartson has acted as counsel to Host REIT in connection with the
REIT Conversion and Host REIT's election to be taxed as a REIT. Hogan &
Hartson has provided to Host REIT and the Operating Partnership an opinion to
the effect that, beginning with Host REIT's first full taxable year commencing
after the REIT Conversion is completed, Host REIT will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code (see Appendix D for this opinion). It
must be emphasized that this opinion is conditioned upon completion of the
REIT Conversion in the manner described in this Proxy Statement/Prospectus and
upon certain assumptions and representations made by Host REIT and the
Operating Partnership as to factual matters relating to the organization and
operation of Host REIT, the Operating Partnership, the Partnerships and
Private Partnerships, the Subsidiary Partnerships, the Non-Controlled
Subsidiaries, the Host Employee/Charitable Trust and Crestline and the
Lessees, including the economic and other terms of each Lease and the
expectations of Host REIT and the Lessees with respect thereto. In addition,
this opinion is based upon the factual representations of Host REIT concerning
its business and properties as described in this Proxy Statement/Prospectus
and assumes that all of the transactions and other actions described under
"The Restructuring Transactions" and "The REIT Conversion" and related
portions of this Proxy Statement/Prospectus and under "Federal Income Tax
Consequences" are completed in a timely fashion (which means prior to the
first day of the first taxable year for which Host REIT's election to be taxed
as a REIT will be effective, currently expected to be January 1, 1999, except
where the description thereof clearly contemplates completion of such action
subsequent thereto). Moreover, such qualification and taxation as a REIT
depends upon Host REIT's ability to meet on an ongoing basis (through actual
annual operating results, distribution levels and diversity of share
ownership) the various qualification tests imposed under the Code discussed
below, the results of which will not be reviewed by Hogan & Hartson.
Accordingly, no assurance can be given that the actual results of Host REIT's
operations for any particular taxable year will satisfy such requirements.
Further, the anticipated income tax treatment described in this Proxy
Statement/Prospectus may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time. See "--Failure of Host REIT to
Qualify as a REIT" below.
If Host REIT qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to its stockholders. This treatment would substantially eliminate
the "double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, Host REIT will be
subject to federal income tax as follows:
1. Host REIT will be taxed at regular corporate rates on any
undistributed "REIT taxable income," including undistributed net capital
gains (provided, however, that properly designated undistributed capital
gains will effectively avoid taxation at the stockholder level). A REIT's
"REIT taxable income" is the otherwise taxable income of the REIT subject
to certain adjustments, including a deduction for dividends paid.
2. Under certain circumstances, Host REIT may be subject to the
"alternative minimum tax" on its items of tax preference.
3. If Host REIT has (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate
rate on such income.
4. If Host REIT has net income from "prohibited transactions" (which are,
in general, certain sales or other dispositions of property held primarily
for sale to customers in the ordinary course of business other than
foreclosure property), such income will be subject to a 100% tax.
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5. If Host REIT should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), but has nonetheless maintained
its qualification as a REIT because certain other requirements have been
met, it will be subject to a 100% tax on an amount equal to (a) the gross
income attributable to the greater of the amount by which Host REIT fails
the 75% or 95% test multiplied by (b) a fraction intended to reflect Host
REIT's profitability.
6. If Host REIT should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, Host REIT would be subject
to a 4% excise tax on the excess of such required distribution over the sum
of amounts actually distributed and amounts retained but with respect to
which federal income tax was paid.
7. If Host REIT acquires any asset from a "C" corporation (i.e.,
generally a corporation subject to full corporate-level tax) in a
transaction in which the basis of the asset in the hands of Host REIT is
determined by reference to the basis of the asset in the hands of the "C"
corporation (a "Built-In Gain Asset"), and Host REIT recognizes gain on the
disposition of such asset during the ten-year period beginning on the date
on which such asset was acquired by Host REIT (the "Recognition Period"),
then, to the extent of the asset's "Built-In Gain" (i.e., the excess of (a)
the fair market value of such asset over (b) Host REIT's adjusted basis in
the asset, determined when Host REIT acquired the asset), such gain will be
subject to tax at the highest regular corporate rate applicable.
Host REIT will own an indirect interest in appreciated assets that Host held
before the REIT Conversion. Such appreciated assets will have a "carryover"
basis and thus will be "Built-In Gain Assets" with respect to Host REIT. Under
IRS Notice 88-19, unless Host REIT were to elect to be subject to corporate
income tax on any Built-In Gain recognized with respect to such Built-In Gain
Assets during the Recognition Period commencing on the first day of Host
REIT's first taxable year as a REIT, Host would have to pay federal corporate
income tax on the Built-In Gain at the time of the REIT Conversion. In
connection with the REIT Conversion, Host REIT will make the election provided
for in Notice 88-19 with respect to all of Host's assets that will be owned by
the Operating Partnership subsequent to the REIT Conversion. As a result of
this election, if such appreciated property is sold within the ten-year period
following the REIT Conversion, Host REIT will generally be subject to regular
corporate tax on that gain to the extent of the Built-In Gain in that property
at the time of the REIT Conversion. The total amount of gain on which Host
REIT can be taxed is limited to its net Built-In Gain (defined for these
purposes as the excess of the aggregate fair market value of its assets at the
time it became a REIT over the adjusted tax bases of those assets at that
time) at the time of the REIT Conversion. This tax could be very material,
however, and may result in the Operating Partnership and Host REIT seeking to
avoid a taxable disposition of any significant assets owned by Host at the
time of the REIT Conversion for the ten taxable years following the REIT
Conversion (even though such disposition might otherwise be in the best
interests of Host REIT).
Notwithstanding Host REIT's status as a REIT, it is likely that substantial
deferred liabilities of Host will be recognized over the next ten years
(including, but not limited to, tax liabilities attributable to Built-In Gain
Assets and deferred tax liabilities attributable to taxable income for which
neither Host REIT nor the Operating Partnership will receive corresponding
cash). In addition, the IRS could assert substantial additional liabilities
for taxes against Host for taxable years prior to the time Host REIT qualifies
as a REIT. Under the terms of the REIT Conversion and the Partnership
Agreement, the Operating Partnership will be responsible for paying (or
reimbursing Host REIT for the payment of) all such tax liabilities as well as
any other liabilities (including contingent liabilities and liabilities
attributable to litigation that Host REIT may incur), whether such liabilities
are incurred by reason of Host's activities prior to the REIT Conversion or
the activities of Host REIT subsequent thereto.
The Operating Partnership will pay (or reimburse Host REIT for) all taxes
incurred by Host REIT (except for taxes imposed on Host REIT by reason of its
failure to qualify as a REIT or to distribute to its stockholders an amount
equal to its "REIT taxable income," including net capital gains). This
obligation by the Operating Partnership would include any federal corporate
income tax imposed on Built-In Gain.
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Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more directors or
trustees; (ii) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest; (iii) which
would be taxable as a domestic corporation, but for Sections 856 through 859
of the Code; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half
of each taxable year not more than 50% in value of the outstanding stock of
which is owned, actually or constructively, by five or fewer individuals (as
defined in the Code to include certain entities) (the "not closely held"
requirement); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets.
The Code provides that conditions (i) to (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of twelve months, or during a proportionate part of a
taxable year of less than twelve months. Conditions (v) and (vi) will not
apply until after the first taxable year for which Host REIT makes the
election to be taxed as a REIT. For purposes of conditions (v) and (vi),
pension funds and certain other tax-exempt entities are treated as
individuals, subject to a "look-through" exception in the case of condition
(vi). Compliance with condition (v) shall be determined by disregarding the
ownership of Host REIT shares by any person(s) who: (1) acquired such Host
REIT shares as a gift or bequest or pursuant to a legal separation or divorce;
(2) is the estate of any person making such transfer to the estate; or (3) is
a company established exclusively for the benefit of (or wholly-owned by)
either the person making such transfer or a person described in (1) or (2). In
connection with condition (vi), Host REIT is required to send annual letters
to its stockholders requesting information regarding the actual ownership of
its shares. If Host REIT complies with this requirement, and it does not know,
or exercising reasonable diligence would not have known, whether it failed to
meet condition (vi), then it will be treated as having met condition (vi). If
Host REIT fails to send such annual letters, it will be required to pay either
a $25,000 penalty or, if the failure is intentional, a $50,000 penalty. The
IRS may require Host REIT, under those circumstances, to take further action
to ascertain actual ownership of its shares, and failure to comply with such
an additional requirement would result in an additional $25,000 (or $50,000)
penalty. No penalty would be assessed in the first instance, however, if the
failure to send the letters is due to reasonable cause and not to willful
neglect.
Host REIT believes that it will meet conditions (i) through (iv). In
addition, Host REIT believes that it will have outstanding (commencing with
its first taxable year as a REIT) Host REIT Common Stock with sufficient
diversity of ownership to allow it to satisfy conditions (v) and (vi). With
respect to condition (vi), Host REIT intends to comply with the requirement
that it send annual letters to its stockholders requesting information
regarding the actual ownership of its shares. In addition, the Host REIT
Charter provides for restrictions regarding the transfer and ownership of Host
REIT Common Stock, which restrictions are intended to assist Host REIT in
continuing to satisfy the share ownership requirements described in (v) and
(vi) above. Such ownership and transfer restrictions are described in
"Description of Host REIT Capital Stock--Restrictions on Ownership and
Transfer." These restrictions, together with compliance with the annual
stockholder letter requirement described above, however, may not ensure that
Host REIT will, in all cases, be able to satisfy the share ownership
requirements described above. If Host REIT fails to satisfy such share
ownership requirements, Host REIT's status as a REIT will terminate. See "--
Failure of Host REIT to Qualify as a REIT."
A corporation may not elect to become a REIT unless its taxable year is the
calendar year. Although Host currently has adopted a 52-53 week year ending on
the Friday closest to January 1, Host REIT will adopt a calendar year taxable
year in connection with the REIT Conversion.
Distribution of "Earnings and Profits" Attributable to "C" Corporation
Taxable Years. In order to qualify as a REIT, Host REIT cannot have at the end
of any taxable year any undistributed E&P that is attributable to a "C"
corporation taxable year. A REIT has until the close of its first taxable year
as a REIT in which it has non-REIT earnings and profits to distribute such
E&P. In connection with the REIT Conversion, Host REIT intends to make the
Initial E&P Distribution. The aggregate amount of the Initial E&P Distribution
is currently expected to be in the range of $525 to $625 million and is
intended to eliminate the substantial majority,
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if not all, of Host's undistributed E&P. For a more detailed discussion of the
Initial E&P Distribution, see "The REIT Conversion--The Initial E&P
Distribution," above. For a discussion of the federal income tax consequences
of the Initial E&P Distribution, see "--Federal Income Tax Consequences of the
Initial E&P Distribution," above. To the extent, however, that Host has any
such undistributed E&P at the time of the REIT Conversion (including E&P
resulting from either transactions undertaken in contemplation of the REIT
Conversion or the REIT Conversion itself), such E&P (the "Acquired Earnings")
will carry over to Host REIT and will be treated as accumulated earnings and
profits of a REIT attributable to non-REIT years. Host REIT will be required
to distribute such E&P prior to the end of 1999 (the first taxable year for
which the REIT election of Host REIT currently is expected to be effective,
although such REIT election may be effective for taxable year 2000). Failure
to do so would result in disqualification of Host REIT as a REIT at least for
taxable year 1999. If Host REIT should be so disqualified for taxable year
1999, subject to the satisfaction by Host REIT of certain "deficiency
dividend" procedures described below in "--Annual Distribution Requirements
Applicable to REITs" and assuming that Host REIT otherwise satisfies the
requirements for qualification as a REIT, Host REIT should qualify as a REIT
for taxable year 2000 and thereafter. Host REIT believes that the Initial E&P
Distribution, together with any subsequent distributions of Acquired Earnings
made prior to December 31, 1999, will be sufficient to distribute all of the
Acquired Earnings as of December 31, 1999, but there are substantial
uncertainties relating to the estimate of the Acquired Earnings, as described
below, and the value of noncash consideration to be distributed as part of the
Initial E&P Distribution, and, thus, there can be no assurance this
requirement will be met.
The estimated amount of the Acquired Earnings will be based on the allocated
consolidated earnings and profits of Host (including each of its predecessors)
accumulated from 1929, the first year that the predecessor of Host was a "C"
corporation, through and including Host's 1998 taxable year (and taking into
account the allocation, as a matter of law, of 81% of Host's accumulated E&P
to Marriott International on October 8, 1993 in connection with the Marriott
International Distribution), determined based on the available tax returns and
certain assumptions with respect to both such returns and other matters. The
calculation of the Acquired Earnings, however, depends upon a number of
factual and legal interpretations related to the activities and operations of
Host and its corporate affiliates during its entire corporate existence and is
subject to review and challenge by the IRS. There can be no assurance that the
IRS will not examine the tax returns of Host and its affiliates for all years
prior to and including the REIT Conversion and propose adjustments to increase
their taxable income. The impact of such proposed adjustments, if any, may be
material. If the IRS were to examine Host's calculation of its E&P (and thus
the amount of Acquired Earnings, if any), the IRS can consider all taxable
years of Host, its affiliates and its predecessors as open for review for
purposes of such determination.
Hogan & Hartson will express no opinion as to the amount of E&P of Host and
its predecessors and, accordingly, for purposes of its opinion as to the
qualification of Host REIT as a REIT following the REIT Conversion, Hogan &
Hartson is relying upon a representation from Host REIT that by the end of
1999 it will have eliminated all Acquired Earnings.
Qualified REIT Subsidiary. If Host REIT owns a corporate subsidiary that is
a "qualified REIT subsidiary," that subsidiary will be disregarded for federal
income tax purposes, and all assets, liabilities and items of income,
deduction and credit of the subsidiary will be treated as assets, liabilities
and items of Host REIT itself. Generally, a qualified REIT subsidiary is a
corporation all of the capital stock of which is owned by one REIT. Host REIT
anticipates owning one or more qualified REIT subsidiaries for purposes of
holding de minimis indirect interests in the Hotel Partnerships. A "qualified
REIT subsidiary" will not be subject to federal corporate income taxation,
although it may be subject to state and local taxation in certain
jurisdictions.
Ownership of Partnership Interests by a REIT. In the case of a REIT which is
a partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code (including satisfying the gross income
tests and the
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asset tests). Thus, Host REIT's proportionate share of the assets and items of
income of the Operating Partnership (including the Operating Partnership's
share of such items of the Partnerships, Private Partnerships and any other
subsidiaries that are partnerships or LLCs) will be treated as assets and
items of income of Host REIT for purposes of applying the requirements
described herein. A summary of the rules governing the federal income taxation
of partnerships and their partners is provided below in "--Tax Aspects of Host
REIT's Ownership of OP Units." As the sole general partner of the Operating
Partnership, Host REIT will have direct control over the Operating Partnership
and indirect control over the Hotel Partnerships and the partnerships in which
the Operating Partnership or the Hotel Partnerships have a controlling
interest and intends to operate these entities consistent with the
requirements for qualification of Host REIT as a REIT.
Income Tests Applicable to REITs. In order to maintain qualification as a
REIT, Host REIT annually must satisfy two gross income requirements. First, at
least 75% of Host REIT's gross income (excluding gross income from "prohibited
transactions") for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property
(including "rents from real property" and, in certain circumstances, interest)
or from certain types of temporary investments. Second, at least 95% of Host
REIT's gross income (excluding gross income from "prohibited transactions")
for each taxable year must be derived from such real property investments,
dividends, interest, certain hedging instruments and gain from the sale or
disposition of stock or securities, including certain hedging instruments (or
from any combination of the foregoing).
Rents paid pursuant to the Leases (together with dividends and interest
received from the Non-Controlled Subsidiaries) will constitute substantially
all of the gross income of Host REIT. Several conditions must be satisfied in
order for rents received by Host REIT, including the rents received pursuant
to the Leases, to qualify as "rents from real property" in satisfying the
gross income requirements for a REIT described in the preceding paragraph.
First, the amount of rent must not be based in whole or in part on the income
or profits of any person. However, an amount received or accrued generally
will not be excluded from the term "rents from real property" solely by reason
of being based on a fixed percentage or percentages of receipts or sales.
Second, rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if Host REIT, or an actual or
constructive owner of 10% or more of Host REIT, actually or constructively
owns 10% or more of such tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property" (the "15% Personal Property Test").
Finally, if (i) Host REIT operates or manages a property or furnishes or
renders services to the tenants at the property other than through an
independent contractor from whom Host REIT derives no revenue, excluding for
these purposes services "usually or customarily rendered" in connection with
the rental of real property and not otherwise considered "rendered to the
occupant," and (ii) the greater of (a) the income derived from such services
or (b) 150% of the cost of providing such services (the "Impermissible Tenant
Service Income") exceeds one percent of the total amount received by Host REIT
with respect to the property (or, if such services are not available to all
tenants at a property, possibly with respect to each tenant to whom the
services are made available), then no amount received by Host REIT with
respect to the property (or, where possibly applicable, such tenant) will
qualify as "rents from real property." If the Impermissible Tenant Service
Income is one percent or less of the total amount received by the REIT with
respect to the property (or, where possibly applicable, such tenant), then
only the Impermissible Tenant Service Income will not qualify as "rents from
real property." To the extent that services other than those customarily
furnished or rendered in connection with the rental of real property are
rendered to the tenants of the property by an independent contractor, the cost
of the services must be borne by the independent contractor.
The Operating Partnership and each Partnership and Private Partnership that
owns Hotels (together with certain other subsidiaries of the Operating
Partnership that may own Hotels) will enter into a Lease with a Lessee that is
a Crestline subsidiary, pursuant to which the owner of such Hotels will lease
the Hotels that it owns to the
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Lessee for a term of years (ranging generally from seven to ten years,
depending upon the particular Hotel) commencing on or before the January 1,
1999 (assuming the Merger occurs prior to that date; otherwise as soon as
practicable following the distribution of the Crestline common stock as part
of the Initial E&P Distribution). In addition, the Operating Partnership will
lease to the Lessees, on similar terms, the Hotels contributed by the
Blackstone Entities. Each Lease will provide for thirteen payments per annum
of the specified Base Rent plus, to the extent that it would exceed the Base
Rent, Percentage Rent, which Percentage Rent will be calculated based upon the
gross sales of the Hotels subject to the particular Lease, plus certain other
amounts. See "Business and Properties--The Leases."
Neither Host REIT nor the Operating Partnership intends to (i) provide any
services to the Lessees with respect to the operation of the Hotels; (ii)
charge rent for any Hotel that is based in whole or in part on the income or
profits of any person (except by reason of being based on a percentage of
receipts or sales, as described above); (iii) rent any Hotel to a Related
Party Tenant (unless the Board of Directors determines in its discretion that
the rent received from such Related Party Tenant is not material and will not
jeopardize Host REIT's status as a REIT); or (iv) derive rental income
attributable to personal property other than personal property leased in
connection with the lease of real property, the amount of which is less than
15% of the total rent received under the lease (unless the Board of Directors
determines in its discretion that the amount of such rent attributable to
personal property is not material and will not jeopardize Host REIT's status
as a REIT).
In order for the rent paid pursuant to the Leases to constitute "rents from
real property," (i) the Lessees must not be regarded as Related Party Tenants;
and (ii) the Leases must be respected as true leases for federal income tax
purposes and not treated as service contracts, joint ventures or some other
type of arrangement. A Lessee will be regarded as a Related Party Tenant only
if Host REIT and/or one or more actual or constructive owners of 10% or more
of Host REIT, actually or constructively, own 10% or more of such Lessee
through an ownership interest in Crestline. In order to help preclude the
Lessees from being regarded as Related Party Tenants, (i) the Articles of
Incorporation of Crestline will expressly prohibit any person (or persons
acting as a group), including Host REIT (and/or any 10% or greater stockholder
of Host REIT), from owning more than 9.8% of the lesser of the number or value
of the shares of capital stock of Crestline; (ii) the Host REIT Charter will
expressly prohibit any person (or persons acting as a group) or entity from
owning, actually and/or constructively, more than 9.8% of the lesser of the
number or value of Host REIT Common Stock (subject to a limited exception for
a holder of shares of Host REIT Common Stock solely by reason of the Merger in
excess of the Ownership Limit so long as the holder thereof would not own,
directly or by attribution under the Code, more than 9.9% in value of the
outstanding shares of capital stock of Host REIT as of the Special Merger
Ownership Limit Effective Time) or any other class or series of shares of Host
REIT; and (iii) the Partnership Agreement will expressly prohibit any person
(or persons acting as a group) or entity (other than Host REIT and the
Blackstone Entities) from owning more than 4.9% by value of any class of
interests in the Operating Partnership. Each of these prohibitions will
contain self-executing enforcement mechanisms. Assuming that these
prohibitions are enforced at all times (and no waivers thereto are granted),
the Lessees should not be regarded as Related Party Tenants. There can be no
assurance, however, that the ownership restrictions described herein will be
enforced in accordance with their terms in all circumstances or otherwise will
ensure, in all cases, that the Lessees will not be regarded as Related Party
Tenants.
The determination of whether the Leases are true leases depends upon an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties; (ii) the form of the agreement;
(iii) the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the operation of
the property or whether the lessee was required simply to use its best efforts
to perform its obligations under the agreement); and (iv) the extent to which
the property owner retains the risk of loss with respect to the property
(e.g., whether the lessee bears the risk of increases in operating expenses or
the risk of damage to the property) or the potential for economic gain (e.g.,
appreciation) with respect to the property.
In addition, Section 7701(e) of the Code provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking
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into account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property; (ii) the service
recipient controls the property; (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of
the useful life of the property, the recipient shares the risk that the
property will decline in value, the recipient shares in any appreciation in
the value of the property, the recipient shares in savings in the property's
operating costs or the recipient bears the risk of damage to or loss of the
property); (iv) the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if there is
nonperformance under the contract; (v) the service provider does not use the
property concurrently to provide significant services to entities unrelated to
the service recipient; and (vi) the total contract price does not
substantially exceed the rental value of the property for the contract period.
Since the determination of whether a service contract should be treated as a
lease is inherently factual, the presence or absence of any single factor may
not be dispositive in every case.
The Leases have been structured with the intent to qualify as true leases
for federal income tax purposes. For example, with respect to each Lease (i)
the Operating Partnership (or, where appropriate, the applicable Partnership
or Private Partnership or other lessor entity) and the Lessee intend for their
relationship to be that of a lessor and lessee and such relationship is
documented by a lease agreement, (ii) the Lessee has the right to exclusive
possession and use and quiet enjoyment of the Hotels covered by the Lease
during the term of the Lease, (iii) the Lessee bears the cost of, and will be
responsible for, day-to-day maintenance and repair of the Hotels (other than
the cost of certain capital expenditures), and will dictate (through the
Managers, who work for the Lessees during the terms of the Leases) how the
Hotels are operated and maintained, (iv) the Lessee bears all of the costs and
expenses of operating the Hotels (including the cost of any inventory used in
their operation) during the term of the Lease (other than the cost of certain
furniture, fixtures and equipment, and certain capital expenditures), (v) the
Lessee benefits from any savings (and bears the burdens of any increases) in
the costs of operating the Hotels during the term of the Lease, (vi) in the
event of damage or destruction to a Hotel, the Lessee is at economic risk
because it will bear the economic burden of the loss in income from operation
of the Hotels subject to the right, in certain circumstances, to terminate the
Lease if the lessor does not restore the Hotel to its prior condition, (vii)
the Lessee has indemnified the Operating Partnership (or, where appropriate,
the applicable Partnership or Private Partnership or other lessor entity)
against all liabilities imposed on the Operating Partnership (or, where
appropriate, the applicable Partnership or Private Partnership or other lessor
entity) during the term of the Lease by reason of (A) injury to persons or
damage to property occurring at the Hotels or (B) the Lessee's use,
management, maintenance or repair of the Hotels, (viii) the Lessee is
obligated to pay, at a minimum, substantial Base Rent for the period of use of
the Hotels under the Lease, (ix) the Lessee stands to incur substantial losses
(or reap substantial gains) depending on how successfully it (through the
Managers, who work for the Lessees during the terms of the Leases) operates
the Hotels, and (x) Host REIT and the Operating Partnership believe that each
Lessee reasonably expects to derive a meaningful profit, after expenses and
taking into account the risks associated with the Lease, from the operation of
the Hotels during the term of its Leases. Moreover, upon termination of a
Lease, each Hotel is expected to have a remaining useful life equal to at
least 20% of its expected useful life on the date of the consummation of the
REIT Conversion, and a fair market value equal to at least 20% of its fair
market value on the date of the consummation of the REIT Conversion.
Based upon representations made by Host REIT and the Operating Partnership
(including representations as to the matters described in the previous
paragraph and as to economic and other terms of the Leases), Hogan & Hartson,
counsel to Host REIT, has provided to Host REIT an opinion letter to the
effect that the Leases will be respected as leases for federal income tax
purposes. As noted previously, however, an opinion of counsel does not bind
the IRS or the courts. Moreover, Limited Partners should be aware that there
are no controlling Treasury Regulations, published IRS rulings or judicial
decisions involving leases with terms substantially the same as the Leases
that discuss whether such leases constitute true leases for federal income tax
purposes and that this issue, more so than many others, is likely to turn on
the surrounding facts and underlying economic circumstances. Hogan & Hartson
is not expressing any opinion as to the economic terms of the Leases, the
commercial reasonableness thereof, or whether the actual economic
relationships created thereby are such that the Leases
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will be respected for federal income tax purposes. Therefore, there can be no
assurance that the IRS will not assert a contrary position or that such
position will be sustained by a court if so challenged. If the Leases were
recharacterized as service contracts or partnership agreements, rather than
true leases, or disregarded altogether for tax purposes, all or part of the
payments that the Operating Partnership receives from the Lessees would not be
considered rent or would not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, Host REIT very
likely would not be able to satisfy either the 75% or 95% gross income tests
and, as a result, would lose its REIT status.
As indicated above, "rents from real property" must not be based in whole or
in part on the income or profits of any person. Payments made pursuant to the
Leases should qualify as "rents from real property" since they will be based
on either a fixed dollar amount (i.e., Base Rent) or specified percentages of
gross sales (i.e., Percentage Rents) which percentages will be fixed at the
time the Leases are entered into. The foregoing assumes that the Leases (i)
are not renegotiated during their term in a manner that has the effect of
basing either Percentage Rent or Base Rent on income or profits and (ii) are
not in reality used as a means of basing rent on income or profits. More
generally, the rent payable under the Leases would not qualify as "rents from
real property" if, considering the Leases and all the surrounding
circumstances, the arrangement does not conform with normal business practice,
but is in reality used as a means of basing rent on income or profits. Because
each of the Base Rent and the Percentage Rent will be based on fixed dollar
amounts and fixed percentages of the gross sales of each Hotel that are
established in the Leases, and Host REIT has represented that (i) the
percentages will not be renegotiated during the terms of the Leases in a
manner that has the effect of basing rent on income or profits and (ii) the
Leases conform with normal business practice and were not intended to be used
as a means of basing rent on income or profits, the rent payable under the
Leases should not be considered based in whole or in part on the income or
profits of any person. Furthermore, Host REIT has represented that, with
respect to other properties that it acquires in the future, it will not charge
rent for any property that is based in whole or in part on the income or
profits of any person (except by reason of being based on a fixed percentage
of gross revenues, as described above).
Host REIT may lease certain items of personal property to the Lessees in
connection with the Leases. The 15% Personal Property Test provides that if a
lease provides for the rental of both real and personal property and the
portion of the rent attributable to personal property is 15% or less of the
total rent due under the lease, then all rent paid pursuant to such lease
qualifies as "rent from real property." If, however, a lease provides for the
rental of both real and personal property, and the portion of the rent
attributable to personal property exceeds 15% of the total rent due under the
lease, then the portion of the rent that is attributable to personal property
does not qualify as "rent from real property." The amount of rent attributable
to personal property is that amount which bears the same ratio to total rent
for the taxable year as the average of the adjusted tax bases of the personal
property at the beginning and end of the year bears to the average of the
aggregate adjusted tax bases of both the real and personal property at the
beginning and end of such year. Host REIT has represented that, with respect
to each Lease that includes a lease of items of personal property, the amount
of rent attributable to personal property with respect to such Lease,
determined as set forth above, will not exceed 15% of the total rent due under
the Lease (except for several Leases where the rent attributable to personal
property, which would constitute non-qualifying income for purposes of the 75%
and 95% gross income tests, would not be material relative to the overall
gross income of Host REIT). Each Lease permits the Operating Partnership to
take certain measures, including requiring the Lessee to purchase certain
furniture, fixtures and equipment or to lease such property from a third party
(including a Non-Controlled Subsidiary), if necessary to ensure that all of
the rent attributable to personal property with respect to such Lease will
qualify as "rent from real property." In order to protect Host REIT's ability
to qualify as a REIT, the Operating Partnership, in connection with the REIT
Conversion, will sell to a Non-Controlled Subsidiary substantial personal
property associated with a number of Hotels currently owned by Host or being
acquired in connection with the REIT Conversion. The Non-Controlled Subsidiary
will separately lease all such personal property directly to the applicable
Lessee and will receive rental payments which Host REIT believes represents
the fair rental value of such personal property directly from the Lessees.
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If any of the Hotels were to be operated directly by the Operating
Partnership or a Partnership or Private Partnership as a result of a default
by a Lessee under the applicable Lease, such Hotel would constitute
foreclosure property until the close of the third tax year following the tax
year in which it was acquired (or for up to an additional three years if an
extension is granted by the IRS), provided that (i) the operating entity
conducts operations through an independent contractor (which might, but would
not necessarily in all circumstances, include Marriott International and its
subsidiaries) within 90 days after the date the Hotel is acquired as the
result of a default by a Lessee, (ii) the operating entity does not undertake
any construction on the foreclosed property other than completion of
improvements that were more than 10% complete before default became imminent,
and (iii) foreclosure was not regarded as foreseeable at the time the
applicable Partnership or Private Partnership entered into such Leases. For as
long as any of these Hotels constitute foreclosure property, the income from
the Hotels would be subject to tax at the maximum corporate rates, but it
would qualify under the 75% and 95% gross income tests. However, if any of
these Hotels does not constitute foreclosure property at any time in the
future, income earned from the disposition or operation of such property will
not qualify under the 75% and 95% gross income tests.
"Interest" generally will not qualify under the 75% or 95% gross income
tests if it depends in whole or in part on the income or profits of any
person. However, interest will not fail to so qualify solely by reason of
being based upon a fixed percentage or percentages of receipts or sales. Host
REIT does not expect to derive significant amounts of interest that will not
qualify under the 75% and 95% gross income tests.
The Non-Controlled Subsidiaries will hold various assets contributed by Host
and its subsidiaries to the Operating Partnership, the ownership of which by
the Operating Partnership might jeopardize Host REIT's status as a REIT. These
assets primarily will consist of partnership or other interests in Hotels that
are not leased and certain foreign hotels in which Host owns interests. In
addition, as described above, the Operating Partnership will sell to a Non-
Controlled Subsidiary approximately $200 million in value of personal property
associated with certain Hotels, in order to facilitate Host REIT's compliance
with the 15% Personal Property Test. The Operating Partnership will own 100%
of the nonvoting stock of each Non-Controlled Subsidiary but none of the
voting stock (or control) of that Non-Controlled Subsidiary. Each Non-
Controlled Subsidiary is taxable as a regular "C" corporation. The Operating
Partnership's share of any dividends received from a Non-Controlled Subsidiary
should qualify for purposes of the 95% gross income test, but not for purposes
of the 75% gross income test. The Operating Partnership does not anticipate
that it will receive sufficient dividends from the Non-Controlled Subsidiaries
to cause it to exceed the limit on non-qualifying income under the 75% gross
income test.
Given the magnitude and scope of Host's existing operations, Host REIT
inevitably will have some gross income from various sources (including, but
not limited to, "safe harbor" leases, the operation of the Hotel in
Sacramento, minority partnership interests in partnerships that own hotels
that are not leased under leases that produce rents qualifying as "rents from
real property" and rent attributable to personal property at a few Hotels that
does not satisfy the 15% Personal Property Test) that fails to constitute
qualifying income for purposes of one or both of the 75% or 95% gross income
tests. Host REIT, however, believes that, even taking into account the
anticipated sources of non-qualifying income, its aggregate gross income from
all sources will satisfy the 75% and 95% gross income tests applicable to
REITs for each taxable year commencing subsequent to the date of the REIT
Conversion.
If Host REIT fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will be generally available if Host REIT's failure to meet
such tests was due to reasonable cause and not due to willful neglect, Host
REIT attaches a schedule of the sources of its income to its federal income
tax return and any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances Host REIT would be entitled to the benefit of these relief
provisions. For example, if Host REIT fails to satisfy the gross income tests
because nonqualifying income that Host REIT intentionally incurs exceeds the
limits on such income, the IRS could conclude that Host REIT's failure to
satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a
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particular set of circumstances involving Host REIT, Host REIT will not
qualify as a REIT. As discussed above in "--General," even if these relief
provisions apply, a tax would be imposed with respect to the excess net
income.
Any gain realized by Host REIT on the sale of any property held as inventory
or other property held primarily for sale to customers in the ordinary course
of business (including Host REIT's share of any such gain realized by the
Operating Partnership) will be treated as income from a "prohibited
transaction" that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon Host REIT's ability to
satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in
the ordinary course of a trade or business is a question of fact that depends
upon all the facts and circumstances with respect to the particular
transaction. The Operating Partnership intends that both it and the
Partnerships and Private Partnerships will hold the Hotels for investment with
a view to long-term appreciation, to engage in the business of acquiring and
owning the Hotels (and other hotels) and to make such occasional sales of the
Hotels as are consistent with the Operating Partnership's investment
objectives. There can be no assurance, however, that the IRS might not contend
that one or more of such sales is subject to the 100% penalty tax.
Asset Tests Applicable to REITs. Host REIT, at the close of each quarter of
its taxable year, must also satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of Host REIT's total assets must be
represented by real estate assets, including for this purpose (i) its
allocable share of real estate assets held by partnerships in which Host REIT
owns an interest (including its allocable share of the assets held through the
Operating Partnership) and (ii) stock or debt instruments held for not more
than one year purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of Host REIT, cash, cash items and government
securities. Second, not more than 25% of Host REIT's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by Host REIT may not exceed 5% of the value of Host REIT's
total assets and Host REIT may not own more than 10% of any one issuer's
outstanding voting securities.
The Operating Partnership does not own any of the voting stock of a Non-
Controlled Subsidiary but it will own 100% of the nonvoting stock of each Non-
Controlled Subsidiary. The Operating Partnership may also own nonvoting stock,
representing substantially all of the equity, in other corporate entities that
serve as partners or members in the various entities that hold title to the
Hotels. Host REIT will represent, however, that neither Host REIT, the
Operating Partnership nor any of the Hotel Partnerships or Subsidiary
Partnerships will own more than 10% of the voting securities of any entity
that would be treated as a corporation for federal income tax purposes. In
addition, Host REIT and its senior management believe, and Host REIT will
represent, that the securities of any one issuer owned by Host REIT, the
Operating Partnership, the Partnerships and Private Partnerships and any
Subsidiary Partnerships (including Host REIT's pro rata share of the value of
the securities of each Non-Controlled Subsidiary) will not exceed 5% of the
total value of Host REIT's assets. There can be no assurance, however, that
the IRS might not contend that the value of such securities exceeds the 5%
value limitation or that nonvoting stock of a Non-Controlled Subsidiary or
another corporate entity owned by the Operating Partnership should be
considered "voting stock" for this purpose.
After initially meeting the asset tests at the close of any quarter, Host
REIT will not lose its status as a REIT for failure to satisfy the asset tests
at the end of a later quarter solely by reason of changes in asset values. If
the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including, for example, as a
result of Host REIT increasing its interest in the Operating Partnership as a
result of the exercise of the Unit Redemption Right or an additional capital
contribution of proceeds from an offering of Host REIT Common Stock by Host
REIT), the failure can be cured by disposition of sufficient nonqualifying
assets within 30 days after the close of that quarter. Host REIT intends to
maintain adequate records of the value of its assets to ensure compliance with
the asset tests and to take such other actions within 30 days after the close
of any quarter as may be required to cure any noncompliance. If Host REIT
fails to cure noncompliance with the asset tests within such time period, Host
REIT would cease to qualify as a REIT.
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Clinton Administration's Proposed Changes to REIT Asset Test. The Clinton
Administration's fiscal year 1999 budget proposal, announced on February 2,
1998, includes a proposal to amend the 10% voting securities test. The
proposal would require a REIT to own no more than 10% of the vote or value of
all classes of stock of any corporation (except for qualified REIT
subsidiaries or corporations that qualify as REITs). Corporations (referred to
herein as "subsidiary corporations") existing prior to the effective date of
the proposal generally would be "grandfathered"; i.e., the REIT would be
subject to the existing 10% voting securities test (described above) with
respect to grandfathered subsidiary corporations. However, such
"grandfathered" status would terminate with respect to a subsidiary
corporation if the subsidiary corporation engaged in a new trade or business
or acquired substantially new assets.
Because the Operating Partnership will own 100% of the nonvoting stock of
each Non-Controlled Subsidiary, and Host REIT will be deemed to own an
interest in each Non-Controlled Subsidiary equal to its proportionate interest
in the Operating Partnership, Host REIT would not satisfy the proposed 10%
value limitation with respect to any of the Non-Controlled Subsidiaries.
Whether any of the Non-Controlled Subsidiaries would qualify as a
grandfathered subsidiary corporation as the proposal is currently drafted
would depend upon the effective date of the proposal (which is not yet known).
If a Non-Controlled Subsidiary otherwise eligible for "grandfathered" status
were to engage in a new trade or business or were to acquire substantial new
assets, or if Host REIT were to make a capital contribution to a Non-
Controlled Subsidiary otherwise eligible for "grandfathered" status, its
"grandfathered" status would terminate and Host REIT would fail to qualify as
a REIT. Moreover, Host REIT would not be able to own, directly or indirectly,
more than 10% of the vote or value of any subsidiary corporation formed or
acquired after the effective date of the proposal. Thus, the proposal, if
enacted, would materially impede Host REIT's ability to engage in new third-
party management or similar activities (and, if enacted prior to the REIT
Conversion, might materially impair Host's ability to complete the REIT
Conversion.)
Annual Distribution Requirements Applicable to REITs. Host REIT, in order to
qualify as a REIT, is required to distribute dividends (other than capital
gain dividends) to its stockholders in an amount at least equal to (i) the sum
of (a) 95% of Host REIT's REIT taxable income (computed without regard to the
dividends paid deduction and Host REIT's net capital gain) and (b) 95% of the
net income (after tax), if any, from foreclosure property, minus (ii) the sum
of certain items of noncash income. In addition, if Host REIT disposes of any
Built-In Gain Asset during its Recognition Period, Host REIT will be required,
pursuant to Treasury Regulations which have not yet been promulgated, to
distribute at least 95% of the Built-In Gain (after tax), if any, recognized
on the disposition of such asset. See "--General" above for a discussion of
"Built-In Gain Assets." Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before Host
REIT timely files its tax return for such year and if paid on or before the
first regular dividend payment date after such declaration. Host REIT intends
to make timely distributions sufficient to satisfy these annual distribution
requirements. In this regard, the Partnership Agreement authorizes Host REIT,
as general partner, to take such steps as may be necessary to cause the
Operating Partnership to distribute to its partners an amount sufficient to
permit Host REIT to meet these distribution requirements.
To the extent that Host REIT does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its REIT taxable income,
as adjusted, it will be subject to tax thereon at regular ordinary and capital
gain corporate tax rates. Host REIT, however, may designate some or all of its
retained net capital gain, so that, although the designated amount will not be
treated as distributed for purposes of this tax, a stockholder would include
its proportionate share of such amount in income, as capital gain, and would
be treated as having paid its proportionate share of the tax paid by Host REIT
with respect to such amount. The stockholder's basis in its Host REIT Common
Stock would be increased by the amount the stockholder included in income and
decreased by the amount of the tax the stockholder is treated as having paid.
Host REIT would make an appropriate adjustment to its earnings and profits.
For a more detailed description of the federal income tax consequences to a
stockholder of such a designation, see "--Taxation of Taxable U.S.
Stockholders Generally."
There is a significant possibility that Host REIT's REIT taxable income will
exceed its cash flow (due in part to certain "non-cash" or "phantom" income
expected to be taken into account in computing Host REIT's
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REIT taxable income). Host REIT anticipates, however, that it will generally
have sufficient cash or liquid assets to enable it to satisfy the distribution
requirements described above. It is possible, however, that Host REIT, from
time to time, may not have sufficient cash or other liquid assets to meet
these distribution requirements. In such event, in order to meet the
distribution requirements, Host REIT may find it necessary to arrange for
short-term, or possibly long-term, borrowings to fund required distributions
and/or to pay dividends in the form of taxable stock dividends.
Host REIT intends to calculate its REIT taxable income based upon the
conclusion that the Hotel Partnerships, the Subsidiary Partnerships or the
Operating Partnership, as applicable, is the owner of the Hotels for federal
income tax purposes. As a result, Host REIT expects that the depreciation
deductions with respect to the Hotels will reduce its REIT taxable income.
This conclusion is consistent with the conclusion above that the Leases will
be treated as true leases for federal income tax purposes. If the IRS were to
challenge successfully this position, in addition to failing in all likelihood
the 75% and 95% gross income tests described above, Host REIT also might be
deemed retroactively to have failed to meet the REIT distribution requirements
and would have to rely on the payment of a "deficiency dividend" in order to
retain its REIT status.
Under certain circumstances, Host REIT may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in Host REIT's
deduction for dividends paid for the earlier year. Thus, Host REIT may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
Host REIT would be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
Furthermore, if Host REIT should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, Host REIT would be subject to
a 4% excise tax on the excess of such required distribution over the sum of
amounts actually distributed and amounts retained with respect to which the
REIT pays federal income tax.
Failure of Host REIT to Qualify as a REIT. If Host REIT fails to qualify for
taxation as a REIT in any taxable year, and if the relief provisions do not
apply, Host REIT will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. Distributions
to stockholders in any year in which Host REIT fails to qualify will not be
deductible by Host REIT nor will they be required to be made. As a result,
Host REIT's failure to qualify as a REIT would significantly reduce the cash
available for distribution by Host REIT to its stockholders and could
materially reduce the value of the Host REIT Common Stock. In addition, if
Host REIT fails to qualify as a REIT, all distributions to stockholders will
be taxable as ordinary income, to the extent of Host REIT's current and
accumulated E&P, although subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction
with respect to these distributions. Unless entitled to relief under specific
statutory provisions, Host REIT also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances Host REIT
would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
Distributions by Host REIT. As long as Host REIT qualifies as a REIT,
distributions made by Host REIT out of its current or accumulated E&P (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction in the case of U.S. Stockholders
that are corporations. To the extent that Host REIT makes distributions (not
designated as capital gain dividends) in excess of its current and accumulated
E&P, such distributions will be treated first as a tax-free return of capital
to each U.S. Stockholder, reducing the adjusted basis which such U.S.
Stockholder has in its Host REIT Common Stock for tax purposes by the amount
of such distribution (but not below zero), with distributions in excess of a
U.S. Stockholder's adjusted basis in its Host REIT Common Stock taxable as
capital gains (provided that the Host REIT Common Stock has been held as a
capital asset). Dividends declared by Host REIT in October, November or
December of any year and payable to
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a stockholder of record on a specified date in any such month shall be treated
as both paid by Host REIT and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by Host REIT on or
before January 31 of the following calendar year.
Distributions made by Host REIT that are properly designated by Host REIT as
capital gain dividends will be taxable to taxable non-corporate U.S.
Stockholders (i.e., individuals, estates or trusts) as gain from the sale or
exchange of a capital asset held for more than one year (to the extent that
they do not exceed Host REIT's actual net capital gain for the taxable year)
without regard to the period for which such non-corporate U.S. Stockholder has
held his Host REIT Common Stock. In the event that Host REIT designates any
portion of a dividend as a "capital gain dividend," a U.S. Stockholder's share
of such capital gain dividend would be an amount which bears the same ratio to
the total amount of dividends paid to such U.S. Stockholder for the year as
the aggregate amount designated as a capital gain dividend bears to the
aggregate amount of all dividends paid on all classes of shares for the year.
On November 10, 1997, the IRS issued Notice 97-64, which provides generally
that Host REIT may classify portions of its designated capital gain dividend
as (i) a 20% gain distribution (which would be taxable to non-corporate U.S.
Stockholders at a maximum rate of 20%), (ii) an unrecaptured Section 1250 gain
distribution (which would be taxable to non-corporate U.S. Stockholders at a
maximum rate of 25%) or (iii) a 28% rate gain distribution (which would be
taxable to non-corporate U.S. Stockholders at a maximum rate of 28%). If no
designation is made, the entire designated capital gain dividend will be
treated as a 28% rate gain distribution. Notice 97-64 provides that a REIT
must determine the maximum amounts that it may designate as 20% and 25% rate
capital gain dividends by performing the computation required by the Code as
if the REIT were an individual whose ordinary income were subject to a
marginal tax rate of at least 28%. Notice 97-64 further provides that
designations made by the REIT only will be effective to the extent that they
comply with Revenue Ruling 89-81, which requires that distributions made to
different classes of shares be composed proportionately of dividends of a
particular type. On July 22, 1998, as part of the IRS Restructuring Act, the
holding period requirement for the application of the 20% and 25% capital gain
tax rates was reduced to 12 months from 18 months for sales of capital gain
assets on or after January 1, 1998. Although Notice 97-64 will apply to sales
of capital gain assets after July 28, 1997 and before January 1, 1998, it is
expected that the IRS will issue clarifying guidance (most likely applying the
same principles set forth in Notice 97-64) regarding a REIT's designation of
capital gain dividends in light of the new holding period requirements. For a
discussion of the capital gain tax rates applicable to non-corporate U.S.
Stockholders, see "--1997 Act and IRS Restructuring Act Changes to Capital
Gain Taxation" below.
Distributions made by Host REIT that are properly designated by Host REIT as
capital gain dividends will be taxable to taxable corporate U.S. Stockholders
as long-term gain (to the extent that they do not exceed Host REIT's actual
net capital gain for the taxable year) at a maximum rate of 35% without regard
to the period for which such corporate U.S. Stockholder has held its Host REIT
Common Stock. Such U.S. Stockholders may, however, be required to treat up to
20% of certain capital gain dividends as ordinary income.
U.S. Stockholders may not include in their individual income tax returns any
net operating losses or capital losses of Host REIT. Instead, such losses
would be carried over by Host REIT for potential offset against future income
(subject to certain limitations). Distributions made by Host REIT and gain
arising from the sale or exchange by a U.S. Stockholder of Host REIT Common
Stock will not be treated as passive activity income, and, as a result, U.S.
Stockholders generally will not be able to apply any "passive losses" against
such income or gain. In addition, taxable distributions from Host REIT
generally will be treated as investment income for purposes of the investment
interest limitation. Capital gain dividends and capital gains from the
disposition of shares (including distributions treated as such), however, will
be treated as investment income only if the U.S. Stockholder so elects, in
which case such capital gains will be taxed at ordinary income rates.
Host REIT will notify stockholders after the close of its taxable year as to
the portions of distributions attributable to that year that constitute
ordinary income, return of capital and capital gain. Host REIT may designate
(by written notice to its stockholders) its net capital gain so that with
respect to retained net capital gains, a U.S. Stockholder would include its
proportionate share of such gain in income, as long-term capital gain,
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and would be treated as having paid its proportionate share of the tax paid by
Host REIT with respect to the gain. The U.S. Stockholder's basis in its Host
REIT Common Stock would be increased by its share of such gain and decreased
by its share of such tax. With respect to such long-term capital gain of a
U.S. Stockholder that is an individual or an estate or trust, the IRS, as
described above in this section, has authority to issue regulations that could
apply the special tax rate applicable generally to the portion of the long-
term capital gains of an individual or an estate or trust attributable to
deductions for depreciation taken with respect to depreciable real property.
IRS Notice 97-64, described above in this section, did not address the
taxation of non-corporate REIT stockholders with respect to retained net
capital gains.
Sales of Host REIT Common Stock. Upon any sale or other disposition of Host
REIT Common Stock, a U.S. Stockholder will recognize gain or loss for federal
income tax purposes in an amount equal to the difference between (i) the
amount of cash and the fair market value of any property received on such sale
or other disposition and (ii) the holder's adjusted basis in such Host REIT
Common Stock for tax purposes. Such gain or loss will be capital gain or loss
if the Host REIT Common Stock have been held by the U.S. Stockholder as a
capital asset. In the case of a U.S. Stockholder who is an individual or an
estate or trust, such gain or loss will be long-term capital gain or loss (and
any such long-term capital gain shall be subject to the maximum capital gain
rate of 20%). In the case of a U.S. Stockholder that is a corporation, such
gain or loss will be long-term capital gain or loss if such shares have been
held for more than one year (and any such capital gain shall be subject to the
maximum capital gain rate of 35%). In general, any loss recognized by a U.S.
Stockholder upon the sale or other disposition of Host REIT Common Stock that
have been held for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. Stockholder from Host REIT that were
required to be treated as long-term capital gains.
1997 Act and IRS Restructuring Act Changes to Capital Gain Taxation. The
1997 Act altered the taxation of capital gain income. Under the 1997 Act,
individuals, trusts and estates that hold certain investments for more than 18
months may be taxed at a maximum long-term capital gain rate of 20% on the
sale or exchange of those investments. Individuals, trusts and estates that
hold certain assets for more than one year but not more than 18 months may be
taxed at a maximum long-term capital gain rate of 28% on the sale or exchange
of those investments. The 1997 Act also provides a maximum rate of 25% for
"unrecaptured Section 1250 gain" for individuals, trusts and estates, special
rules for "qualified 5-year gain" and other changes to prior law. The recently
enacted IRS Restructuring Act, however, reduced the holding period requirement
established by the 1997 Act for the application of the 20% and 25% capital
gain tax rates to 12 months from 18 months for sales of capital gain assets
after December 31, 1997. The 1997 Act allows the IRS to prescribe regulations
on how the 1997 Act's capital gain rates will apply to sales of capital assets
by "pass-through entities" (including REITs, such as Host REIT) and to sales
of interests in "pass-through entities." For a discussion of the rules under
the 1997 Act that apply to the taxation of distributions by Host REIT to its
stockholders that are designated by Host REIT as "capital gain dividends," see
"--Distributions by Host REIT" above. Stockholders are urged to consult with
their own tax advisors with respect to the rules contained in the 1997 Act and
the IRS Restructuring Act.
BACKUP WITHHOLDING FOR HOST REIT DISTRIBUTIONS
Host REIT will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a U.S. Stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Stockholder that does not provide Host REIT
with a correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. In addition, Host REIT may be
required to withhold a portion of its capital gain distributions to any U.S.
Stockholders who fail to certify their non-foreign status to Host REIT. See
"--Taxation of Non-U.S. Stockholders."
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TAXATION OF TAX-EXEMPT STOCKHOLDERS OF HOST REIT
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by
a tax-exempt entity. Based on that ruling, provided that a tax-exempt
stockholder (except certain tax-exempt stockholders described below) has not
held its Host REIT Common Stock as "debt financed property" within the meaning
of the Code and such Host REIT Common Stock are not otherwise used in a trade
or business, the dividend income from Host REIT will not be UBTI to a tax-
exempt stockholder. Similarly, income from the sale of Host REIT Common Stock
will not constitute UBTI unless such tax-exempt stockholder has held such Host
REIT Common Stock as "debt financed property" within the meaning of the Code
or has used the Host REIT Common Stock in a trade or business.
For tax-exempt stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in Host REIT will constitute UBTI unless the organization is
properly able to deduct amounts set aside or placed in reserve for certain
purposes so as to offset the income generated by its investment in Host REIT.
Such prospective stockholders should consult their own tax advisors concerning
these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of
1993 (the "1993 Act") provides that, effective for taxable years beginning in
1994, a portion of the dividends paid by a "pension held REIT" shall be
treated as UBTI as to any trust which (i) is described in Section 401(a) of
the Code, (ii) is tax-exempt under Section 501(a) of the Code and (iii) holds
more than 10% (by value) of the interests in the REIT. Tax-exempt pension
funds that are described in Section 401(a) of the Code are referred to below
as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code (added by the 1993 Act)
provides that stock owned by qualified trusts shall be treated, for purposes
of the "not closely held" requirement, as owned by the beneficiaries of the
trust (rather than by the trust itself) and (ii) either (a) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT or
(b) one or more such qualified trusts, each of which owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The percentage of any REIT dividend
treated as UBTI is equal to the ratio of (i) the UBTI earned by the REIT
(treating the REIT as if it were a qualified trust and therefore subject to
tax on UBTI) to (ii) the total gross income of the REIT. A de minimis
exception applies where the percentage is less than 5% for any year. The
provisions requiring qualified trusts to treat a portion of REIT distributions
as UBTI will not apply if the REIT is able to satisfy the "not closely held"
requirement without relying upon the "look-through" exception with respect to
qualified trusts.
Based on the anticipated ownership of Host REIT Common Stock immediately
following the REIT Conversion and as a result of certain limitations on
transfer and ownership of Host REIT Common Stock contained in the Host REIT
Charter, Host REIT does not expect to be classified as a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing federal income taxation of the ownership and disposition
of Host REIT Common Stock by Non-U.S. Stockholders are complex and no attempt
is made herein to provide more than a brief summary of such rules.
Accordingly, the discussion does not address all aspects of federal income tax
and does not address state, local or foreign tax consequences that may be
relevant to a Non-U.S. Stockholder in light of its particular circumstances.
In addition, this discussion is based on current law, which is subject to
change, and assumes that Host REIT qualifies for taxation as a REIT.
Prospective Non-U.S. Stockholders should consult with their own tax advisers
to determine the impact of federal, state, local and foreign income tax laws
with regard to an investment in Host REIT Common Stock, including any
reporting requirements.
Distributions by Host REIT. Distributions by Host REIT to a Non-U.S.
Stockholder that are neither attributable to gain from sales or exchanges by
Host REIT of United States real property interests nor designated
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by Host REIT as capital gains dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
E&P of Host REIT. Such distributions ordinarily will be subject to withholding
of United States federal income tax on a gross basis (that is, without
allowance of deductions) at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty, unless the dividends are treated as
effectively connected with the conduct by the Non-U.S. Stockholder of a United
States trade or business. Under certain treaties, however, lower withholding
rates generally applicable to dividends do not apply to dividends from a REIT,
such as Host REIT. Certain certification and disclosure requirements must be
satisfied to be exempt from withholding under the effectively connected income
exemption. Dividends that are effectively connected with such a trade or
business will be subject to tax on a net basis (that is, after allowance of
deductions) at graduated rates, in the same manner as U.S. Stockholders are
taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a Non-U.S. Stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax
treaty. Host REIT expects to withhold United States income tax at the rate of
30% on any distribution made to a Non-U.S. Stockholder unless (i) a lower
treaty rate applies and any required form or certification evidencing
eligibility for that lower rate is filed with Host REIT or (ii) a Non-U.S.
Stockholder files an IRS Form 4224 with Host REIT claiming that the
distribution is effectively connected income.
Distributions in excess of current or accumulated E&P of Host REIT will not
be taxable to a Non-U.S. Stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's Host REIT Common Stock, but rather will
reduce the adjusted basis of such Host REIT Common Stock. To the extent that
such distributions exceed the adjusted basis of a Non-U.S. Stockholder's Host
REIT Common Stock, they will give rise to gain from the sale or exchange of
its Host REIT Common Stock, the tax treatment of which is described below. As
a result of a legislative change made by the Small Business Job Protection Act
of 1996, it appears that Host REIT will be required to withhold 10% of any
distribution in excess of Host REIT's current and accumulated earnings and
profits. Consequently, although Host REIT intends to withhold at a rate of 30%
on the entire amount of any distribution (or a lower applicable treaty rate),
to the extent that Host REIT does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate)
would be subject to withholding at a rate of 10%. However, the Non-U.S.
Stockholder may seek a refund of such amounts from the IRS if it subsequently
determined that such distribution was, in fact, in excess of current or
accumulated E&P of Host REIT, and the amount withheld exceeded the Non-U.S.
Stockholder's United States tax liability, if any, with respect to the
distribution.
Distributions to a Non-U.S. Stockholder that are designated by Host REIT at
the time of distribution as capital gain dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) the
investment in the Host REIT Common Stock is effectively connected with the
Non-U.S. Stockholder's United States trade or business, in which case the Non-
U.S. Stockholder will be subject to the same treatment as U.S. Stockholders
with respect to such gain (except that a stockholder that is a foreign
corporation may also be subject to the 30% branch profits tax, as discussed
above) or (ii) the Non-U.S. Stockholder is a nonresident alien individual who
is present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States, in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital gains.
Pursuant to FIRPTA, distributions to a Non-U.S. Stockholder that are
attributable to gain from sales or exchanges by Host REIT of United States
real property interests (whether or not designated as capital gain dividends)
will cause the Non-U.S. Stockholder to be treated as recognizing such gain as
income effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be taxed at the same rates applicable to
U.S. Stockholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, such gain may be subject to a 30% branch
profits tax in the hands of a Non-U.S. Stockholder that is a corporation, as
discussed above. Host REIT is required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Stockholder's
federal income tax liability.
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Although the law is not entirely clear on the matter, it appears that
amounts designated by Host REIT pursuant to the 1997 Act as undistributed
capital gains in respect of the Host REIT Common Stock held by U.S.
Stockholders (see "--Annual Distribution Requirements Applicable to REITs"
above) would be treated with respect to Non-U.S. Stockholders in the manner
outlined in the preceding two paragraphs for actual distributions by Host REIT
of capital gain dividends. Under that approach, the Non-U.S. Stockholders
would be able to offset as a credit against their United States federal income
tax liability resulting therefrom their proportionate share of the tax paid by
Host REIT on such undistributed capital gains (and to receive from the IRS a
refund to the extent their proportionate share of such tax paid by Host REIT
were to exceed their actual United States federal income tax liability).
Sales of Host REIT Common Stock. Gain recognized by a Non-U.S. Stockholder
upon the sale or exchange of Host REIT Common Stock generally will not be
subject to United States taxation unless such shares constitute a "United
States real property interest" within the meaning of FIRPTA. The Host REIT
Common Stock will not constitute a "United States real property interest" so
long as Host REIT is a "domestically controlled REIT." A "domestically
controlled REIT" is a REIT in which at all times during a specified testing
period less than 50% in value of its stock is held directly or indirectly by
Non-U.S. Stockholders. Host REIT is unable at this time to predict whether it
will be a "domestically controlled REIT," and therefore whether the sale of
Host REIT Common Stock will be subject to taxation under FIRPTA. Moreover,
even if Host REIT initially qualifies as a "domestically controlled REIT,"
because the Host REIT Common Stock is expected to be publicly traded, no
assurance can be given that Host REIT would continue to be a "domestically
controlled REIT." Notwithstanding the foregoing, gain from the sale or
exchange of Host REIT Common Stock not otherwise subject to FIRPTA will be
taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder is a nonresident
alien individual who is present in the United States for 183 days or more
during the taxable year and has a "tax home" in the United States. In such
case, the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
Even if Host REIT does not qualify as or ceases to be a "domestically
controlled REIT," gain arising from the sale or exchange by a Non-U.S.
Stockholder of Host REIT Common Stock would not be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest" if
(i) the Host REIT Common Stock are "regularly traded" (as defined by
applicable Treasury Regulations) on an established securities market (e.g.,
the NYSE) and (ii) such Non-U.S. Stockholder owned 5% or less of the Host REIT
Common Stock throughout the five-year period ending on the date of the sale or
exchange. If gain on the sale or exchange of Host REIT Common Stock were
subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to
regular United States income tax with respect to such gain in the same manner
as a taxable U.S. Stockholder (subject to any applicable alternative minimum
tax, a special alternative minimum tax in the case of nonresident alien
individuals and the possible application of the 30% branch profits tax in the
case of foreign corporations) and the purchaser of the Host REIT Common Stock
would be required to withhold and remit to the IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Stockholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gain dividends or
(iii) distributions attributable to gain from the sale or exchange by Host
REIT of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Host REIT Common Stock by or through a foreign office of
a foreign broker. Information reporting (but not backup withholding) will
apply, however, to a payment of the proceeds of a sale of Host REIT Common
Stock by a foreign office of a broker that (a) is a United States person, (b)
derives 50% or more of its gross income for certain periods from the conduct
of a trade or business in the United States or (c) is a "controlled foreign
corporation" (generally, a foreign corporation controlled by United States
stockholders) for United States tax purposes, unless the broker has
documentary evidence in its records that the holder is a Non-U.S. Stockholder
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and certain other conditions are met or the stockholder otherwise establishes
an exemption. Payment to or through a United States office of a broker of the
proceeds of a sale of Host REIT Common Stock is subject to both backup
withholding and information reporting unless the stockholder certifies under
penalty of perjury that the stockholder is a Non-U.S. Stockholder, or
otherwise establishes an exemption. A Non-U.S. Stockholder may obtain a refund
of any amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS.
The IRS has recently finalized regulations regarding the withholding and
information reporting rules discussed above. In general, these regulations do
not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. These regulations generally are effective for payments made after
December 31, 2000, subject to certain transition rules. Valid withholding
certificates that are held on December 31, 1999, will remain valid until the
earlier of December 31, 2000 or the date of expiration of the certificate
under rules currently in effect (unless otherwise invalidated due to changes
in the circumstances of the person whose name is on such certificate). A Non-
U.S. Stockholder should consult its own advisor regarding the effect of the
new Treasury Regulations.
TAX ASPECTS OF HOST REIT'S OWNERSHIP OF OP UNITS
General. Substantially all of Host REIT's investments will be held through
the Operating Partnership, which will hold the Hotels either directly or
through the Partnerships or Private Partnerships (which, in turn, may hold
Hotels through certain Subsidiary Partnerships (as defined in the following
paragraph)). In general, partnerships are "pass-through" entities that are not
subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit
of a partnership, and are potentially subject to tax thereon, without regard
to whether the partners receive a distribution from the partnership. Host REIT
will include in its income its proportionate share of the foregoing
partnership items for purposes of the various REIT income tests and in the
computation of its REIT taxable income. Moreover, for purposes of the REIT
asset tests, Host REIT will include its proportionate share of assets held
through the Operating Partnership, the Partnerships and Private Partnerships,
and any Subsidiary Partnerships. See "--Federal Income Taxation of Host REIT
Following the Merger--Ownership of Partnership Interests by a REIT."
Entity Classification. If the Operating Partnership or any of the
partnerships or limited liability companies in which the Operating Partnership
or any of the Partnerships or Private Partnerships will have a direct or
indirect interest (other than an indirect interest held through an entity
treated for federal income tax purposes as a corporation) following the REIT
Conversion (the "Subsidiary Partnerships") were treated as an association, the
entity would be taxable as a corporation and therefore would be subject to an
entity level tax on its income. In such a situation, the character of Host
REIT's assets and items of gross income would change and could preclude Host
REIT from qualifying as a REIT (see "--Federal Income Taxation of Host REIT
Following the Merger--Asset Tests Applicable to REITs" and "--Income Tests
Applicable to REITs").
The entire discussion of the federal income tax consequences of the
ownership of Host REIT Common Stock is based on the Operating Partnership and
all of the Subsidiary Partnerships being classified as a partnership for
federal income tax purposes. Pursuant to Treasury Regulations under Section
7701 of the Code, a partnership will be treated as a partnership for federal
income tax purposes unless it elects to be treated as a corporation or would
be treated as a corporation because it is a "publicly traded partnership."
Neither the Operating Partnership nor any of the Subsidiary Partnerships will
elect to be treated as a corporation, and therefore, subject to the disclosure
below, each will be treated as a partnership for federal income tax purposes
(or if it has only one partner or member, disregarded entirely for federal
income tax purposes).
Pursuant to Section 7704 of the Code, however, a partnership that does not
elect to be treated as a corporation nevertheless will be treated as a
corporation for federal income tax purposes if it is a "publicly traded
partnership," unless at least ninety percent (90%) of its income consists of
"qualifying income" within the meaning of that section. A "publicly traded
partnership" is any partnership (i) the interests in which are traded
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on an established securities market or (ii) the interests in which are readily
tradable on a "secondary market (or the substantial equivalent thereof)." OP
Units will not be traded on an established securities market. There is a
significant risk, however, that after the Unit Redemption Right becomes
exercisable, such interests would be considered readily tradable on the
substantial equivalent of a secondary market.
Hogan & Hartson has delivered to Host REIT and the Operating Partnership an
opinion stating that, based on certain factual assumptions and representations
described in the opinion (including as to the proposed method of operation of
the Operating Partnership after the REIT Conversion), the Operating
Partnership and each of the Subsidiary Partnerships will be treated as a
partnership (or disregarded) for federal income tax purposes (and not treated
as an association taxable as a corporation). Hogan & Hartson is of the opinion
that, based upon representations by Host REIT and the Operating Partnership as
to the expected ownership and operations of the Operating Partnership, even if
the Operating Partnership were considered to be a "publicly traded
partnership" under the Code because OP Units were considered to be readily
tradable on the substantial equivalent of a secondary market, the proposed
method of operation of the Operating Partnership is such that it will qualify
as a partnership for federal income tax purposes because it will have
sufficient "qualifying income." In this regard, the income requirements
generally applicable to REITs and the definition of "qualifying income" under
Section 7704 of the Code are similar in most key respects. There is one
significant difference, however, that is relevant to the Operating
Partnership. For a REIT, rent from a tenant does not qualify as "rents from
real property" if the REIT and/or one or more actual or constructive owners of
10% or more of the REIT actually or constructively own 10% or more of the
tenant; under Section 7704 of the Code, however, rent from a tenant is not
qualifying income if a partnership and/or one or more actual or constructive
owners of 5% or more of the partnership actually or constructively own 10% or
more of the tenant.
A substantial majority of the Operating Partnership's income will come from
rent payments by the Lessees, which will be indirectly controlled subsidiaries
of Crestline. Accordingly, because The Blackstone Group, Host REIT and any
owner of 10% or more of Host REIT will own (or be deemed to own) 5% or more of
the Operating Partnership, if The Blackstone Group, Host REIT and/or any owner
of 10% or more of Host REIT were to own (or be deemed to own) collectively 10%
or more of Crestline, none of the rent from the Lessees would be qualifying
income for purposes of determining whether the Operating Partnership should be
taxed as a corporation. In order to avoid this result, the Crestline Articles
of Incorporation expressly provide that no person (or persons acting as a
group), including The Blackstone Group, Host REIT and any owner of 10% or more
of Host REIT, may own, actually and/or constructively, more than 9.8% by value
of the equity in Crestline and the Crestline Articles of Incorporation contain
self-executing mechanisms intended to enforce this prohibition. In addition,
the Partnership Agreement prohibits any person (or persons acting as a group)
or entity (other than The Blackstone Group and Host REIT) from owning,
actually and/or constructively, more than 4.9% of the value of the Operating
Partnership, and the Host REIT Charter prohibits any person (or persons acting
as a group) or entity (including The Blackstone Group and the Marriott family
and their affiliated entities as a group) from, subject to certain limited
exceptions, owning, actually and/or constructively, more than 9.8% of the
lesser of the number or value of the total outstanding shares of Host REIT.
Assuming that all of these prohibitions are enforced at all times in
accordance with their terms (as to which there can be no assurance), then so
long as the Operating Partnership's income is such that Host REIT could meet
the gross income tests applicable to REITs (see "--Federal Income Taxation of
Host REIT Following the Merger--Income Tests Applicable to REITs" and "--
Ownership of Partnership Interests by a REIT"), the Operating Partnership's
"qualifying income" should be sufficient for it to avoid being classified as a
corporation even if it were considered a publicly traded partnership.
If the Operating Partnership were taxable as a corporation, most, if not
all, of the tax consequences described herein would be inapplicable. In
particular, Host REIT would not qualify as a REIT because the value of Host
REIT's ownership interest in the Operating Partnership would exceed 5% of Host
REIT's assets and Host REIT would be considered to hold more than 10% of the
voting securities of another corporation (see "--Federal Income Taxation of
Host REIT Following the Merger--Asset Tests Applicable to REITs"), which would
adversely affect the value of the Host REIT Common Stock (see "--Federal
Income Taxation of Host
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REIT Following the Merger--Failure of Host REIT to Qualify as a REIT").
However, as described above, Hogan & Hartson, counsel to the Operating
Partnership, is of the opinion that the proposed method of operation of the
Operating Partnership (as represented by the Operating Partnership and Host)
is such that it will be treated as a partnership for federal income tax
purposes and will not be subject to tax as a corporation or an association
taxable as a corporation. As noted previously, an opinion of counsel does not
bind the courts and no assurance can be provided that such opinion will not be
challenged by the IRS or will be sustained by a court if so challenged.
Allocations of Operating Partnership Income, Gain, Loss and Deduction. The
Partnership Agreement provides that if the Operating Partnership operates at a
net loss, net losses shall be allocated to Host REIT and the limited partners
in proportion to their respective percentage ownership interests in the
Operating Partnership, provided that net losses that would have the effect of
creating a deficit balance in a limited partner's capital account (as
specially adjusted for such purpose) ("Excess Losses") will be reallocated to
Host REIT, as general partner of the Operating Partnership. The Partnership
Agreement also provides that, if the Operating Partnership operates at a net
profit, net income shall be allocated first to Host REIT to the extent of
Excess Losses with respect to which Host REIT has not previously been
allocated net income and any remaining net income shall be allocated in
proportion to the respective percentage ownership interests of Host REIT and
the limited partners. Finally, the Partnership Agreement provides that if the
Operating Partnership has preferred units outstanding, income will first be
allocated to such preferred units to the extent necessary to reflect and
preserve the economic rights associated with such preferred units.
Although a partnership agreement will generally determine the allocation of
income and loss among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) of the
Code and the Treasury Regulations promulgated thereunder. Generally, Section
704(b) and the Treasury Regulations promulgated thereunder require that
partnership allocations respect the economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The allocations of taxable income and loss
provided for in the Partnership Agreement and the partnership agreements for
the Hotel Partnerships (and any Subsidiary Partnerships) are intended to
comply with the requirements of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations with Respect to the Hotels. Pursuant to Section 704(c) of
the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Hotels) that is contributed to a partnership
in exchange for an interest in the partnership must be allocated in a manner
such that the contributing partner is charged with, or benefits from,
respectively, the difference between the adjusted tax basis and the fair
market value of such property at the time of contribution (the "Book-Tax
Difference") associated with the property at the time of the contribution. The
Partnership Agreement requires that such allocations be made in a manner
consistent with Section 704(c) of the Code.
In general, the partners of the Operating Partnership (including Host REIT)
who contributed depreciated assets having a Book-Tax Difference will be
allocated depreciation deductions for tax purposes that are lower than such
deductions would be if determined on a pro rata basis. Thus, the carryover
basis of the contributed assets in the hands of the Operating Partnership may
cause Host REIT to be allocated lower depreciation and other deductions, and
therefore to be effectively allocated more income, which might adversely
affect Host REIT's ability to comply with the REIT distribution requirements.
See "--Federal Income Taxation of Host REIT Following the Merger--Annual
Distribution Requirements Applicable to REITs". However, in light of the
complexity of the governing rules affecting the calculation and allocation of
depreciation with respect to properties contributed to a partnership,
particularly when a number of those properties are subject to the separate
adjustments required in connection with a technical termination under Section
708 of the Code, the number of Hotels that the Operating Partnership will be
acquiring in connection with the OP Contribution, the Partnership
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Mergers, and the Blackstone Acquisition, and the impact on these calculations
of other outside events, including equity offerings by Host or Host REIT and
other acquisitions undertaken by Host, Host REIT or the Operating Partnership
prior to or in connection with the REIT Conversion, Host, Host REIT and the
Operating Partnership believe that it is impossible to predict with any degree
of precision the impact that the REIT Conversion will have on the future
depreciation allocable by the Operating Partnership to Host REIT.
In addition, in the event of the disposition of any of the contributed
assets which have such a Book-Tax Difference, all income attributable to such
Book-Tax Difference generally will be allocated to such partners, even though
the proceeds of such sale would be allocated proportionately among all the
partners in the Operating Partnership (and likely would be retained by the
Operating Partnership, rather than distributed to holders of OP Units). Thus,
if the Operating Partnership were to sell a Hotel with a Book-Tax Difference
that was contributed to the Operating Partnership by Host or Host REIT
(including in connection with the OP Contribution), Host REIT generally would
be allocated all of the income attributable to such Book-Tax Difference, which
could exceed the economic or book income allocated to it as a result of such
sale. Such an allocation might cause Host REIT to recognize taxable income in
excess of cash proceeds, which might adversely affect Host REIT's ability to
comply with the REIT distribution requirements (and could subject Host REIT to
a corporate level tax on such gain to the extent the gain is recognized within
the 10-year period after the first day of Host REIT's first taxable year as a
REIT). See "--Federal Income Taxation of Host REIT Following the Merger--
Annual Distribution Requirements Applicable to REITs" and "--Federal Income
Taxation of Host REIT Following the Merger--General." It should be noted in
this regard that as the general partner of the Operating Partnership, Host
REIT will determine whether or not to sell a Hotel contributed to the
Operating Partnership by Host REIT.
The Operating Partnership and Host REIT have determined to use generally the
traditional method, with a provision for a curative allocation of gain on sale
to the extent prior allocations of depreciation with respect to a specific
Hotel were limited by the "ceiling rule" applicable under the traditional
method, to account for Book-Tax Differences with respect to the Hotels
contributed to the Operating Partnership in connection with the OP
Contribution or the Partnership Mergers (although there may be certain
exceptions). This method is generally a more favorable method for accounting
for Book-Tax Differences from the perspective of those partners (including
Host REIT) receiving OP Units in exchange for property with a low basis
relative to value at the time of the OP Contribution and the Partnership
Mergers and is a less favorable method from the perspective of those partners
contributing cash (or "high basis" assets) to the Operating Partnership
(including Host REIT, to the extent it contributes cash to the Operating
Partnership).
With respect to any property purchased by the Operating Partnership
subsequent to the REIT Conversion, such property will initially have a tax
basis equal to its fair market value, and Section 704(c) of the Code will not
apply.
OTHER TAX CONSEQUENCES FOR HOST REIT AND ITS STOCKHOLDERS
Host REIT and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it (through the
Operating Partnership) or they transact business or reside. The state and
local tax treatment of Host REIT and its stockholders may not conform to the
federal income tax consequences discussed above. Consequently, prospective
stockholders of Host REIT should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in Host REIT.
A portion of the cash to be used by Host REIT to fund distributions is
expected to come from each Non-Controlled Subsidiary through payments of
dividends on the shares of such corporation held by the Operating Partnership
(and, in some cases, interest on notes held by the Operating Partnership).
Each Non-Controlled Subsidiary will pay federal and state income tax at the
full applicable corporate rates on its taxable income computed without regard
to any deduction for dividends. To the extent that a Non-Controlled Subsidiary
is required to pay federal, state or local taxes, the cash otherwise available
for distribution by Host REIT to its stockholders will be reduced accordingly.
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LEGAL MATTERS
Certain legal matters, including certain tax matters, will be passed upon
for Host and Host REIT by Hogan & Hartson. L.L.P.
EXPERTS
The financial statements and schedule of Host Marriott Corporation and Host
Marriott Hotels as of January 2, 1998 and January 3, 1997 and for each of the
three years in the period ended January 2, 1998, the financial statements and
schedule of HMC Senior Communities, Inc. as of January 2, 1998 and for the
period June 21, 1997 (inception) through January 2, 1998, the balance sheet of
Host Marriott, L.P. as of June 19, 1998 and the balance sheet of HMC Merger
Corporation as of September 28, 1998 included in this Proxy
Statement/Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.
OTHER MATTERS
The Board of Directors of Host knows of no other business to be presented at
the Special Meeting. In the event that other matters properly come before the
Special Meeting, the persons named as proxies will vote on them in accordance
with their best judgment.
STOCKHOLDER PROPOSALS
Each of the Host Bylaws and Host REIT Bylaws requires the 1999 Annual
Meeting to be held in May 1999. The Host Annual Meeting for 1999 (or, if the
Merger has been consummated, the Host REIT Annual Meeting for 1999) is
tentatively scheduled to be held on Thursday, May 13, 1999. Accordingly,
stockholder proposals submitted for presentation at the 1999 Annual Meeting of
Stockholders of Host REIT, in the event of the approval of the Agreement and
the consummation of the Merger, or the 1999 Annual Meeting of Stockholders of
Host, in the event that the Agreement is not approved by Host's stockholders
or the Merger is not otherwise consummated because other conditions have not
been satisfied, must be submitted in writing by any stockholder who meets the
requirements of the proxy rules under the Exchange Act by notice delivered or
mailed by first-class United States mail, postage prepaid, to the Corporate
Secretary, Host Marriott Corporation or HMC Merger Corporation, as the case
may be, 10400 Fernwood Road, Bethesda, Maryland 20817-1109 and must be
received no later than December 4, 1998 to be eligible for inclusion in the
proxy materials for that meeting. Any such notice shall set forth: (a) the
name and address of the stockholder and the text of the proposal to be
introduced; (b) the number of shares of Host Common Stock held of record,
owned beneficially and represented by proxy by such stockholder as of the date
of such notice; and (c) a representation that the stockholder intends to
appear in person or by proxy at the meeting to introduce the proposal
specified in the notice. Any stockholder proposal received after February 22,
1999 shall be considered untimely, regardless of whether it is submitted for
inclusion in the Company's proxy materials pursuant to Rule 14a-8 under the
Exchange Act or simply to notify the Company of the stockholder's intention to
introduce it for action at the meeting. The chairman of the meeting may refuse
to acknowledge the introduction of any stockholder proposals for which notice
is not provided in accordance with the foregoing procedures.
AVAILABLE INFORMATION; INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Host is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith
files reports, proxy statements and other information with the
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Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 75
Park Place, New York, New York 10007 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material may be obtained at
prescribed rates by writing the Commission, Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants, including Host, that
file electronically with the Commission. Host Common Stock is listed on the
NYSE, and reports, proxy statements and other information concerning Host may
also be inspected at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
Host REIT has filed with the Commission a registration statement (the
"Registration Statement," which term shall include any amendments thereto) on
Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to Host REIT Common Stock to be issued upon the consummation of
the Merger pursuant to the Agreement described herein, and this Proxy
Statement/Prospectus constitutes the Prospectus of Host REIT with respect to
such Host REIT Common Stock. This Proxy Statement/Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
thereto, certain parts of which are omitted in accordance with the rules and
regulations of the Commission, and to which reference is hereby made. For
further information, reference is hereby made to the Registration Statement
and the exhibits thereto.
Statements contained in this Proxy Statement/Prospectus as to the contents
of any contract or other document which is filed as an exhibit to the
Registration Statement are not necessarily complete, and each such statement
is qualified in its entirety by reference to the full text of such contract or
document.
Upon consummation of the REIT Conversion, Host REIT and the Operating
Partnership will be required to file reports and other information with the
Commission pursuant to the Exchange Act. In addition to applicable legal or
NYSE requirements, if any, holders of the Host REIT Common Stock will receive
annual reports containing audited financial statements with a report thereon
by Host REIT's and the Operating Partnership's independent public accountants,
and quarterly reports containing unaudited financial information for each of
the first three quarters of each fiscal year.
All documents filed with the Commission by Host pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior
to the date of the Special Meeting shall be deemed to be incorporated by
reference in this Proxy Statement/Prospectus and to be a part hereof from the
date any such document is filed. Any statement contained herein or in any
document incorporated or deemed to be incorporated herein by reference shall
be deemed to be modified or superseded for all purposes of this Proxy
Statement/Prospectus to the extent a statement contained in this Proxy
Statement/Prospectus or in any subsequently filed document that also is deemed
to be incorporated herein by reference modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy
Statement/Prospectus. All information appearing in this Proxy
Statement/Prospectus is qualified in its entirety by the information and
financial statements (including notes thereto) appearing in the documents
incorporated herein by reference, except to the extent set forth in the
immediately preceding statement.
No persons have been authorized to give any information or to make any
representation with respect to the matters described in this Proxy
Statement/Prospectus other than those contained herein or in the documents
incorporated by reference herein and, if given or made, such information or
representation must not be relied upon as having been authorized by Host or
Host REIT. This Proxy Statement/Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, any securities in any jurisdiction
to or from any person to whom it is not lawful to make any such offer or
solicitation in such jurisdiction. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of securities made hereunder shall
under any circumstances create an implication that there has been no change in
the facts set forth in this Proxy Statement/Prospectus or the affairs of Host
or Host REIT since the date hereof or that the information herein is correct
as of any time subsequent to the date hereof.
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GLOSSARY
"100% Participation with No Notes Issued" means all Partnerships participate
in the Partnership Mergers and the REIT Conversion and no Notes are issued.
"100% Participation with Notes Issued" means all Partnerships participate in
the Partnership Mergers and the REIT Conversion and every Limited Partner
elects to receive Notes.
"15% Personal Property Test" means the test applied to determine whether a
REIT satisfies the requirement under the Code that, in order for rent
attributable to the lease of personal property to qualify as "rents from real
property," such rent must not account for more than 15% of the total rent
received under the lease of real and personal property.
"1993 Act" means the Omnibus Budget Reconciliation Act of 1993.
"1993 Employee Benefits Allocation Agreement" means the Employee Benefits
and Other Employment Matters Allocation Agreement between Host and Marriott
International, as amended.
"1995 Employee Benefits Allocation Agreement" means the Employee Benefits
and Other Employment Matters Allocation Agreement entered into by Host and HM
Services that provides for the allocation of certain responsibilities with
respect to employee compensation, benefits and labor matters.
"1997 Act" means the Taxpayer Relief Act of 1997.
"1998 Employee Benefits Allocation Agreement" means the Employee Benefits
and Other Employment Matters Allocation Agreement among Host, the Operating
Partnership and Crestline, to be entered into in connection with the REIT
Conversion.
"Acquired Earnings" means undistributed earnings and profits of Host REIT
attributable to a "C" corporation taxable year (including accumulated
undistributed earnings and profits acquired from Host, some of which may have
resulted from either transactions undertaken in contemplation of the REIT
Conversion or the REIT Conversion itself).
"Acquiring Person" means a person or group of affiliated or associated
persons.
"ADA" means the Americans with Disabilities Act.
"Agreement" means the Agreement and Plan of Merger dated November , 1998 by
and among Host, Host REIT and the Operating Partnership, a copy of which is
attached hereto as Appendix A.
"Atlanta Marquis" means Atlanta Marriott Marquis II Limited Partnership, a
Delaware limited partnership, or, as the context may require, such entity
together with is subsidiaries, or any of such subsidiaries.
"Available Cash" means net income plus depreciation and amortization and any
reduction in reserves and minus interest and principal payments on debt,
capital expenditures, any additions to reserves and other adjustments.
"Beneficiary" means a qualified charitable organization selected by Host
REIT to be the beneficiary of a trust into which excess shares are to be
transferred pursuant to the Host REIT Charter.
"Blackstone" means Blackstone Real Estate Acquisitions L.L.C.
"Blackstone Acquisition" means the expected acquisition from The Blackstone
Entities of ownership of, or controlling interests in, twelve hotels and a
mortgage loan secured by a thirteenth hotel in exchange for OP
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Units, the assumption of certain liabilities and other consideration,
including up to 18% of the shares of Crestline common stock, to the extent
such acquisition is consummated.
"Blackstone Entities" means The Blackstone Group, a Delaware limited
partnership and a series of funds controlled by Blackstone Real Estate
Partners, a Delaware limited partnership.
"Blackstone Hotels" means the twelve upscale and luxury full-service hotel
properties expected to be acquired by Host from the Blackstone Entities in the
Blackstone Acquisition.
"Book-Tax Difference" means the difference between the fair market value of
property contributed to a partnership at the time of contribution and the
adjusted tax basis of such property at the time of such contribution.
"BT Wolfensohn Opinion" means the written opinion of BT Wolfensohn, which
has acted as financial advisor to Host, dated November , 1998.
"Built-In Gain Asset" means an asset which has been acquired from a C
corporation in a transaction in which the basis of the asset in the hands of
Host REIT is determined by reference to the basis of the asset in the hands of
the C corporation.
"Chain Services" mean services generally furnished on a central or regional
basis to the Hotels. Such services include the following: (i) the development
and operation of computer systems and reservation services, (ii) regional
management and administrative services, regional marketing and sales services,
regional training services, manpower development and relocation costs of
regional personnel and (iii) such additional central or regional services as
may from time to time be more efficiently performed on a regional or group
level.
"Chicago Suites" means Mutual Benefit Chicago Marriott Suite Hotel Partners,
L.P., a Rhode Island limited partnership.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the U.S. Securities and Exchange Commission.
"Company" means Host (to the extent of its business and assets to be
contributed to the Operating Partnership) with respect to the period prior to
the REIT Conversion, and Host REIT and the Operating Partnership collectively
with respect to the period after the REIT Conversion.
"Comprehensive Stock Incentive Plan" means the Host Marriott Corporation
1997 Comprehensive Stock Incentive Plan, formerly called the Host Marriott
Corporation 1993 Comprehensive Stock Incentive Plan.
"Control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
"Control shares" means voting shares which, if aggregated with all other
such voting shares previously acquired by the acquiror or in respect of which
the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority or (iii) a majority or more of the voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval.
"Convertible Preferred Securities" means the 6 3/4% Convertible Quarterly
Income Preferred Securities issued by Host Marriott Financial Trust, with an
aggregate liquidation amount of $550 million, which are guaranteed on a
subordinated basis by, and convertible into the common stock of, Host.
"CPI" means the Consumer Price Index.
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"Crestline" means Crestline Capital Corporation (formerly HMC Senior
Communities, Inc.), a Maryland corporation, or, as the context may require,
such entity together with the Lessees and its other subsidiaries or any of
them, which currently is a wholly-owned subsidiary of Host but will become a
separate public company as part of the REIT Conversion when Host or Host REIT
distributes the common stock of Crestline to its existing stockholders as part
of the Initial E&P Distribution.
"Debentures" means the 6 3/4% Convertible Subordinated Debentures due
December 2, 2026 issued by Host.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act.
"Desert Springs" means Desert Springs Marriott Limited Partnership, a
Delaware limited partnership, or, as the context may require, such entity
together with its subsidiaries, or any of such subsidiaries.
"DGCL" means the Delaware General Corporation Law, as amended.
"E&P" means earnings and profits.
"Effective Date" means the date upon which the Reincorporation by means of
the Merger is consummated.
"Effective Time" means the later of the time at which the Articles of Merger
with respect to the Merger of Host with and into Host REIT is filed with the
SDAT or the Certificate of Merger is filed with the Delaware Secretary of
State (or such later time as may be specified in the Articles of Merger) and
Certificate of Merger.
"Excess FF&E" means replacement FF&E that could cause the average tax basis
of the items of the Lessor's FF&E and other personal property that are leased
to the applicable Lessee to exceed 15% of the aggregate average tax basis of
the real and personal property subject to the applicable Lease.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FF&E" means furniture, fixtures and equipment.
"FF&E Adjustment" means the amount by which the annual Minimum Rent would be
reduced in the event that the average tax basis of the items of the Lessor's
FF&E and other personal property that are leased to the applicable Lessee
could exceed 15% of the aggregate average tax basis of the real and personal
property subject to the applicable Lease.
"FF&E Replacements" means FF&E to be acquired and certain routine repairs
that are normally capitalized to be performed in the next year.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Forum Group" means the Forum Group, Inc., which was acquired by Host on
June 21, 1997 from Marriott Senior Living Services, Inc., a subsidiary of
Marriott International. The Forum Group holds interests in 31 senior living
communities.
"Full Participation Scenario" means the REIT Conversion, including the
Blackstone Acquisition, occurs, all the Partnerships participate and no Host
REIT Common Stock or Notes are issued.
"Funds From Operations" or "FFO" as defined by NAREIT means net income
computed in accordance with GAAP, excluding gains or losses from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. FFO should not be considered as an alternative to net income,
operating profit, cash flows from operations or any other operating or
liquidity performance measure prescribed by GAAP. FFO is also not an indicator
of funds
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available to fund the Company's cash needs, including its ability to make
distributions. The Company's method of calculating FFO may be different from
methods used by other REITs and, accordingly, is not comparable to such other
REITs.
"GAAP" means generally accepted accounting principles.
"Gross Revenues" means proceeds from aggregate sales from a Hotel, including
room sales, food and beverage sales and telephone and other income.
"Hanover" means Hanover Marriott Limited Partnership, a Delaware limited
partnership.
"HM Services" means Host Marriott Services Corporation.
"HMH Properties" means HMH Properties, Inc.
"Hogan & Hartson" means Hogan & Hartson L.L.P.
"Host" means Host Marriott Corporation, a Delaware corporation, and either
the general partner or an affiliate of the general partner of each
Partnership, or, as the context may require, Host Marriott Corporation
together with its subsidiaries or any of such subsidiaries.
"Host Bylaws" means Host's Amended Bylaws.
"Host Certificate" means Host's Restated Certificate of Incorporation.
"Host Common Stock" means shares of the common stock, par value $1.00 per
share, of Host.
"Host Employee/Charitable Trust" means the Host Marriott Statutory
Employee/Charitable Trust, a Delaware statutory business trust, the indirect
beneficiaries of which with respect to distributions of income are employees
of Host REIT eligible to participate in the Comprehensive Stock Incentive Plan
(excluding Directors of Host REIT and certain other highly compensated
employees) and the beneficiary of which with respect to capital is one or more
charitable organizations specified therein. The Host Employee/Charitable Trust
and possibly certain other investors will be the owners of the voting stock of
the Non-Controlled Subsidiaries.
"Host REIT" means HMC Merger Corporation, a wholly-owned, newly formed
Maryland subsidiary of Host (to be renamed "Host Marriott Corporation" in
connection with the Merger), which was formed for the sole purpose of
effecting the Reincorporation by means of the Merger, and which will be the
sole general partner of the Operating Partnership, and the successor to Host,
or, as the context may require, HMC Merger Corporation and the Operating
Partnership collectively together with their subsidiaries or any of such
subsidiaries.
"Host REIT Bylaws" means the bylaws of Host REIT attached to the Agreement
as Exhibit C.
"Host REIT Charter" means the Articles of Incorporation of Host REIT that
will be in effect upon consummation of the Merger and the other transactions
comprising the REIT Conversion, attached to the Agreement as Exhibit B.
"Host REIT Common Stock" means shares of the common stock, par value $.01
per share, of Host REIT.
"Host REIT Preferred Stock" means shares of the preferred stock, par value
$.01 per share of Host REIT.
"Host REIT Right" means one preferred stock purchase right issued under the
Host REIT Rights Agreement.
"Host REIT Rights Agreement" means the rights agreement to be adopted by
Host REIT substantially as described herein.
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"Host Right" means the right issued under the Host Rights Agreement.
"Host Rights Agreement" means the rights agreement dated as of February 3,
1989 between Host and the Bank of New York.
"Hotels" means the approximately 125 full-service hotels operating primarily
under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand
names in which the Company and its subsidiaries are expected initially to have
controlling interests or own outright following the REIT Conversion and the
Blackstone Acquisition.
"Impermissible Tenant Service Income" means any amount charged to a tenant
for services rendered by Host REIT or its affiliates other than through an
independent contractor from whom Host REIT derives no revenue excluding for
these purposes services "usually or customarily rendered" in connection with
the rental of real property and not otherwise considered "rendered to the
occupant."
"Initial E&P Distribution" means one or more taxable distributions by Host
or Host REIT to its stockholders in connection with the REIT Conversion
consisting of shares of common stock of Crestline and cash or other
consideration in an amount to be determined.
"Interested Stockholder" means a person who owns 10% or more of the voting
power of a corporation's then outstanding shares of capital stock or his
affiliate.
"IRS" means the Internal Revenue Service.
"IRS Restructuring Act" means the Internal Revenue Service Restructuring and
Reform Act of 1998, which was signed into law on July 22, 1998.
"Leases" means the lease agreements under which the Lessees will lease the
Hotels from the Operating Partnership.
"Lessees" means the entities to which the Operating Partnership will lease
the Hotels and who will operate the Hotels under the existing long-term
Management Agreements and pay rent to the Operating Partnership.
"LIBOR" means the London Interbank Offered Rate.
"Limited Partners" means the limited partners, excluding those affiliated
with Host, of the Partnerships that are participating in the Partnership
Mergers.
"Management Agreements" means the existing long-term management agreements
pursuant to which the Managers manage the Hotels.
"Managers" means the subsidiaries of Marriott International and other
companies who manage the Hotels on behalf of Host, the Partnerships or the
Private Partnerships (and following the REIT Conversion, on behalf of the
Lessees) pursuant to the existing Management Agreements.
"Market Leasing Factor" means the amount used to determine the FF&E
Adjustment to Minimum Rent in the event that the average tax basis of the
items of the Lessor's FF&E and other personal property that are leased to the
applicable Lessee could exceed 15% of the aggregate average tax basis of the
real and personal property subject to the applicable Lease. The Market Leasing
Factor will be determined for the first two years under a Lease at the time
the Lease is executed. Each year thereafter, the Market Leasing Factor will be
determined by an independent valuation expert based upon the median of the
leasing rates of at least three nationally recognized companies engaged in the
business of leasing similar personal property.
"Marriott International" means Marriott International, Inc., a Delaware
corporation.
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"Marriott International Purchase Right" means the right of Marriott
International to purchase up to 20% of each class of Host's outstanding voting
shares at the then fair market value upon the occurrence of certain change of
control events involving Host, which will continue in effect after the Merger
until June 2017, subject to certain limitations intended to protect the REIT
status of Host REIT.
"MDAH" means Marriott Diversified American Hotels, L.P., a Delaware limited
partnership.
"Merger" means the proposed merger of Host with and into Host REIT, as
described in this Proxy Statement/Prospectus.
"MGCL" means the Maryland General Corporation Law, as amended.
"MHP" means Marriott Hotel Properties Limited Partnership, a Delaware
limited partnership, or, as the context may require, such entity together with
its subsidiaries, or any of such subsidiaries.
"MHP2" means Marriott Hotel Properties II Limited Partnership, a Delaware
limited partnership, or, as the context may require, such entity together with
its subsidiaries, or any of such subsidiaries.
"Minimum Rent" means a fixed dollar amount specified in each lease, less the
FF&E Adjustment.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"New Credit Facility" means the new $1.25 billion credit facility of the
Operating Partnership.
"Non-Controlled Subsidiaries" means the taxable corporations in which the
Operating Partnership will own 95% of the economic interest but no voting
stock and which will hold various assets contributed by Host and its
subsidiaries to the Operating Partnership, which assets, if owned directly by
the Operating Partnership, could jeopardize Host REIT's status as a REIT.
"Non-U.S. Stockholders" means persons that are, for purposes of federal
income taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts.
"Note" means an unsecured note of the Operating Partnership which a Limited
Partner may elect to receive in connection with the Partnership Mergers in
exchange for OP Units.
"NYSE" means the New York Stock Exchange, Inc.
"OP Contribution" means the contribution by Host of its wholly-owned full-
service hotels, its interests in certain hotel partnerships and certain other
assets to the Operating Partnership in exchange for units of limited and
general partnership interest in the Operating Partnership and the assumption
of liabilities.
"OP Units" means the limited partnership interests in the Operating
Partnership.
"Operating Partnership" means Host Marriott, L.P., a Delaware limited
partnership, the sole general partner of which will be Host REIT, or, as the
context may require, such entity together with its subsidiaries, including the
Non-Controlled Subsidiaries, or any of them.
"Ownership Limit" means the prohibition in the Host REIT Charter against
ownership, directly or indirectly or by virtue of the attribution provisions
of the Code, by any person or persons acting as a group of more than (i) 9.8%
of the lesser of the number or value of shares of Host REIT Common Stock
outstanding or (ii) 9.8% of the lesser of the number or value of the issued
and outstanding shares of any class or series of Host REIT preferred stock,
subject to waiver or modification by Host REIT in certain limited
circumstances and to certain limited exceptions for a holder of shares of Host
REIT Common Stock solely by reason of the Merger in excess of the Ownership
Limit so long as such holder would not own, directly or by attribution under
the Code, more than 9.9% by value of the outstanding capital stock of Host
REIT as of the Special Merger Ownership Limit Effective Time.
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"Partnership" means any of the eight limited partnerships that own full-
service hotels in which Host or its subsidiaries are general partners (Atlanta
Marquis, Chicago Suites, Desert Springs, Hanover, MDAH, MHP, MHP2 or PHLP),
or, as the context may require, any such entity together with its
subsidiaries, or any of such subsidiaries.
"Partnership Agreement" means the amended and restated agreement of limited
partnership of the Operating Partnership.
"Partnership Mergers" means the acquisition by merger, if and to the extent
consummated, of up to eight of the Partnerships that own full-service hotels
in which Host or its subsidiaries are general partners in exchange for OP
Units (which may be exchanged for Host REIT Common Stock or Notes).
"Percentage Rent" means an amount of rent based upon specified percentages
of aggregate sales (including room sales, food and beverage sales and
telephone and other sales) at each Hotel which is subject to a Lease.
"Person" means an individual, corporation, partnership, limited liability
company, trust or other entity.
"PHLP" means Potomac Hotel Limited Partnership, a Delaware limited
partnership.
"Plan Assets" means the underlying assets of Host REIT which are deemed to
be assets of an investing ERISA Plan.
"Plans" means, collectively, the Host Marriott Corporation 1997
Comprehensive Stock Incentive Plan (formerly called the Host Marriott
Corporation 1993 Comprehensive Stock Incentive Plan), the Host Marriott
Corporation Employee Stock Purchase Plan, the Host Marriott Corporation (HMC)
Retirement and Savings Plan and the Host Marriott Corporation Executive
Deferred Compensation Plan.
"Private Partnership" means a partnership (other than a Partnership) or
limited liability company that owns one or more full-service Hotels and that,
prior to the REIT Conversion, is partially but not wholly-owned by Host or one
of its subsidiaries. The Private Partnerships are not participating in the
Partnership Mergers.
"Private Partnership Transactions" means the acquisition of the partnership
interests from four Private Partnerships that own one or more full-service
hotels and that, prior to the REIT Conversion, are partially but not wholly-
owned by Host or one of its subsidiaries in exchange for OP Units, if and to
the extent such acquisitions are consummated.
"Prohibited Owner" means a Person holding record title to any shares in
excess of the Ownership Limit.
"Prohibited Transferee" means a Person who would violate the Ownership Limit
or any other restriction in the Host REIT Charter because of a transfer of
shares of beneficial interest of Host REIT to such Person or any other event.
"Proxy Statement/Prospectus" means this Proxy Statement/Prospectus, dated
November , 1998, including the appendices attached hereto.
"Recognition Period" means the ten-year period beginning on the date on
which a Built-In Gain Asset is acquired by Host REIT.
"Record Date" means November 13, 1998.
"Reincorporation" means the reincorporation of Host from the State of
Delaware to the State of Maryland by means of the Merger.
224
<PAGE>
"REIT" means a real estate investment trust.
"REIT Conversion" means (i) the OP Contribution, (ii) the Reincorporation by
means of the Merger, (iii) the Initial E&P Distribution, (iv) the recently
completed refinancing and amendment of the debt securities and certain credit
facilities of Host substantially in the manner described herein, (v) the
Partnership Mergers (if and to the extent consummated), (vi) the Private
Partnership Transactions (if and to the extent consummated), (vii) the
Blackstone Acquisition (if and to the extent consummated), (viii) the creation
and capitalization of the Non-Controlled Subsidiaries, (ix) the leasing of
virtually all of the full-service Hotels owned or controlled by the Operating
Partnership to the Lessees and (x) such other related transactions described
in "The REIT Conversion" and such other steps occurring prior to, concurrent
with or within a reasonable time after the Effective Date, as Host may
determine in its sole discretion to be necessary or desirable to complete or
facilitate the transactions contemplated herein or otherwise to permit Host
REIT to elect to be treated as a REIT for federal income tax purposes for the
first full taxable year commencing after the REIT Conversion.
"Related Party Tenant" means a tenant in which Host REIT, or an actual or
constructive owner of 10% or more of Host REIT, actually or constructively
owns 10% or more of the interests.
"Restructuring Transactions" means the OP Contribution and the
Reincorporation by means of the Merger.
"REVPAR" means revenue per available room. REVPAR measures daily room
revenues generated on a per room basis by combining the average daily room
rate charged and the average daily occupancy achieved. REVPAR excludes food
and beverage and other ancillary revenues generated by the hotel.
"Rights Distribution Date" means the earlier to occur of (i) 10 days
following the Stock Acquisition Date or (ii) 10 business days (or such later
date as the Board of Directors may determine) following the commencement of a
tender offer or exchange offer, the consummation of which would result in the
beneficial ownership by a person of 20% or more of the outstanding Host REIT
Common Stock.
"SAR" means stock appreciation rights.
"SDAT" means the Maryland State Department of Assessments and Taxation.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Note Refinancing" means the recently completed refinancing of $1.55
billion of outstanding senior notes through offers to purchase such debt
securities for cash and a concurrent solicitation of consents to amend the
terms of the debt securities to facilitate the transactions constituting the
REIT Conversion.
"SFAS" means Statement of Financial Accounting Standard.
"Special Dividend" means the currently contemplated form of the "other"
consideration comprising the Initial E&P Distribution, consisting of a special
dividend payable, at each stockholder's election, in cash or Host Common Stock
(or Host REIT Common Stock if the Merger has occurred).
"Special Meeting" means the special meeting of stockholders of Host to be
held at the Ritz-Carlton Hotel, 1700 Tysons Boulevard, McLean, Virginia,
22102, on December 15, 1998 at 10:00 a.m., local time, and any adjournments or
postponements thereof.
"Special Merger Ownership Limit Effective Time" means 12:01 a.m. (Eastern
Time) on the first day after the Effective Date.
"Stock Acquisition Date" means the date of a public announcement that an
Acquiring Person has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding Host REIT Common Stock.
"Subsidiary Partnerships" means partnerships or limited liability companies
in which either the Operating Partnership, the Partnerships or the Private
Partnerships have an interest.
"Transfer and Exchange Agent" means First Chicago Trust Company of New York,
the transfer agent and registrar for Host REIT Common Stock.
"Treasury Regulations" means the regulations promulgated by the IRS under
the Code.
225
<PAGE>
"U.S. Stockholder" means a holder of Host REIT Common Stock who (for United
States federal income tax purposes) is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized
in or under the laws of the United States or any political subdivision
thereof, (iii) an estate or trust the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have authority to control
all substantial decisions of the trust.
"UBTI" means unrelated business taxable income.
"Unit Redemption Right" means the right of Limited Partners who retain OP
Units to redeem, beginning one year following the effective date of the
Partnership Mergers, their OP Units and receive, at Host REIT's election,
either Host REIT Common Stock on a one-for-one basis (subject to adjustment)
or cash in an amount equal to the market value of such shares.
"UPREIT" means an umbrella partnership real estate investment trust.
226
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following financial information is included on the pages indicated:
HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HOST MARRIOTT CORPORATION
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheets as of January 2, 1998 and January 3, 1997... F-4
Consolidated Statements of Operations for the Fiscal Years Ended January
2, 1998, January 3, 1997 and December 29, 1995......................... F-5
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended January 2, 1998, January 3, 1997 and December 29, 1995........... F-6
Consolidated Statement of Cash Flows for the Fiscal Years Ended January
2, 1998, January 3, 1997 and December 29, 1995......................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Condensed Consolidated Balance Sheet as of September 11, 1998
(unaudited)............................................................ F-31
Condensed Consolidated Statements of Operations for the Thirty-Six Weeks
Ended September 11, 1998 and September 12, 1997 (unaudited)............ F-32
Condensed Consolidated Statements of Cash Flows for the Thirty-Six Weeks
Ended September 11, 1998 and September 12, 1997 (unaudited)............ F-33
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-34
HOST MARRIOTT HOTELS
Report of Independent Public Accountants................................ F-43
Combined Consolidated Balance Sheets as of January 2, 1998 and January
3, 1997................................................................ F-44
Combined Consolidated Statements of Operations for the Fiscal Years
Ended January 2, 1998, January 3, 1997 and December 29, 1995........... F-45
Combined Consolidated Statements of Cash Flows for the Fiscal Years
Ended January 2, 1998, January 3, 1997 and December 29, 1995........... F-46
Notes to Combined Consolidated Financial Statements..................... F-47
Condensed Combined Consolidated Balance Sheet as of September 11, 1998
(unaudited)............................................................ F-71
Condensed Combined Consolidated Statements of Operations for the Thirty-
Six Weeks Ended September 11, 1998 and September 12, 1997 (unaudited).. F-72
Condensed Combined Consolidated Statements of Cash Flows for the Thirty-
Six Weeks Ended September 11, 1998 and September 12, 1997 (unaudited).. F-73
Notes to Condensed Combined Consolidated Financial Statements
(unaudited)............................................................ F-74
HMC SENIOR COMMUNITIES, INC., WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION (TENANT FINANCIAL STATEMENTS)
Report of Independent Public Accountants................................ F-81
Consolidated Balance Sheet as of January 2, 1998........................ F-82
Consolidated Statement of Operations for the Period from June 21, 1997
(inception) through January 2, 1998.................................... F-83
Consolidated Statement of Shareholder's Equity for the Period from June
21, 1997 (inception) through January 2, 1998........................... F-84
Consolidated Statement of Cash Flows for the Period from June 21, 1997
(inception) through January 2, 1998.................................... F-85
Notes to Consolidated Financial Statements.............................. F-86
Condensed Consolidated Balance Sheet as of September 11, 1998
(unaudited)............................................................ F-96
Condensed Consolidated Statement of Operations for the Thirty-Six Weeks
Ended September 11, 1998 and the Twelve Weeks Ended September 12, 1997
(unaudited)............................................................ F-97
Condensed Consolidated Statement of Cash Flows for the Thirty-Six Weeks
Ended September 11, 1998 and the Twelve Weeks Ended September 12, 1997
(unaudited)............................................................ F-98
Notes to Condensed Consolidated Financial Statements.................... F-99
HOST MARRIOTT L.P.
Report of Independent Public Accountants................................ F-101
Balance Sheet as of September 11, 1998 (unaudited) and June 19, 1998.... F-102
Notes to Balance Sheet.................................................. F-103
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HMC MERGER CORPORATION
Report of Independent
Public Accountants..... F-105
Balance Sheet as of
September 28, 1998..... F-106
Notes to Balance Sheet.. F-107
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OPERATING PARTNERSHIP
Introduction to
Unaudited Pro Forma
Financial Statements of
the Company............ F-108
100% Participation with
No Notes Issued
Pro Forma Balance Sheet
as of September 11,
1998(1)............... F-110
Pro Forma Statement of
Operations for the
First Three Quarters
1998(1)............... F-114
Pro Forma Statement of
Operations for Fiscal
Year 1997(1).......... F-115
Pro Forma Statement of
Cash Flows for the
First Three Quarters
1998.................. F-120
Pro Forma Statement of
Cash Flows for Fiscal
Year 1997............. F-121
100% Participation with
Notes Issued
Pro Forma Balance Sheet
as of June 19,
1998(1)............... F-123
Pro Forma Statement of
Operations for the
First Three Quarters
1998(1)............... F-127
Pro Forma Statement of
Operations for Fiscal
Year 1997(1).......... F-128
Pro Forma Statement of
Cash Flows for the
First Three Quarters
1998 ................. F-134
Pro Forma Statement of
Cash Flows for Fiscal
Year 1997............. F-135
No Partnership
Participation
Pro Forma Balance Sheet
as of September 11,
1998(1)............... F-137
Pro Forma Statement of
Operations for the
First Three Quarters
1998(1)............... F-140
Pro Forma Statement of
Operations for Fiscal
Year 1997(1).......... F-141
Pro Forma Statement of
Cash Flows for the
First Three Quarters
1998.................. F-146
Pro Forma Statement of
Cash Flows for Fiscal
Year 1997............. F-147
HOST REIT
Introduction to Unau-
dited Pro Forma Finan-
cial Statements of Host
REIT................... F-149
100% Participation with
No Notes Issued
Pro Forma Balance Sheet
as of September 11,
1998(1)............... F-150
Pro Forma Statement of
Operations for the
First Three Quarters
1998(1)............... F-151
Pro Forma Statement of
Operations for Fiscal
Year 1997(1).......... F-152
100% Participation with
Notes Issued
Pro Forma Balance Sheet
as of September 11,
1998(1)............... F-155
Pro Forma Statement of
Operations for the
First Three Quarters
1998(1)............... F-156
Pro Forma Statement of
Operations for Fiscal
Year 1997(1).......... F-157
No Partnership
Participation
Pro Forma Balance Sheet
as of September 11,
1998(1)............... F-160
Pro Forma Statement of
Operations for the
First Three Quarters
1998(1)............... F-161
Pro Forma Statement of
Operations for Fiscal
Year 1997(1).......... F-162
CRESTLINE
Introduction to
Unaudited Pro Forma
Financial Statements of
Crestline.............. F-164
All Partnerships
Participate
Pro Forma Balance Sheet
as of September 11,
1998(1)............... F-166
Pro Forma Statement of
Operations for the
First Three Quarters
1998(1)............... F-167
Pro Forma Statement of
Operations for Fiscal
Year 1997(1).......... F-168
No Partnership
Participation
Pro Forma Balance Sheet
as of September 11,
1998(1)............... F-173
Pro Forma Statement of
Operations for the
First Three Quarters
1998(1)............... F-174
Pro Forma Statement of
Operations for Fiscal
Year 1997(1).......... F-175
</TABLE>
- --------
(1) Pro forma statement includes a final column to show the pro forma effect
of a delay in the effectiveness of Host's REIT Conversion until January 1,
2000 (the "REIT 2000 Pro Forma").
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheets of Host
Marriott Corporation and subsidiaries as of January 2, 1998 and January 3,
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
January 2, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Corporation and subsidiaries as of January 2, 1998 and January 3,
1997, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended January 2, 1998, in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, in
1995 the Company changed its method of accounting for the impairment of long-
lived assets.
Arthur Andersen LLP
Washington, D.C.
February 27, 1998
F-3
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ASSETS
Property and Equipment, net.................................... $5,217 $3,805
Notes and Other Receivables, net (including amounts due from
affiliates of $23 million and $156 million, respectively)..... 54 297
Due from Managers.............................................. 93 89
Investments in Affiliates...................................... 13 11
Other Assets................................................... 284 246
Short-term Marketable Securities............................... 354 --
Cash and Cash Equivalents...................................... 511 704
------ ------
$6,526 $5,152
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Senior Notes Issued by the Company or its Subsidiaries........ $1,585 $1,021
Mortgage Debt................................................. 1,979 1,529
Other......................................................... 219 97
------ ------
3,783 2,647
Accounts Payable and Accrued Expenses.......................... 97 74
Deferred Income Taxes.......................................... 508 464
Other Liabilities.............................................. 388 290
------ ------
Total Liabilities........................................... 4,776 3,475
------ ------
Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust Holding Company Substantially
All of Whose Assets are the Convertible Subordinated
Debentures Due 2026 ("Convertible Preferred Securities")...... 550 550
------ ------
Shareholders' Equity
Common Stock, 600 million shares authorized; 203.8 million
shares in 1997 and 202.0 million shares in 1996 issued and
outstanding.................................................. 204 202
Additional Paid-in Capital.................................... 947 926
Retained Earnings (Deficit)................................... 49 (1)
------ ------
Total Shareholders' Equity.................................. 1,200 1,127
------ ------
$6,526 $5,152
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
REVENUES
Hotels.................................................. $1,093 $ 717 $ 474
Senior living communities............................... 37 -- --
Net gains (losses) on property transactions............. (11) 1 (3)
Equity in earnings of affiliates........................ 5 3 --
Other................................................... 23 11 13
------ ----- -----
Total revenues........................................ 1,147 732 484
------ ----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees
of $162 million, $101 million and $67 million,
respectively).......................................... 649 461 281
Senior living communities (including Marriott
International management fees of $6 million in 1997)... 20 -- --
Other (including a $60 million write-down of undeveloped
land in 1995).......................................... 29 38 89
------ ----- -----
Total operating costs and expenses.................... 698 499 370
------ ----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST................................... 449 233 114
Minority interest........................................ (32) (6) (2)
Corporate expenses....................................... (47) (43) (36)
Interest expense......................................... (302) (237) (178)
Dividends on Convertible Preferred Securities of
subsidiary trust........................................ (37) (3) --
Interest income.......................................... 52 48 27
------ ----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES................................................... 83 (8) (75)
Benefit (provision) for income taxes..................... (36) (5) 13
------ ----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS................. 47 (13) (62)
DISCONTINUED OPERATIONS
Loss from discontinued operations (net of income tax
benefit of $3 million in 1995)......................... -- -- (8)
Provision for loss on disposal (net of income tax
benefit of $23 million in 1995)........................ -- -- (53)
------ ----- -----
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS................. 47 (13) (123)
Extraordinary items--Gain (loss) on extinguishment of
debt (net of income tax expense (benefit) of $1 million
in 1997 and ($10) million in 1995)...................... 3 -- (20)
------ ----- -----
NET INCOME (LOSS)........................................ $ 50 $ (13) $(143)
====== ===== =====
BASIC EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS.................................... $ .23 $(.07) $(.39)
Discontinued operations (net of income taxes)............ -- -- (.39)
Extraordinary items--Gain (loss) on extinguishment of
debt (net of income taxes).............................. .02 -- (.12)
------ ----- -----
BASIC EARNINGS (LOSS) PER COMMON SHARE................... $ .25 $(.07) $(.90)
====== ===== =====
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS.................................... $ .23 $(.07) $(.39)
Discontinued operations (net of income taxes)............ -- -- (.39)
Extraordinary items--Gain (loss) on extinguishment of
debt (net of income taxes).............................. .01 -- (.12)
------ ----- -----
DILUTED EARNINGS (LOSS) PER COMMON SHARE................. $ .24 $(.07) $(.90)
====== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
COMMON CONVERTIBLE ADDITIONAL
SHARES PREFERRED COMMON PAID-IN RETAINED
OUTSTANDING STOCK STOCK CAPITAL EARNINGS
----------- ----------- ------ ---------- --------
(IN MILLIONS) (IN MILLIONS)
<C> <S> <C> <C> <C> <C>
Balance, December 30,
153.6 1994.................... $ 13 $154 $479 $ 64
-- Net loss................. -- -- -- (143)
Distribution of stock of
Host Marriott Services
-- Corporation............. -- -- (4) 95
Common stock issued for
the comprehensive stock
and employee stock
1.3 purchase plans.......... -- 1 16 --
Conversion of preferred
4.8 stock to common stock... (13) 5 8 --
- --------------------------------------------------------------------------------
Balance, December 29,
159.7 1995.................... -- 160 499 16
-- Net loss................. -- -- -- (13)
Adjustment to Host
Marriott Services
-- Dividend................ -- -- -- (4)
Common stock issued for
the comprehensive stock
and employee stock
3.9 purchase plans.......... -- 3 17 --
Common stock issued for
6.8 warrants exercised...... -- 7 42 --
Common stock issued in
31.6 stock offering.......... -- 32 368 --
- --------------------------------------------------------------------------------
Balance, January 3,
202.0 1997.................... -- 202 926 (1)
-- Net income............... -- -- -- 50
Common stock issued for
the comprehensive stock
and employee stock
1.8 purchase plans.......... -- 2 21 --
- --------------------------------------------------------------------------------
Balance, January 2,
203.8 1998.................... $ -- $204 $947 $ 49
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations................ $ 47 $ (13) $ (62)
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 240 168 122
Income taxes........................................... (20) (35) (35)
Amortization of deferred income........................ (4) (6) (7)
Net (gains) losses on property transactions............ 19 4 70
Equity in earnings of affiliates....................... (5) (3) --
Other.................................................. 60 49 33
Changes in operating accounts:
Other assets.......................................... 60 9 (2)
Other liabilities..................................... 67 32 (9)
------- ----- -----
Cash from continuing operations........................ 464 205 110
Cash from (used in) discontinued operations............ -- (4) 32
------- ----- -----
Cash from operations................................... 464 201 142
------- ----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets........................... 51 373 358
Less non-cash proceeds................................. -- (35) (33)
------- ----- -----
Cash received from sales of assets...................... 51 338 325
Acquisitions............................................ (596) (702) (392)
Capital expenditures:
Capital expenditures for renewals and replacements..... (131) (87) (56)
Lodging construction funded by project financing....... -- (3) (40)
New investment capital expenditures.................... (29) (69) (64)
Purchases of short-term marketable securities........... (354) -- --
Notes receivable collections............................ 6 13 43
Affiliate notes receivable and collections, net......... (6) 21 2
Other................................................... 13 (15) 26
------- ----- -----
Cash used in investing activities from continuing
operations............................................ (1,046) (504) (156)
Cash used in investing activities from discontinued
operations............................................ -- -- (52)
------- ----- -----
Cash used in investing activities...................... (1,046) (504) (208)
------- ----- -----
FINANCING ACTIVITIES
Issuances of debt....................................... 857 46 1,251
Issuances of Convertible Preferred Securities, net...... -- 533 --
Issuances of common stock............................... 6 454 13
Scheduled principal repayments.......................... (93) (82) (100)
Debt prepayments........................................ (403) (173) (960)
Other................................................... 22 28 --
------- ----- -----
Cash from financing activities from continuing
operations............................................ 389 806 204
Cash used in financing activities from discontinued
operations............................................ -- -- (4)
------- ----- -----
Cash from financing activities......................... 389 806 200
------- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (193) 503 134
CASH AND CASH EQUIVALENTS, beginning of year............ 704 201 67
------- ----- -----
CASH AND CASH EQUIVALENTS, end of year.................. $ 511 $ 704 $ 201
======= ===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties and senior living communities ............. $ 733 $ 696 $ 141
======= ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
As of January 2, 1998, Host Marriott Corporation (the "Company") owned, or
had controlling interests in, 95 upscale and luxury full-service hotel lodging
properties generally located throughout the United States and operated under
the Marriott and Ritz-Carlton brand names. Most of these properties are
managed by Marriott International, Inc. ("Marriott International"). At that
date, the Company also held minority interests in various partnerships that
own 242 additional properties, including 22 full-service hotel properties,
managed by Marriott International. The Company also owned a portfolio
consisting of 30 premier senior living communities as of January 2, 1998, all
of which are managed by Marriott Senior Living Services, Inc. ("MSLS"), a
subsidiary of Marriott International.
On December 29, 1995, the Company distributed to its shareholders through a
special tax-free dividend (the "Special Dividend") its food, beverage, and
merchandise concessions business at airports, on tollroads, and at arenas and
other attractions (the "Operating Group"). See Note 2 for a discussion of the
Special Dividend. The 1995 consolidated financial statements were restated to
reflect the Operating Group as discontinued operations.
The structure of the Company was substantially altered on October 8, 1993
(the "Marriott International Distribution Date") when the Company distributed
the stock of a wholly-owned subsidiary, Marriott International, Inc., in a
special dividend (the "Marriott International Distribution"). See Note 14 for
a description of the Marriott International Distribution and related
transactions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in affiliates over
which the Company has the ability to exercise significant influence, but does
not control, are accounted for using the equity method. All material
intercompany transactions and balances have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31. Fiscal
years 1997 and 1995 included 52 weeks compared to 53 weeks for fiscal year
1996.
Revenues and Expenses
Revenues primarily represent house profit from the Company's hotel
properties and senior living communities because the Company has delegated
substantially all of the operating decisions related to the generation of
house profit from its hotel properties and senior living communities to the
manager. Revenues also include net gains (losses) on property transactions and
equity in the earnings of affiliates. House profit reflects the net revenues
flowing to the Company as property owner and represents hotel properties' and
senior living communities' operating results, less property-level expenses,
excluding depreciation, management fees, real and personal property taxes,
ground and equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses in the accompanying consolidated
financial statements. See Note 18.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
F-8
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has considered the impact of EITF 97-2 on its financial
statements and has determined that EITF 97-2 requires the Company to include
property-level sales and operating expenses of its hotels and senior living
communities in its statements of operations (see Note 18). The Company will
adopt EITF 97-2 in the fourth quarter of 1998 with retroactive effect in prior
periods to conform to the new presentation. Application of EITF 97-2 to the
consolidated financial statements for the fiscal years ended January 2, 1998,
January 3, 1997 and December 29, 1995 would have increased both revenues and
operating expenses by approximately $1.7 billion, $1.2 billion and $.9
billion, respectively and would have had no impact on operating profit, net
income or earnings per share.
Earnings (Loss) Per Common Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per common share are computed by dividing net income by the weighted
average number of shares of common stock outstanding plus other dilutive
securities. Diluted earnings per common share has not been adjusted for the
impact of the Convertible Preferred Securities for 1997 and 1996 and for the
comprehensive stock plan and warrants for 1996 and 1995 as they are anti-
dilutive.
A reconciliation of the number of shares utilized for the calculation of
dilutive earnings per common share follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Weighted average number of common shares outstanding......... 203.1 188.7 158.3
Assuming distribution of common shares granted under compre-
hensive stock plan, less shares assumed purchased at average
market price................................................ 4.8 -- --
Assuming distribution of common shares issuable for warrants,
less shares assumed purchased at average market price....... .3 -- --
----- ----- -----
Shares utilized for the calculation of diluted earnings per
share..................................................... 208.2 188.7 158.3
===== ===== =====
</TABLE>
International Operations
The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates: revenues of $39 million and
$18 million and loss before income taxes of $9 million and $2 million in 1997
and 1996, respectively. International revenues and income before income taxes
in 1995 were not material.
Property and Equipment
Property and equipment is recorded at cost. For newly developed properties,
cost includes interest, rent and real estate taxes incurred during development
and construction. Replacements and improvements are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to ten
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.
Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire without further cost to the Company.
In cases where management is holding for sale particular hotel properties or
senior living communities, the Company assesses impairment based on whether
the estimated sales price less costs of disposal of each
F-9
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
individual property to be sold is less than the net book value. A property is
considered to be held for sale when the Company has made the decision to
dispose of the property. Otherwise, the Company assesses impairment of its
real estate properties based on whether it is probable that undiscounted
future cash flows from each individual property will be less than its net book
value. If a property is impaired, its basis is adjusted to its fair market
value.
Deferred Charges
Deferred financing costs related to long-term debt are deferred and
amortized over the remaining life of the debt.
Cash, Cash Equivalents and Short-term Marketable Securities
The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $115 million and $67 million at January 2,
1998 and January 3, 1997, respectively, of cash related to certain
consolidated partnerships, the use of which is restricted generally for
partnership purposes to the extent it is not distributed to the partners.
Short-term marketable securities include investments with a maturity of 91
days to one year at the date of purchase. The Company's short-term marketable
securities represent investments in U.S. government agency notes and high
quality commercial paper. The short-term marketable securities are categorized
as available for sale and, as a result, are stated at fair market value.
Unrealized holding gains and losses are included as a separate component of
shareholders' equity until realized.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents
and short-term marketable securities. The Company maintains cash and cash
equivalents and short-term marketable securities with various high credit-
quality financial institutions. The Company performs periodic evaluations of
the relative credit standing of these financial institutions and limits the
amount of credit exposure with any institution.
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.
Self-Insurance Programs
Prior to the Marriott International Distribution Date, the Company was self-
insured for certain levels of general liability, workers' compensation and
employee medical coverage. Estimated costs of these self-insurance programs
were accrued at present values of projected settlements for known and
anticipated claims. The Company discontinued its self-insurance programs for
claims arising subsequent to the Marriott International Distribution Date.
Interest Rate Swap Agreements
The Company has entered into a limited number of interest rate swap
agreements to diversify certain of its debt to a variable rate or fixed rate
basis. The interest rate differential to be paid or received on interest rate
swap agreements is accrued as interest rates change and is recognized as an
adjustment to interest expense.
F-10
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Statements of Financial Accounting Standards
The Company adopted Statements of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" during 1995. Adoption of these statements did not have a
material effect on the Company's continuing operations. See Note 2 for a
discussion of the adoption of SFAS No. 121 on discontinued operations.
During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." The adoption of SFAS No. 123 did not have a material effect on
the Company's consolidated financial statements. See Note 10.
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share;" SFAS
No. 129, "Disclosure of Information About Capital Structure" and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
adoption of these statements did not have a material effect on the Company's
consolidated financial statements and the appropriate disclosures required by
these statements have been incorporated herein. The Company will adopt SFAS
No. 130, "Reporting Comprehensive Income," in 1998 and does not expect it to
have a material effect on the Company's consolidated financial statements.
2. HM SERVICES SPECIAL DIVIDEND
On December 29, 1995, the Company distributed to its shareholders through
the Special Dividend all of the outstanding shares of common stock of Host
Marriott Services Corporation ("HM Services"), formerly a wholly-owned
subsidiary of the Company, which, as of the date of the Special Dividend,
owned and operated food, beverage and merchandise concessions at airports, on
tollroads and at stadiums and arenas and other tourist attractions. The
Special Dividend provided Company shareholders with one share of common stock
of HM Services for every five shares of Company common stock held by such
shareholders on the record date of December 22, 1995. The Company recorded
approximately $9 million of expenses related to the consummation of the
Special Dividend in 1995. Revenues for the Company's discontinued operations
totaled $1,158 million in 1995. The provision for loss on disposal includes
the operating loss from discontinued operations from August 9, 1995
(measurement date) through December 29, 1995 of $44 million, net of taxes, and
estimated expenses related to the Special Dividend of $9 million.
Effective September 9, 1995, the Company adopted SFAS No. 121, which
requires that an impairment loss be recognized when the carrying amount of an
asset exceeds the sum of the undiscounted estimated future cash flows
associated with the asset. As a result of the adoption of SFAS No. 121, the
Company recognized a non-cash, pre-tax charge during the fourth quarter of
1995 of $47 million. Such charge has been reflected in discontinued operations
for fiscal year 1995.
For purposes of governing certain of the ongoing relationships between the
Company and HM Services after the Special Dividend and to provide for an
orderly transition, the Company and HM Services entered into various
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement and a Transitional Services Agreement.
Effective as of December 29, 1995, these agreements provide, among other
things, for the division between the Company and HM Services of certain assets
and liabilities, including but not limited to liabilities related to employee
stock and other benefit plans and the establishment of certain obligations for
HM Services to issue shares upon exercise of warrants (see Note 7) and to
issue shares or pay cash to the Company upon exercise of stock options held by
certain former employees of the Company (see Note 10).
F-11
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Land and land improvements................................... $ 521 $ 349
Buildings and leasehold improvements......................... 4,796 3,507
Furniture and equipment...................................... 710 548
Construction in progress..................................... 35 82
------ ------
6,062 4,486
Less accumulated depreciation and amortization............... (845) (681)
------ ------
$5,217 $3,805
====== ======
</TABLE>
Interest cost capitalized in connection with the Company's development and
construction activities totaled $1 million in 1997, $3 million in 1996 and $5
million in 1995.
In 1997, the Company, through an agreement with the ground lessor of one of
its properties terminated its ground lease and recorded a $15 million loss on
the write-off of its investment, including certain transaction costs, which
has been included in net gains (losses) on property transactions in the
accompanying consolidated financial statements.
In 1996, the Company recorded additional depreciation expense of $15 million
as a result of a change in the estimated depreciable lives and salvage values
for certain hotel properties. Also, in 1996, the Company recorded a $4 million
charge to write down an undeveloped land parcel to its net realizable value
based on its expected sales value.
In 1995, the Company made a determination that its owned Courtyard and
Residence Inn properties were held for sale and recorded a $10 million charge
to write down the carrying value of five of these individual properties to
their estimated net realizable values. In the fourth quarter of 1995,
management instituted a program to liquidate certain non-income producing
assets and to reinvest the proceeds in the acquisition of full-service hotels.
As part of this program, management determined that a 174-acre parcel of
undeveloped land in Germantown, Maryland that was to be developed into an
office project over an extended period of time would no longer be developed
and instead decided to attempt to sell the property. Accordingly, the Company
recorded a pre-tax charge of $60 million in the fourth quarter of 1995 to
reduce the asset to its estimated sales value. In 1997, the Company sold a
portion of the land parcel at its approximate net book value of $11 million.
4. INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES
Investments in and receivables from affiliates consist of the following:
<TABLE>
<CAPTION>
OWNERSHIP
INTERESTS 1997 1996
--------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Equity investments
Hotel partnerships which own 22 full-service
Marriott Hotels, 120 Courtyard hotels, 50
Residence Inns and 50 Fairfield Inns operated
by Marriott International, as of January 2,
1998........................................... 1%-50% $ 13 $ 11
Notes and other receivables, net................. -- 23 156
------ -------
$ 36 $ 167
====== =======
</TABLE>
Hotel properties owned by affiliates generally were acquired from the
Company in connection with limited partnership offerings. The Company or one
of its subsidiaries typically serve as a general partner of each partnership
and the hotels are operated by Marriott International under long-term
agreements.
F-12
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1997, the Company acquired all of the outstanding interests in the
Chesapeake Hotel Limited Partnership ("CHLP") that owns six hotels and
acquired controlling interests in four affiliated partnerships for
approximately $550 million, including the assumption of approximately $410
million of debt. These affiliated partnerships included the partnerships that
own the 353-room Hanover Marriott; the 884-room Marriott's Desert Springs
Resort and Spa; the Marriott Hotel Properties Limited Partnership ("MHPLP")
that owns the 1,503-room Marriott Orlando World Center and a 50.5% interest in
the 624-room Marriott Harbor Beach Resort; and the partnership that owns the
418-unit Leisure Park retirement community. Subsequent to year-end, the
Company obtained a controlling interest in the partnership that owns the
1,671-room Atlanta Marriott Marquis for approximately $239 million, including
the assumption of $164 million of mortgage debt.
In 1996, the Company purchased controlling interests in four affiliated
partnerships for $640 million, including $429 million of existing debt. These
affiliated partnerships included the partnership that owns the 1,355-room San
Diego Marriott Hotel and Marina; the Marriott Hotel Properties II Limited
Partnership that owns the 1,290-room New Orleans Marriott, the 999-room San
Antonio Marriott Rivercenter, the 368-room San Ramon Marriott, and a 50%
limited partner interest in the 754-room Santa Clara Marriott; the Marriott
Suites Limited Partnership that owns four hotels; and the partnership that
owns the 510-room Salt Lake City Marriott.
Receivables from affiliates are reported net of reserves of $144 million at
January 2, 1998 and $227 million at January 3, 1997. Receivables from
affiliates at January 2, 1998 include a $10 million debt service guarantee for
the partnership that owns the Atlanta Marriott Marquis, which was repaid in
early 1998. Receivables from affiliates at January 3, 1997 included a $140
million mortgage note at 9% that amortizes through 2003, which was eliminated
in the consolidation of CHLP in 1997. The Company has committed to advance
additional amounts to affiliates, if necessary, to cover certain debt service
requirements. Such commitments are limited, in the aggregate, to an additional
$60 million at January 2, 1998. Subsequent to January 2, 1998, this amount was
reduced to $20 million in connection with the refinancing and acquisition of a
controlling interest in the Atlanta Marriott Marquis. Net amounts repaid to
the Company under these commitments totaled $2 million and $13 million in 1997
and 1996, respectively. Net amounts funded by the Company totaled $10 million
in 1997 and $8 million in 1995. There were no fundings in 1996.
The Company's pre-tax income from affiliates includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Interest income............................................... $11 $17 $16
Equity in net income.......................................... 5 3 --
--- --- ---
$16 $20 $16
=== === ===
</TABLE>
Combined summarized balance sheet information for the Company's affiliates
follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Property and equipment....................................... $1,991 $2,636
Other assets................................................. 284 334
------ ------
Total assets............................................... $2,275 $2,970
====== ======
Debt, principally mortgages.................................. $2,185 $2,855
Other liabilities............................................ 412 672
Partners' deficit............................................ (322) (557)
------ ------
Total liabilities and partners' deficit.................... $2,275 $2,970
====== ======
</TABLE>
F-13
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Combined summarized operating results for the Company's affiliates follow:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues................................................ $ 610 $ 737 $ 770
Operating expenses:
Cash charges (including interest)...................... (381) (465) (506)
Depreciation and other non-cash charges................ (192) (230) (240)
----- ----- -----
Income before extraordinary items....................... 37 42 24
Extraordinary items--forgiveness of debt................ 40 12 181
----- ----- -----
Net income............................................ $ 77 $ 54 $ 205
===== ===== =====
</TABLE>
In December 1997, the Company, on behalf of six of its subsidiaries, filed a
preliminary Prospectus/Consent Solicitation with the Securities and Exchange
Commission, which describes the potential consolidation of six limited
partnerships, including 219 limited-service hotel properties, into a single
operating partnership and the formation of a new general partner which would
intend to qualify as a real estate investment trust ("REIT"). Completion of
this transaction is subject to several major contingencies, including a vote
by the partners in each partnership, and no assurance can be given that the
transaction will be consummated.
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Properties Notes, with a rate of 9 1/2% due May 2005......... $ 600 $ 600
New Properties Notes, with a rate of 8 7/8% due July 2007.... 600 --
Acquisitions Notes, with a rate of 9% due December 2007...... 350 350
Senior Notes, with an average rate of 9 3/4% at January 2,
1998, maturing through 2012................................. 35 71
------ ------
Total Senior Notes......................................... 1,585 1,021
------ ------
Mortgage debt (non-recourse) secured by $3.0 billion of real
estate assets, with an average rate of 8.6% at January 2,
1998, maturing through 2022................................. 1,957 1,529
Line of Credit, secured by $500 million of real estate
assets, with a variable rate of Eurodollar plus 1.7% or Base
Rate (as defined) plus 0.7% at the option of the Company
(7.6% at January 2, 1998) due March 1998.................... 22 --
------ ------
Total Mortgage Debt........................................ 1,979 1,529
------ ------
Other notes, with an average rate of 8% at January 2, 1998,
maturing through 2027....................................... 200 86
Capital lease obligations.................................... 19 11
------ ------
Total Other................................................ 219 97
------ ------
$3,783 $2,647
====== ======
</TABLE>
In May 1995, HMH Properties, Inc. ("Properties"), a wholly-owned subsidiary
of Host Marriott Hospitality, Inc., issued an aggregate of $600 million of 9
1/2% senior secured notes (the "Properties Notes"). The bonds were issued in
conjunction with a concurrent $400 million offering by a subsidiary of the
Company's discontinued HM Services' business at par, and have a final maturity
of May 2005. The net proceeds were used
F-14
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to defease, and subsequently redeem, all of the senior notes issued by Host
Marriott Hospitality, Inc. and to repay borrowings under the line of credit
with Marriott International. In connection with the redemptions and
defeasance, the Company recognized an extraordinary loss in 1995 of $17
million, net of taxes, related to continuing operations.
In December 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an
indirect, wholly-owned subsidiary of the Company, issued $350 million of 9%
senior notes (the "Acquisitions Notes"). The Acquisitions Notes were issued at
par and have a final maturity of December 2007. A portion of the net proceeds
were utilized to repay in full the outstanding borrowings under the $230
million revolving line of credit (the "Acquisition Revolver"), which was then
terminated. In connection with the termination of the Acquisition Revolver,
the Company recognized an extraordinary loss in 1995 of $3 million, net of
taxes.
On July 10, 1997, Properties and Acquisitions completed consent
solicitations (the "Consent Solicitations") with holders of their senior notes
to amend certain provisions of their senior notes' indentures. The Consent
Solicitations facilitated the merger of Acquisitions with and into Properties
(the "Merger"). The amendments to the indentures also increased the ability of
Properties to acquire, through certain subsidiaries, additional properties
subject to non-recourse indebtedness and controlling interests in
corporations, partnerships and other entities holding attractive properties
and increased the threshold required to permit Properties to make
distributions to affiliates.
Concurrent with the Consent Solicitations and the Merger, Properties issued
an aggregate of $600 million of 8 7/8% senior notes (the "New Properties
Notes") at par with a maturity of July 2007. Properties received net proceeds
of approximately $570 million, net of the costs of the Consent Solicitations
and the Offering, which will be used to fund future acquisitions of, or the
purchase of interests in, full-service hotels and other lodging-related
properties, which may include senior living communities, as well as for
general corporate purposes.
The Properties Notes, the Acquisitions Notes and the New Properties Notes
are guaranteed on a joint and several basis by certain of Properties'
subsidiaries and rank pari passu in right of payment with all other existing
future senior indebtedness of Properties. Properties was the owner of 58 of
the Company's 95 lodging properties at January 2, 1998.
The net assets of Properties at January 2, 1998 were approximately $518
million, substantially all of which were restricted. The indentures governing
the Properties Notes, the Acquisitions Notes and the New Properties Notes
contain covenants that, among other things, limit the ability to incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell stock of subsidiaries, and enter into certain mergers
and consolidations.
During 1997, the Company, through a newly-created, wholly-owned subsidiary,
HMC Capital Resources Corporation ("Capital Resources"), entered into a
revolving line of credit agreement (the "Line of Credit") with a group of
commercial banks under which it may borrow up to $500 million for the
acquisition of lodging real estate and for the Company's working capital
purposes. On June 19, 2000, any outstanding borrowings on the Line of Credit
convert to a term loan arrangement with all unpaid advances due June 19, 2004.
Borrowings under the Line of Credit bear interest at either the Eurodollar
rate plus 1.7% or the Base Rate (as defined in the agreement) plus 0.7%, at
the option of the Company. An annual fee of 0.35% is charged on the unused
portion of the commitment. The Line of Credit was originally secured by six
hotel properties contributed to Capital Resources, with a carrying value of
approximately $500 million as of January 2, 1998, and is guaranteed by the
Company. As a result of this transaction, the Company terminated its line of
credit with Marriott International. As of January 2, 1998, outstanding
borrowings on the Line of Credit were approximately $22 million as a result of
a borrowing to fund the acquisition of the Ontario Airport Marriott.
F-15
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also purchased 100% of the outstanding bonds secured by a first
mortgage on the San Francisco Marriott in 1997. The Company purchased the
bonds for $219 million, an $11 million discount to the face value of $230
million. In connection with the redemption and defeasance of the bonds, the
Company recognized an extraordinary gain of $5 million, which represents the
$11 million discount less the write-off of unamortized deferred financing
fees, net of taxes.
In 1997, the Company incurred approximately $418 million of mortgage debt in
conjunction with the acquisition of 11 hotels. In connection with the
acquisition of the outstanding common stock of Forum Group, Inc. (the "Forum
Group") in June 1997 (see Note 12), the Company also assumed debt of
approximately $270 million. The $270 million of debt is comprised of secured
debt of approximately $198 million and unsecured debt of approximately $72
million ($59 million of which was provided by Marriott International). In
1997, the Company completed $56 million of the $107 million expansion plan for
the Forum Group properties. As a result, an additional $33 million of debt
financing has been provided by Marriott International, and Marriott
International may provide additional financing as the expansion plan is
completed. The Company also assumed approximately $15 million of debt in
conjunction with the acquisition of the Leisure Park retirement community.
In conjunction with the construction of the Philadelphia Marriott, which was
completed and opened in January 1995, the Company obtained first mortgage
financing from Marriott International for 60% of the construction and
development costs of the hotel. In the fourth quarter of 1996, the Company
repaid the $109 million mortgage, prior to the rate increasing to 10% per
annum with an additional 2% deferred, with the proceeds from the convertible
preferred securities offering discussed in Note 6. In the first quarter of
1997, the Company obtained $90 million in first mortgage financing from two
insurance companies secured by the Philadelphia Marriott. The mortgage bears
interest at a fixed rate of 8.49% and matures in April 2009.
In December 1997, the Company successfully completed the refinancing of the
MHPLP mortgage debt for approximately $152 million. The new mortgage bears
interest at 7.48% and matures in January 2008. In connection with the
refinancing, the Company recognized an extraordinary loss of $2 million, which
represents payment of a prepayment penalty and the write-off of unamortized
deferred financing fees, net of taxes.
At January 2, 1998, the Company was party to an interest rate exchange
agreement with a financial institution (the contracting party) with an
aggregate notional amount of $100 million. Under this agreement, the Company
collects interest based on specified floating interest rates of one month
LIBOR (rate of 6% at January 2, 1998) and pays interest at fixed rates (rate
of 7.99% at January 2, 1998). This agreement expires in 1998 in conjunction
with the maturity of the mortgage on the New York Marriott Marquis. Also in
1997, the Company was party to two additional interest rate swap agreements
with an aggregate notional amount of $400 million which expired in May 1997.
The Company realized a net reduction of interest expense of $1 million in
1997, $6 million in 1996 and $5 million in 1995 related to interest rate
exchange agreements. The Company monitors the creditworthiness of its
contracting parties by evaluating credit exposure and referring to the ratings
of widely accepted credit rating services. The Standard and Poors' long-term
debt rating for the contracting party is A-. The Company is exposed to credit
loss equal to the accrued interest receivable on the notional amount of
interest rate exchange agreements outstanding ($0 at January 2, 1998), in the
event of non-performance by the contracting party to the interest rate swap
agreements; however, the Company does not anticipate non-performance by the
contracting party.
F-16
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's debt balance at January 2, 1998, includes $232 million of debt
that is recourse to the parent company. Aggregate debt maturities at January
2, 1998, excluding capital lease obligations, are (in millions):
<TABLE>
<S> <C>
1998................................................................ $ 371
1999................................................................ 58
2000................................................................ 135
2001................................................................ 220
2002................................................................ 158
Thereafter.......................................................... 2,822
------
$3,764
======
</TABLE>
Cash paid for interest for continuing operations, net of amounts
capitalized, was $286 million in 1997, $220 million in 1996 and $177 million
in 1995. Deferred financing costs, which are included in other assets,
amounted to $97 million and $61 million, net of accumulated amortization, as
of January 2, 1998 and January 3, 1997, respectively. Amortization of deferred
financing costs totaled $7 million, $5 million and $4 million in 1997, 1996
and 1995, respectively.
6. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF A SUBSIDIARY TRUST HOLDING COMPANY SUBSTANTIALLY ALL OF WHOSE ASSETS ARE
THE CONVERTIBLE SUBORDINATED DEBENTURES DUE 2026
In December 1996, Host Marriott Financial Trust (the "Issuer"), a wholly-
owned subsidiary trust of the Company, issued 11 million shares of 6 3/4%
convertible quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by the Company to the extent the Issuer has funds
available therefor. This guarantee, when taken together with the Company's
obligations under the indenture pursuant to which the Debentures were issued,
the Debentures, the Company's obligations under the Trust Agreement and its
obligations under the indenture to pay costs, expenses, debts and liabilities
of the Issuer (other than with respect to the Convertible Preferred
Securities) provides a full and unconditional guarantee of amounts due on the
Convertible Preferred Securities. Proceeds from the issuance of the
Convertible Preferred Securities were invested in 6 3/4% Convertible
Subordinated Debentures (the "Debentures") due December 2, 2026 issued by the
Company. The Issuer exists solely to issue the Convertible Preferred
Securities and its own common securities (the "Common Securities") and invest
the proceeds therefrom in the Debentures, which is its sole asset. Separate
financial statements of the Issuer are not presented because of the Company's
guarantee described above; the Company's management has concluded that such
financial statements are not material to investors and the Issuer is wholly-
owned and essentially has no independent operations.
Each of the Convertible Preferred Securities is convertible at the option of
the holder into shares of Company common stock at the rate of 2.6876 shares
per Convertible Preferred Security (equivalent to a conversion price of
$18.604 per share of Company common stock). The Debentures are convertible at
the option of the holders into shares of Company common stock at a conversion
rate of 2.6876 shares for each $50 in principal amount of Debentures. The
Issuer will only convert Debentures pursuant to a notice of conversion by a
holder of Convertible Preferred Securities. During 1997 and 1996, no shares
were converted into common stock.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and payable
quarterly in arrears thereafter. The distribution rate and the distribution
and other payment dates for the
F-17
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Convertible Preferred Securities will correspond to the interest rate and
interest and other payment dates on the Debentures. The Company may defer
interest payments on the Debentures for a period not to exceed 20 consecutive
quarters. If interest payments on the Debentures are deferred, so too are
payments on the Convertible Preferred Securities. Under this circumstance, the
Company will not be permitted to declare or pay any cash distributions with
respect to its capital stock or debt securities that rank pari passu with or
junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result
of the acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.
7. SHAREHOLDERS' EQUITY
Six hundred million shares of common stock, with a par value of $1 per
share, are authorized, of which 203.8 million and 202.0 million were issued
and outstanding as of January 2, 1998 and January 3, 1997, respectively. One
million shares of no par value preferred stock are authorized with none
outstanding. During 1995, substantially all outstanding shares of such
preferred stock were converted into approximately five million shares of
common stock with the remainder defeased.
On March 27, 1996, the Company completed the issuance of 31.6 million shares
of common stock for net proceeds of nearly $400 million.
In connection with a class action settlement, the Company issued warrants to
purchase up to 7.7 million shares of the Company's common stock at $8.00 per
share through October 8, 1996 and $10.00 per share thereafter. During 1996,
6.8 million warrants were exercised at $8.00 per share and an equivalent
number of shares of Company common stock were issued. During 1997,
approximately 60,000 warrants were exercised at $10.00 per share and an
equivalent number of shares of Company common stock were issued. As of January
2, 1998, there were approximately 550,000 warrants outstanding.
In February 1989, the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right was distributed
for each outstanding share of the Company's common stock. Each right entitles
the holder to buy 1/1,000th of a share of a newly issued series of junior
participating preferred stock of the Company at an exercise price of $150 per
share. The rights will be exercisable 10 days after a person or group acquires
beneficial ownership of at least 20%, or begins a tender or exchange offer for
at least 30%, of the Company's common stock. Shares owned by a person or group
on February 3, 1989 and held continuously thereafter are exempt for purposes
of determining beneficial ownership under the rights plan. The rights are non-
voting and will expire on February 2, 1999, unless exercised or previously
redeemed by the Company for $.01 each. If the Company is involved in a merger
or certain other business combinations not approved by the Board of Directors,
each right entitles its holder, other than the acquiring person or group, to
purchase common stock of either the Company or the acquiror having a value of
twice the exercise price of the right.
8. INCOME TAXES
Total deferred tax assets and liabilities at January 2, 1998 and January 3,
1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets......................................... $ 158 $ 139
Deferred tax liabilities.................................... (666) (603)
------ ------
Net deferred income tax liability......................... $ (508) $ (464)
====== ======
</TABLE>
F-18
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of January 2, 1998 and January 3, 1997 follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Investments in affiliates................................... $ (310) $ (303)
Property and equipment...................................... (200) (135)
Safe harbor lease investments............................... (65) (73)
Deferred tax gain........................................... (92) (92)
Reserves.................................................... 103 97
Alternative minimum tax credit carryforwards................ 41 26
Other, net.................................................. 15 16
------ ------
Net deferred income tax liability......................... $ (508) $ (464)
====== ======
</TABLE>
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current--Federal............................................. $19 $(2) $ 7
-- State................................................. 4 3 3
-- Foreign............................................... 3 3 --
--- --- ----
26 4 10
--- --- ----
Deferred-- Federal........................................... 8 2 (23)
-- State................................................. 2 (1) --
--- --- ----
10 1 (23)
--- --- ----
$36 $ 5 $(13)
=== === ====
</TABLE>
At January 2, 1998, the Company had approximately $41 million of alternative
minimum tax credit carryforwards available which do not expire.
Through 1997, the Company settled with the Internal Revenue Service ("IRS")
substantially all issues for tax years 1979 through 1993. The Company expects
to resolve any remaining issues with no material impact on the consolidated
financial statements. The Company made net payments to the IRS of
approximately $10 million and $45 million in 1997 and 1996, respectively,
related to these settlements. Certain adjustments totaling approximately $2
million and $11 million in 1996 and 1995, respectively, were made to the tax
provision related to those settlements.
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- -----
<S> <C> <C> <C>
Statutory Federal tax rate............................. 35.0% (35.0)% (35.0)%
State income taxes, net of Federal tax benefit......... 4.9 21.7 2.5
Tax credits............................................ (2.7) -- (0.1)
Additional tax on foreign source income................ 6.0 40.8 --
Tax contingencies...................................... -- 25.0 14.6
Permanent items........................................ .1 9.0 --
Other, net............................................. .1 1.0 0.7
---- ----- -----
Effective income tax rate............................ 43.4% 62.5 % (17.3)%
==== ===== =====
</TABLE>
F-19
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As part of the Marriott International Distribution and the Special Dividend,
the Company, Marriott International and HM Services entered into tax-sharing
agreements which reflect each party's rights and obligations with respect to
deficiencies and refunds, if any, of Federal, state or other taxes relating to
the businesses of the Company, Marriott International and HM Services prior to
the Marriott International Distribution and the Special Dividend.
Cash paid for income taxes, including IRS settlements, net of refunds
received, was $56 million in 1997, $40 million in 1996 and $22 million in
1995.
9. LEASES
The Company leases certain property and equipment under non-cancelable
operating and capital leases. Future minimum annual rental commitments for all
non-cancelable leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN MILLIONS)
<S> <C> <C>
1998....................................................... $ 3 $ 115
1999....................................................... 3 112
2000....................................................... 3 109
2001....................................................... 3 106
2002....................................................... 3 103
Thereafter................................................. 16 1,361
--- ------
Total minimum lease payments............................... 31 $1,906
======
Less amount representing interest.......................... 12
---
Present value of minimum lease payments.................. $19
===
</TABLE>
As discussed in Note 12, the Company sold and leased back 37 of its
Courtyard properties in 1995 and an additional 16 Courtyard properties in 1996
to a REIT. Additionally, in 1996, the Company sold and leased back 18 of its
Residence Inns to the same REIT. These leases, which are accounted for as
operating leases and are included above, have initial terms expiring through
2012 for the Courtyard properties and 2010 for the Residence Inn properties,
and are renewable at the option of the Company. Minimum rent payments are $51
million annually for the Courtyard properties and $17 million annually for the
Residence Inn properties, and additional rent based upon sales levels are
payable to the owner under the terms of the leases.
Leases also include long-term ground leases for certain hotels, generally
with multiple renewal options. Certain leases contain provision for the
payment of contingent rentals based on a percentage of sales in excess of
stipulated amounts.
Certain of the lease payments included in the table above relate to
facilities used in the Company's former restaurant business. Most leases
contain one or more renewal options, generally for five or 10-year periods.
Future rentals on leases have not been reduced by aggregate minimum sublease
rentals of $124 million payable to the Company under non-cancelable subleases.
The Company remains contingently liable at January 2, 1998 on certain leases
relating to divested non-lodging properties. Such contingent liabilities
aggregated $110 million at January 2, 1998. However, management considers the
likelihood of any substantial funding related to these leases to be remote.
F-20
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rentals on operating leases........................... $ 98 $83 $34
Additional rentals based on sales............................. 20 16 17
---- --- ---
$118 $99 $51
==== === ===
</TABLE>
10. EMPLOYEE STOCK PLANS
At January 2, 1998, the Company has two stock-based compensation plans which
are described below. Under the comprehensive stock plan (the "Comprehensive
Plan"), the Company may award to participating employees (i) options to
purchase the Company's common stock, (ii) deferred shares of the Company's
common stock and (iii) restricted shares of the Company's common stock. In
addition, the Company has an employee stock purchase plan (the "Employee Stock
Purchase Plan"). The principal terms and conditions of the two plans are
summarized below.
Total shares of common stock reserved and available for issuance under
employee stock plans at January 2, 1998 are:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Comprehensive Plan............................................. 28
Employee Stock Purchase Plan................................... 3
---
31
===
</TABLE>
Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. Options granted before May 11, 1990 expire 10 years after the
date of grant and nonqualified options granted on or after May 11, 1990 expire
up to 15 years after the date of grant. Most options vest ratably over each of
the first four years following the date of the grant. In connection with the
Marriott International Distribution, the Company issued an equivalent number
of Marriott International options and adjusted the exercise prices of its
options then outstanding based on the relative trading prices of shares of the
common stock of the two companies.
The Company continues to account for expense under its plans under the
provisions of Accounting Principle Board Opinion 25 and related
interpretations as permitted under SFAS No. 123. Accordingly, no compensation
cost has been recognized for its fixed stock options under the Comprehensive
Plan and its Employee Stock Purchase Plan.
For purposes of the following disclosures required by SFAS No. 123, the fair
value of each option granted has been estimated on the date of grant using an
option-pricing model with the following weighted average assumptions used for
grants in 1997, 1996 and 1995, respectively: risk-free interest rate of 6.2%,
6.6% and 6.8%, respectively, volatility of 35%, 36% and 37%, respectively,
expected lives of 12 years and no dividend yield. The weighted average fair
value per option granted during the year was $13.13 in 1997, $8.68 in 1996 and
$5.76 in 1995.
Pro forma compensation cost for 1997, 1996 and 1995 would have reduced
(increased) net income (loss) by approximately $330,000, ($150,000) and
($5,000), respectively. Basic and diluted earnings per share on a pro forma
basis were not impacted by the pro forma compensation cost in 1997, 1996 and
1995.
F-21
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The effects of the implementation of SFAS No. 123 are not representative of
the effects on reported net income in future years because only the effects of
stock option awards granted in 1995, 1996 and 1997 have been considered.
In connection with the Special Dividend, the then outstanding options held
by current and former employees of the Company were redenominated in both
Company and HM Services stock and the exercise prices of the options were
adjusted based on the relative trading prices of shares of the common stock of
the two companies. For all options held by certain current and former
employees of Marriott International, the number and exercise price of the
options were adjusted based on the trading prices of shares of the Company's
common stock immediately before and after the Special Dividend. Therefore, the
options outstanding reflect these revised exercise prices. Pursuant to the
Distribution Agreement between the Company and HM Services, the Company has
the right to receive up to 1.4 million shares of HM Services' common stock or
an equivalent cash value subsequent to exercise of the options held by certain
former and current employees of Marriott International. As of January 2, 1998,
the Company valued this right at approximately $20 million, which is included
in other assets. A summary of the status of the Company's stock option plan
for 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(IN MILLIONS) EXERCISE PRICE (IN MILLIONS) EXERCISE PRICE (IN MILLIONS) EXERCISE PRICE
------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, at beginning of
year................... 8.3 $ 4 10.0 $ 4 11.7 $ 4
Granted................. .1 20 .2 13 -- --
Exercised............... (1.6) 4 (1.9) 4 (2.3) 4
Forfeited/Expired....... -- -- -- -- (.3) 4
Adjustment for Special
Dividend............... -- -- -- -- .9 4
---- ---- ----
Balance, at end of
year................... 6.8 4 8.3 4 10.0 4
==== ==== ====
Options exercisable at
year-end............... 6.4 7.6 8.5
</TABLE>
The following table summarizes information about stock options outstanding
at January 2, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
SHARES WEIGHTED WEIGHTED SHARES WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT REMAINING EXERCISE AT EXERCISE
PRICES JANUARY 2, 1998 CONTRACTUAL LIFE PRICE JANUARY 2, 1998 PRICE
-------- --------------- ---------------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
1-3 4.4 9 $ 2 4.4 $ 2
4-6 1.7 4 6 1.7 6
7-9 .4 12 9 .3 9
10-12 .1 14 12 -- --
13-15 .1 14 15 -- --
19-22 .1 15 20 -- --
--- ---
6.8 6.4
=== ===
</TABLE>
Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. Deferred stock incentive plan shares granted
in 1990 and prior years generally vest in annual installments commencing one
year after the date of grant and continuing for 10 years. Employees also could
elect to forfeit one-fourth of their deferred stock incentive plan award in
exchange for accelerated vesting over a 10-year period. The Company accrues
compensation expense for the fair market
F-22
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value of the shares on the date of grant, less estimated forfeitures. In 1997,
1996 and 1995, 14,000, 13,000 and 158,000 shares were granted, respectively,
under this plan. The compensation cost that has been charged against income
for deferred stock was $1 million in 1995 and was not material in 1996 and
1997. The weighted average fair value per share granted during each year was
$15.81 in 1997, $11.81 in 1996 and $8.49 in 1995.
In 1993, 3,537,000 restricted stock plan shares under the Comprehensive Plan
were issued to officers and key executives to be distributed over the next
three to 10 years in annual installments based on continued employment and the
attainment of certain performance criteria. The Company recognizes
compensation expense over the restriction period equal to the fair market
value of the shares on the date of issuance adjusted for forfeitures, and
where appropriate, the level of attainment of performance criteria and
fluctuations in the fair market value of the Company's common stock. In 1997
and 1996, 198,000 and 2,511,000 shares of additional restricted stock plan
shares were granted to certain key employees under terms and conditions
similar to the 1993 grants. Approximately 161,000 and 500,000 shares were
forfeited in 1996 and 1995, respectively. There were no shares forfeited in
1997. The Company recorded compensation expense of $13 million, $11 million
and $5 million in 1997, 1996 and 1995, respectively, related to these awards.
The weighted average fair value per share granted during each year was $16.88
in 1997 and $14.01 in 1996. There were no restricted stock plan shares granted
in 1995.
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at the lower of market value
at the beginning or end of the plan year.
11. PROFIT SHARING AND POSTEMPLOYMENT BENEFIT PLANS
The Company contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements
and electing participation in the plans. The amount to be matched by the
Company is determined annually by the Board of Directors. The Company provides
medical benefits to a limited number of retired employees meeting restrictive
eligibility requirements. Amounts for these items were not material in 1995
through 1997.
12. ACQUISITIONS AND DISPOSITIONS
In 1997, the Company acquired eight full-service hotels totaling 3,600 rooms
for approximately $145 million. In addition, the Company acquired controlling
interests in nine full-service hotels totaling 5,024 rooms for approximately
$621 million, including the assumption of approximately $418 million of debt.
The Company also completed the acquisition of the 504-room New York Marriott
Financial Center, after acquiring the mortgage on the hotel for $101 million
in late 1996.
Also in 1997, the Company acquired the outstanding common stock of the Forum
Group from MSLS (29 senior living communities) for approximately $460 million,
including approximately $270 million in debt, as described in Note 5. In
addition, the Company plans to add approximately 1,060 units to these
communities for approximately $107 million through an expansion plan which
will be completed in 1999. In 1997, approximately $56 million of the expansion
plan had been completed (including approximately $33 million of debt financing
provided by Marriott International). The Company also acquired 49% of the
remaining 50% interest in the partnership which owned the 418-unit Leisure
Park retirement community for approximately $23 million, including the
assumption of approximately $15 million of debt.
In 1996, the Company acquired six full-service hotels totaling 1,964 rooms
for an aggregate purchase price of approximately $189 million. In addition,
the Company acquired controlling interests in 17 full-service hotels totaling
8,917 rooms for an aggregate purchase price of approximately $1.1 billion,
including the assumption of approximately $696 million of debt. The Company
also purchased the first mortgage of the 504-room New York Marriott Financial
Center for approximately $101 million.
F-23
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1995, the Company acquired nine full-service hotels totaling
approximately 3,900 rooms in separate transactions for approximately $390
million.
During the first and third quarters of 1995, 37 of the Company's Courtyard
properties were sold and leased back from a REIT for approximately $330
million. The Company received net proceeds from the two transactions of
approximately $297 million and will receive approximately $33 million upon
expiration of the leases. A deferred gain of $14 million on the sale/leaseback
transactions is being amortized over the initial term of the leases.
In the first and second quarters of 1996, the Company completed the sale and
leaseback of 16 of its Courtyard properties and 18 of its Residence Inn
properties for $349 million. The Company received net proceeds of
approximately $314 million and will receive approximately $35 million upon
expiration of the leases. A deferred gain of $45 million on the sale/leaseback
transactions is being amortized over the initial term of the leases.
The Company's summarized, unaudited consolidated pro forma results of
operations, assuming the above transactions and the refinancings and new debt
activity discussed in Note 5 occurred on December 30, 1995, are as follows (in
millions, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Revenues.................................................... $1,274 $1,121
Income (loss) before extraordinary items.................... 42 (24)
Net income (loss)........................................... 45 (24)
Basic earnings (loss) per common share:
Income (loss) before extraordinary items................... .21 (.13)
Basic earnings (loss) per common share..................... .22 (.13)
Diluted earnings (loss) per common share:
Income (loss) before extraordinary items................... .20 (.13)
Diluted earnings (loss) per common share................... .22 (.13)
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial assets and liabilities and other
financial instruments are shown below:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets
Short-term marketable securities.......... $ 354 $ 354 $ -- $ --
Receivables from affiliates............... 23 26 156 174
Notes receivable.......................... 31 48 141 155
Other..................................... 20 20 13 13
Financial liabilities
Debt, net of capital leases............... 3,764 3,815 2,636 2,654
Other financial instruments
Convertible Preferred Securities.......... 550 638 550 595
Interest rate swap agreements............. -- -- -- 1
Affiliate debt service commitments........ -- -- -- --
</TABLE>
F-24
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Short-term marketable securities and Convertible Preferred Securities are
valued based on quoted market prices. Receivables from affiliates, notes and
other financial assets are valued based on the expected future cash flows
discounted at risk-adjusted rates. Valuations for secured debt are determined
based on the expected future payments discounted at risk-adjusted rates. The
fair values of the Line of Credit and other notes are estimated to be equal to
their carrying value. Senior Notes are valued based on quoted market prices.
The Company is contingently liable under various guarantees of obligations
of certain affiliates (affiliate debt service commitments) with a maximum
commitment of $60 million at January 2, 1998 and $117 million at January 3,
1997. A fair value is assigned to commitments with expected future fundings.
The fair value of the commitments represents the net expected future payments
discounted at risk-adjusted rates. Such payments are accrued on an
undiscounted basis.
The fair value of interest rate swap agreements is based on the estimated
amount the Company would pay or receive to terminate the swap agreements. The
aggregate notional amount of the agreements was $100 million at January 2,
1998 and $525 million at January 3, 1997.
14. MARRIOTT INTERNATIONAL DISTRIBUTION AND RELATIONSHIP WITH MARRIOTT
INTERNATIONAL
On October 8, 1993 (the "Marriott International Distribution Date"),
Marriott Corporation distributed, through a special tax-free dividend (the
"Marriott International Distribution"), to holders of Marriott Corporation's
common stock (on a share-for-share basis), approximately 116.4 million
outstanding shares of common stock of an existing wholly-owned subsidiary,
Marriott International, resulting in the division of Marriott Corporation's
operations into two separate companies. The distributed operations included
the former Marriott Corporation's lodging management, franchising and resort
timesharing operations, senior living service operations, and the
institutional food service and facilities management business. The Company
retained the former Marriott Corporation's airport and tollroad food, beverage
and merchandise concessions operations, as well as most of its real estate
properties. Effective at the Marriott International Distribution Date,
Marriott Corporation changed its name to Host Marriott Corporation.
The Company and Marriott International have entered into various agreements
in connection with the Marriott International Distribution and thereafter
which provide, among other things, that (i) the majority of the Company's
hotel lodging properties are managed by Marriott International under
agreements with initial terms of 15 to 20 years and which are subject to
renewal at the option of Marriott International for up to an additional 16 to
30 years (see Note 15); (ii) 10 of the Company's full-service properties are
operated under franchise agreements with Marriott International with terms of
15 to 30 years; (iii) all of the Company's senior living communities are
managed by MSLS under agreements with initial terms of 25 to 30 years and
which are subject to renewal at the option of Marriott International for an
additional five to ten years (see Note 16); (iv) Marriott International
provided the Company with $92 million of financing at an average rate of 9% in
1997 (and may provide additional financing as the expansion plan is completed)
in conjunction with the acquisition of senior living communities from Marriott
International (see Notes 5 and 12); (v) the Company acquired 49% of Marriott
International's 50% interest in the Leisure Park retirement community in 1997
for $23 million, including approximately $15 million of assumed debt; (vi)
Marriott International guarantees the Company's performance in connection with
certain loans and other obligations ($107 million at January 2, 1998); (vii)
the Company borrowed and repaid $109 million of first mortgage financing for
construction of the Philadelphia Marriott (see Note 5); (viii) Marriott
International provided the Company with $70 million of mortgage financing in
1995 for the acquisition of three full-service properties by the Company at an
average interest rate of 8.5% (Marriott International subsequently sold one of
the loans in November 1996); (ix) Marriott International and the Company
formed a joint venture and Marriott International provided the Company with
$29 million in debt financing at an average interest rate of 12.7% and $28
million in preferred equity in 1996 for the acquisition of two full-service
properties in Mexico City, Mexico; (x) in 1995, the
F-25
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company also acquired a full-service property from a partnership in which
Marriott International owned a 50% interest; and (xi) Marriott International
provides certain limited administrative services.
In 1997, 1996 and 1995, the Company paid to Marriott International $162
million, $101 million and $67 million, respectively, in hotel management fees;
$13 million, $18 million and $21 million, respectively, in interest and
commitment fees under the debt financing and line of credit provided by
Marriott International, $3 million, $4 million and $12 million, respectively,
for limited administrative services. The Company also paid Marriott
International $4 million, $2 million and $1 million, respectively, of
franchise fees in 1997, 1996 and 1995. In connection with the acquisition of
the Forum Group, the Company paid Marriott International $6 million in senior
living community management fees during 1997.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of the Company if certain events involving a change in
control of the Company occur.
15. HOTEL MANAGEMENT AGREEMENTS
Most of the Company's hotels are subject to management agreements (the
"Agreements") under which Marriott International manages most of the Company's
hotels, 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 Agreements generally provide for payment of base management fees equal to
one to four percent of sales and incentive management fees generally equal to
20% to 50% of Operating Profit (as defined in the Agreements) over a priority
return (as defined) to the Company, with total incentive management fees not
to exceed 20% of cumulative Operating Profit, or 20% of current year Operating
Profit. In the event of early termination of the Agreements, Marriott
International will receive additional fees based on the unexpired term and
expected future base and incentive management fees. The Company has the option
to terminate certain management agreements if specified performance thresholds
are not satisfied. 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.
Pursuant to the terms of the 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.
The Company is obligated to provide the manager with sufficient funds to
cover the cost of (a) certain non-routine repairs and maintenance to the
hotels which are normally capitalized; and (b) replacements and renewals to
the hotels' property and improvements. Under certain circumstances, the
Company will be required to establish escrow accounts for such purposes under
terms outlined in the Agreements.
The Company has entered into franchise agreements with Marriott
International for ten hotels. Pursuant to these franchise agreements, the
Company generally pays a franchise fee based on a percentage of room sales and
food and beverage sales as well as certain other fees for advertising and
reservations. Franchise fees for room sales vary from four to six percent of
sales, while fees for food and beverage sales vary from two to three percent
of sales. The terms of the franchise agreements are from 15 to 30 years.
F-26
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has entered into management agreements with The Ritz-Carlton
Hotel Company, LLC ("Ritz-Carlton"), an affiliate of Marriott International,
to manage four of the Company's hotels. 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 sales and incentive management fees are generally equal to 20% of available
cash flow or operating profit, as defined in the agreements.
The Company has also entered into management agreements with hotel
management companies other than Marriott International and Ritz-Carlton for 12
of its hotels (10 of which are franchised under the Marriott brand). These
agreement generally provide for an initial term of 10 to 20 years with renewal
terms at the option of either party of up to an additional one to 15 years.
The agreement generally provide for payment of base management fees equal to
one to three percent of sales. Seven of the 12 agreements also provide for
incentive management fees generally equal to 15 to 20 percent of available
cash flow, as defined in the agreements.
At January 2, 1998 and January 3, 1997, $75 million and $76 million,
respectively, have been advanced to the hotel managers for working capital and
are included in "Due From Managers" in the accompanying consolidated balance
sheets.
16. SENIOR LIVING COMMUNITY OPERATING AGREEMENTS
The Company's senior living communities (the "Communities") are subject to
operating agreements (the "SLC Agreements") which provide for MSLS to operate
the communities, generally for an initial term of 25 to 30 years with renewal
terms subject to certain performance criteria at the option of MSLS of up to
an additional five to ten years. The SLC Agreements provide for payment of
base management fees generally equal to five to eight percent of gross
revenues and incentive management fees generally equal to zero to 20% of
Operating Profit (as defined in the SLC Agreements) over a priority return to
the Company. In the event of early termination of the SLC Agreements, MSLS
will receive additional fees based on the unexpired term and expected future
base and incentive management fees. The Company has the option to terminate
certain, but not all, management agreements if specified performance
thresholds are not satisfied. No SLC Agreement with respect to a single
community is cross-collateralized or cross-defaulted to any other SLC
Agreement and any single SLC Agreement may be terminated following a default
by the Company or MSLS, although such termination will not trigger the
cancellation of any other SLC Agreement.
Pursuant to the terms of the SLC Agreements, MSLS is required to furnish the
Communities with certain services ("Central Administrative Services") which
are provided on a central or regional basis to all properties in the Marriott
Retirement Community System. These services include the development and
operation of computer systems, computer payroll and accounting services,
marketing and public relations services, and such additional services as may
from time-to-time be performed more efficiently on a central or regional
level. The SLC Agreements establish payment of Central Administrative Services
fees generally equal to 0% of Gross Revenues for the first year and 2%
thereafter.
MSLS is required under the SLC Agreements to deduct an amount from gross
revenues and place the funds into an interest bearing reserve account to cover
the cost of (a) certain routine repairs and maintenance to the Communities
which are normally capitalized; and (b) replacements and renewals to the
Communities' property and improvements. The annual payment amount (expressed
as a percentage of gross revenues) generally will be 2.65% through fiscal year
2002, 2.85% for fiscal years 2003 through 2007, and 3.5% thereafter. The SLC
Agreements provide that the Company shall provide MSLS with sufficient funds
to cover the cost of certain major or non-routine repairs, alterations,
improvements, renewals and replacements to the Communities which are required
to maintain a competitive, efficient and economical operating condition in
accordance with Marriott standards or for the continued safe and orderly
operation of the Communities.
F-27
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At January 2, 1998, approximately $6 million has been advanced to MSLS for
working capital for the senior living communities.
17. LITIGATION
The Company is from time-to-time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In the fourth quarter of 1997, the Company reached a settlement in a lawsuit
against Trinity Industries and others for claims related to construction of
the New York Marriott Marquis. In settlement of the lawsuit, the Company and
its affiliate received a cash settlement of approximately $70 million, the
majority of which was considered a recovery of construction costs and $10
million of which has been recorded as other revenues in the accompanying
financial statements.
18. HOTEL AND SENIOR LIVING COMMUNITY OPERATIONS
As discussed in Note 1, revenues recorded in the consolidated financial
statements reflect house profit from the Company's hotel properties and senior
living communities. House profit reflects the net revenues flowing to the
Company as property owner and represents all gross hotel and senior living
communities' operating revenues, less all gross property-level expenses,
excluding depreciation, management fees, real and personal property taxes,
ground and equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses.
Accordingly, the following table presents sales and the details of house
profit for the Company's hotels for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Sales
Rooms............................................. $1,850 $1,302 $ 908
Food and Beverage................................. 776 515 363
Other............................................. 180 125 81
------ ------ ------
Total Hotel Sales............................... 2,806 1,942 1,352
------ ------ ------
Department Costs
Rooms............................................. 428 313 226
Food and Beverage................................. 592 406 284
Other............................................. 189 63 43
------ ------ ------
Total Department Costs.......................... 1,209 782 553
------ ------ ------
Department Profit................................... 1,597 1,160 799
Other Deductions.................................... (504) (443) (325)
------ ------ ------
House Profit........................................ $1,093 $ 717 $ 474
====== ====== ======
</TABLE>
The following table presents the sales and details of house profit for the
Company's senior living communities for 1997 (in millions):
<TABLE>
<S> <C>
Senior Living Communities Sales........................................ $111
Department Costs....................................................... 74
----
House Profit........................................................... $ 37
====
</TABLE>
F-28
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates in two business segments in the lodging industry:
hotels and senior living communities. The Company's hotels are primarily
operated under the Marriott or Ritz-Carlton brands, contain an average of
nearly 500 rooms, as well as supply other amenities such as meeting space and
banquet facilities; a variety of restaurants and lounges; gift shops; and
swimming pools. They are typically located in downtown, airport, suburban and
resort areas throughout the United States. Senior living communities generally
contain 100 to 300 units and offer a variety of senior care services that
include independent living, assisted living and health care. The communities
provide security, meals, housekeeping, linen service and 24-hour emergency
health care.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest
expense. The Company's income taxes are included in the consolidated Federal
income tax return of the Company and its affiliates and is allocated based
upon the relative contribution to the Company's consolidated taxable
income/loss and changes in temporary differences. The allocation of taxes is
not evaluated at the segment level and, therefore, the Company does not
believe the information is material to the consolidated financial statements.
The following table presents revenues and other financial information by
business segment (in millions):
<TABLE>
<CAPTION>
1997
------------------------------------
SENIOR CORPORATE
HOTELS LIVING & OTHER CONSOLIDATED
------ ------ --------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $1,093 $ 37 $ 17 $1,147
Operating profit (loss).................... 444 16 (11) 449
Interest expense........................... 281 14 7 302
Interest income............................ 40 -- 12 52
Depreciation and amortization ............. 226 11 3 240
Capital expenditures....................... 153 3 4 160
Total assets............................... 5,787 623 116 6,526
<CAPTION>
1996
------------------------------------
SENIOR CORPORATE
HOTELS LIVING & OTHER CONSOLIDATED
------ ------ --------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $ 717 $ -- $ 15 $ 732
Operating profit (loss) ................... 256 -- (23) 233
Interest expense........................... 228 -- 9 237
Interest income............................ 31 -- 17 48
Depreciation and amortization.............. 165 -- 3 168
Capital expenditures....................... 156 -- 3 159
Total assets............................... 4,770 -- 382 5,152
<CAPTION>
1995
------------------------------------
SENIOR CORPORATE
HOTELS LIVING & OTHER CONSOLIDATED
------ ------ --------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $ 474 $ -- $ 10 $ 484
Operating profit (loss) ................... 193 -- (79) 114
Interest expense .......................... 161 -- 17 178
Interest income............................ 11 -- 16 27
Depreciation and amortization.............. 117 -- 5 122
Capital expenditures....................... 154 -- 6 160
Total assets............................... 3,175 -- 382 3,557
</TABLE>
F-29
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of January 2, 1998, the Company's foreign operations consist of four
full-service hotel properties located in Canada and two full-service hotel
properties located in Mexico. There were no intercompany sales between the
properties and the Company. The following table presents revenues and long-
lived assets for each of the geographical areas in which the Company operates
(in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States...... $1,108 $4,995 $714 $3,587 $482 $2,842
International...... 39 222 18 218 2 40
------ ------ ---- ------ ---- ------
Total............ $1,147 $5,217 $732 $3,805 $484 $2,882
====== ====== ==== ====== ==== ======
</TABLE>
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 252 $ 270 $ 246 $ 379 $ 1,147
Operating profit before
minority interest,
corporate expenses and
interest............... 91 124 89 145 449
Income before
extraordinary items ... 6 26 6 9 47
Net income.............. 11 26 6 7 50
Basic earnings per
common share:
Income before
extraordinary items .. .03 .13 .03 .04 .23
Net income............. .05 .13 .03 .03 .25
Diluted earnings per
common share:
Income before
extraordinary items .. .03 .13 .03 .04 .23
Net income............. .05 .13 .03 .03 .24
<CAPTION>
1996
---------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 130 $ 167 $ 167 $ 268 $ 732
Operating profit before
minority interest,
corporate expenses and
interest............... 38 62 49 84 233
Income (loss) before
extraordinary items.... (12) 7 (2) (6) (13)
Net income (loss)....... (12) 7 (2) (6) (13)
Basic earnings (loss)
per common share:
Income (loss) before
extraordinary items .. (.07) .04 (.01) (.03) (.07)
Net income (loss)...... (.07) .04 (.01) (.03) (.07)
Diluted earnings (loss)
per common share:
Income (loss) before
extraordinary items... (.07) .03 (.01) (.03) (.07)
Net income (loss)...... (.07) .03 (.01) (.03) (.07)
</TABLE>
The first three quarters consist of 12 weeks each in both 1997 and 1996, and
the fourth quarter includes 16 weeks in 1997 and 17 weeks in 1996. The sum of
the basic and diluted earnings (loss) per common share for the four quarters
in 1997 and 1996 differs from the annual earnings per common share due to the
required method of computing the weighted average number of shares in the
respective periods.
F-30
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 11, 1998
(UNAUDITED, IN MILLIONS)
<TABLE>
<S> <C>
ASSETS
Property and Equipment, net............................................. $5,937
Notes and Other Receivables (including amounts due from
affiliates of $4 million and $23 million, respectively)................ 32
Due from Managers....................................................... 88
Investments in Affiliates............................................... 18
Other Assets............................................................ 319
Short-Term Marketable Securities........................................ 36
Cash and Cash Equivalents............................................... 539
------
$6,969
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Senior Notes Issued by the Company or its Subsidiaries................ $1,747
Mortgage Debt......................................................... 2,003
Other................................................................. 474
------
4,224
Accounts Payable and Accrued Expenses................................... 70
Deferred Income Taxes................................................... 526
Other Liabilities....................................................... 447
------
Total Liabilities................................................... 5,267
------
Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust Whose Assets are the Convertible
Subordinated
Debentures Due 2026 ("Convertible Preferred Securities")............... 550
------
Shareholders' Equity
Common Stock, 600 million shares authorized; 204.5 million shares
issued and outstanding............................................... 205
Additional Paid-in Capital............................................ 939
Retained Earnings..................................................... 1
Accumulated Other Comprehensive Income................................ 7
------
Total Shareholders' Equity.......................................... 1,152
------
$6,969
======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-31
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND SEPTEMBER 12, 1997
(UNAUDITED, IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
------ ----
<S> <C> <C>
REVENUES
Hotels......................................................... $ 922 $736
Senior living communities...................................... 58 16
Net gains (losses) on property transactions.................... 53 3
Equity in earnings of affiliates............................... 1 3
Other.......................................................... 6 10
------ ----
Total revenues............................................... 1,040 768
------ ----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$138 million and $111 million in 1998 and 1997,
respectively)................................................. 502 433
Senior living communities (including Marriott International
management fees of $9 million and $3 million in 1998 and 1997,
respectively)................................................. 31 9
Other.......................................................... 14 22
------ ----
Total operating costs and expenses........................... 547 464
------ ----
OPERATING PROFIT................................................. 493 304
Minority interest................................................ (36) (24)
Corporate expenses............................................... (33) (27)
REIT Conversion expenses......................................... (14) --
Interest expense................................................. (245) (198)
Dividends on Convertible Preferred Securities of a subsidiary
trust........................................................... (26) (26)
Interest income.................................................. 36 37
------ ----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................ 175 66
Provision for income taxes....................................... (75) (28)
------ ----
INCOME BEFORE EXTRAORDINARY ITEM................................. 100 38
Extraordinary item -- gain (loss) on extinguishment of debt (net
of income taxes of $80 million in 1998 and $3 million in 1997).. (148) 5
------ ----
NET INCOME (LOSS)................................................ $ (48) $ 43
====== ====
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item................................. $ .49 $.19
Extraordinary item............................................... (.73) .02
------ ----
NET INCOME (LOSS)................................................ $ (.24) $.21
====== ====
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item................................. $ .48 $.19
Extraordinary item............................................... (.71) .02
------ ----
NET INCOME (LOSS)................................................ $ (.23) $.21
====== ====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-32
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND SEPTEMBER 12, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary item............................... $ 100 $ 38
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization................................ 184 158
Income taxes................................................. 50 --
Gains on sales of hotel properties........................... (50) --
Equity in (earnings) losses of affiliates.................... -- (3)
Changes in operating accounts................................ (33) 78
Other........................................................ 27 42
------- -----
Cash from operations......................................... 278 313
------- -----
INVESTING ACTIVITIES
Proceeds from sales of assets.................................. 211 35
Acquisitions................................................... (636) (441)
Capital expenditures:
Renewals and replacements.................................... (113) (86)
New development projects..................................... (36) --
New investment capital expenditures.......................... (19) (22)
Purchases of short-term marketable securities.................. (134) --
Sales of short-term marketable securities...................... 451 --
Note receivable collections.................................... 3 5
Affiliate collections, net..................................... 13 --
Other.......................................................... (13) 12
------- -----
Cash used in investing activities............................ (273) (497)
------- -----
FINANCING ACTIVITIES
Issuances of debt, net of related expenses..................... 2,004 682
Issuances of common stock...................................... 2 4
Scheduled principal repayments................................. (42) (77)
Debt prepayments............................................... (1,750) (241)
Costs of extinguishment of debt................................ (175) --
Other.......................................................... (16) 23
------- -----
Cash from financing activities............................... 23 391
------- -----
INCREASE IN CASH AND CASH EQUIVALENTS.......................... $ 28 $ 207
======= =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties and senior living communities.................... $ 164 $ 585
======= =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-33
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements of Host
Marriott Corporation and subsidiaries (the "Company" or "Host Marriott") have
been prepared by the Company without audit. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
The Company believes the disclosures made are adequate to make the information
presented not misleading. However, the condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of September 11, 1998 and the
results of operations for the twelve and thirty-six weeks ended September 11,
1998 and September 12, 1997 and cash flows for the thirty-six weeks ended
September 11, 1998 and September 12, 1997. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
2. In April 1998, the Company reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire controlling interests in 12 luxury
hotels and a first mortgage interest in another hotel in the United States and
certain other assets. The Company expects to pay approximately $862 million in
cash and assumed debt and to issue approximately 43.7 million operating
partnership units ("OP Units") of the new operating partnership (the
"Operating Partnership") (based upon a negotiated value of $20.00 per OP Unit)
and distribute up to 18% of the shares of Crestline (defined below), to be
formed as part of the Company's reorganization, described below. Each OP Unit
will be exchangeable for one share of Host Marriott common stock (or its cash
equivalent). Upon completion of the acquisition, Blackstone will own
approximately 16% of the outstanding shares of Host Marriott common stock on a
fully converted basis. The Blackstone portfolio consists of two Ritz-Carlton,
two Four Seasons, one Grand Hyatt, three Hyatt Regency and four Swissotel
properties, and a mortgage on a third Four Seasons property.
The Blackstone transaction is expected to close immediately after the REIT
Conversion, as described below. At that time, Blackstone's hotels and other
assets will be contributed into the Operating Partnership, and the hotels
leased to subsidiaries of Crestline (defined below). The hotels will continue
to be managed on behalf of the lessees under the existing management
contracts. Consummation of the Blackstone transaction is also subject to
certain conditions, including consummation of the REIT Conversion no later
than March 31, 1999 and Host Marriott qualifying as a REIT for 1999.
3. The Company's board of directors (the "Board") has authorized the Company
to restructure its business operations to qualify as a real estate investment
trust ("REIT"), currently expected to be effective as of January 1, 1999, and
to spin-off its senior living communities business (Crestline Capital
Corporation, "Crestline") through a taxable stock dividend to its shareholders
(collectively, the "REIT Conversion"). After the REIT Conversion, which is
subject to shareholder and final Board approval, the Company intends to
operate as an "UPREIT," with substantially all of its assets and operations
conducted through the newly formed Operating Partnership of which Host
Marriott will be the general partner.
Host Marriott will distribute shares in Crestline to its shareholders at the
time of the REIT Conversion and Host Marriott expects to make a cash
distribution at that time which is expected to be treated as a taxable
dividend. The aggregate value of the Crestline capital stock and the cash to
be distributed to shareholders and Blackstone, if the Blackstone acquisition
is consummated, is currently estimated to be approximately $525 million to
$625 million. The actual amount of the distribution will be based, in part,
upon the estimated amount of accumulated earnings and profits of Host Marriott
as of the last day of its taxable year in which the REIT
F-34
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Conversion is consummated. To the extent that the distributions made are not
sufficient to eliminate Host Marriott's accumulated earnings and profits, one
or more additional taxable distributions will be made prior to the last day of
the first full taxable year as a REIT (currently expected to be December 31,
1999). The distribution satisfies the requirement that a "C" corporation
converting to a REIT distribute all of its accumulated earnings and profits at
the time of conversion to a REIT. Crestline is expected to own Host Marriott's
portfolio of senior living properties. This portfolio currently consists of 31
retirement communities, totaling 7,259 units in 13 states. The communities
will continue to be managed by Marriott International. In addition, Crestline
will lease substantially all of the hotels currently owned by the Operating
Partnership. Crestline will operate independently of Host Marriott.
Following the REIT Conversion, Host Marriott will own OP Units equal to the
number of outstanding shares of Host Marriott common stock at the time of the
REIT Conversion. The UPREIT structure will not affect the ownership by
shareholders of their existing Host Marriott shares.
As part of the REIT Conversion, the Company filed a Prospectus/Consent
Solicitation with the Securities and Exchange Commission. This
Prospectus/Consent Solicitation Statement describes a proposal whereby the
Operating Partnership will acquire by merger (the "Mergers") eight limited
partnerships (the "Partnerships") that own full-service hotels in which the
Company or its subsidiaries are general partners. As more fully described in
the Prospectus/Consent Solicitation Statement, limited partners of those
Partnerships that participate in the Mergers will receive either OP Units or,
at their election, unsecured notes due December 15, 2005 issued by the
Operating Partnership ("Notes") or common stock in the REIT, in exchange for
their partnership interests in such Partnerships. The Prospectus/Consent
Solicitation period expires on December 12, 1998, unless extended.
The REIT expects to qualify as a real estate investment trust under federal
income tax law, beginning January 1, 1999. However, consummation of the REIT
Conversion is subject to significant contingencies that are outside the
control of the Company, including final Board approval, consent of
shareholders, partners, bondholders, lenders, and ground lessors of Host
Marriott, its affiliates and other third parties. Accordingly, there can be no
assurance that the REIT Conversion will be completed or that it will be
effective as of January 1, 1999. If the REIT Conversion is not completed on
January 1, 1999, the effectiveness of REIT election could be delayed until
January 1, 2000, which would result in the Company continuing to pay a
substantial amount of corporate-level income taxes in 1999.
On April 20, 1998, the Company and certain of its subsidiaries filed a shelf
registration on Form S-3 (the "Shelf Registration") with the Securities and
Exchange Commission for the issuance of up to $2.5 billion in securities,
which may include debt, equity or a combination thereof. The Company utilized
$1.7 billion of the capacity under this Shelf Registration to issue the New
Senior Notes (defined below) and anticipates that any net proceeds from the
sale of additional offered securities will be used for refinancing of the
Company's indebtedness, acquisitions and general corporate purposes.
HMH Properties, Inc. ("HMH Properties") an indirect wholly owned subsidiary
of the Company, which currently owns 72 of Host Marriott's hotels, utilized
the Shelf Registration to issue an aggregate of $1.7 billion in new senior
notes (the "New Senior Notes"). The New Senior Notes were issued in two
series, $500 million of 7 7/8% Series A notes due in 2005 and $1.2 billion of
7 7/8% Series B notes due in 2008. Approximately $21 million of the Old Senior
Notes remain outstanding. The 1998 Consent Solicitations facilitated the
merger of HMC Capital Resources Holdings Corporation ("Capital Resources"), a
wholly owned subsidiary of the Company, with and into HMH Properties. Capital
Resources, the then owner of eight of Host Marriott's hotel properties, was
the obligor under the $500 million revolving credit facility (the "Old Credit
Facility").
F-35
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In conjunction with the issuance of the New Senior Notes, HMH Properties
entered into a $1.25 billion credit facility (the "New Credit Facility") with
a group of commercial banks. The New Credit Facility has an initial three-year
term with two one-year extension options. Borrowings under the New Credit
Facility generally bear interest at the Eurodollar rate plus 1.75% (7.5% at
September 11, 1998). The interest rate and commitment fee (0.35% at September
11, 1998) on the unused portion of the New Credit Facility fluctuate based on
certain financial ratios. The New Senior Notes and the New Credit Facility are
guaranteed by the Company and its wholly owned subsidiary, Host Marriott
Hospitality, Inc., and certain subsidiaries of HMH Properties and are secured
by pledges of equity interests in certain subsidiaries of HMH Properties. The
New Senior Notes and the New Credit Facility will be assumed by the Operating
Partnership in connection with the REIT Conversion and the guarantee of the
Company is expected to terminate upon consumation of the REIT Conversion. As
of September 11, 1998, $350 million was outstanding under the New Credit
Facility.
The New Credit Facility and the indenture under which the New Senior Notes
were issued contain covenants restricting the ability of HMH Properties and
certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and make
certain distributions to equityholders of HMH Properties, the Company, and
(following the REIT Conversion) the Operating Partnership and Host REIT. The
New Credit Facility and the New Senior Notes also contain certain financial
covenants relating to, among other things, maintaining certain levels of
tangible net worth and certain ratios of EBITDA to interest and fixed charges,
total debt to EBITDA, unencumbered assets to unsecured debt, and secured debt
to total debt.
On August 5, 1998, simultaneously with the issuance of the New Senior Notes
and the New Credit Facility, HMH Properties, Inc. purchased substantially all
of its (i) $600 million in 9 1/2% senior notes due 2005, (ii) $350 million in
9% senior notes due 2007 and (iii) $600 million in 8 7/8% senior notes due
2007 (collectively, the "Old Senior Notes"). Concurrently with each offer to
purchase, HMH Properties successfully solicited consents (the "1998 Consent
Solicitations") from registered holders of the Old Senior Notes to certain
amendments to eliminate or modify substantially all of the restrictive
covenants and certain other provisions contained in the indentures pursuant to
which the Old Senior Notes were issued.
The net proceeds from the offering and borrowings under the New Credit
Facility were used by Host Marriott to purchase substantially all of the Old
Senior Notes, to repay amounts outstanding under the Old Credit Facility and
to make bond premium and consent payments totaling $175 million. These costs,
along with the write-off of deferred financing fees of approximately $52
million related to the Old Senior Notes and the Old Credit Facility, were
recorded as a pre-tax extraordinary loss on the extinguishment of debt in the
third quarter of 1998.
On September 30, 1998, the Company filed a preliminary Proxy
Statement/Prospectus with the Securities and Exchange Commission. The Proxy
Statement/Prospectus describes the proposed merger by and among Host Marriott,
HMC Merger Corporation ("Host REIT") and Host Marriott, L.P., a recently
formed limited partnership, pursuant to the REIT Conversion. The Prospectus
proposes the restructuring of Host Marriott by contribution of its wholly
owned full-service hotels and its interests in certain hotel partnerships and
other assets to the Operating Partnership and reincorporation of Host Marriott
with and into Host REIT. As a result of the restructuring, shares of Host
Marriott common stock will be converted to shares of Host REIT common stock.
4. Revenues primarily represent house profit from the Company's hotel
properties and senior living communities, net gains (losses) on property
transactions and equity in earnings (losses) of affiliates. House profit
reflects the net revenues flowing to the Company as property owner and
represents gross hotel and senior living communities' operating revenues, less
all gross property-level expenses, excluding depreciation, management
F-36
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
fees, real and personal property taxes, ground and equipment rent, insurance
and certain other costs, which are classified as operating costs and expenses.
House profit generated by the Company's hotels for 1998 and 1997 consists
of:
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Sales
Rooms......................................... $1,514 $1,246
Food & Beverage............................... 642 500
Other......................................... 159 120
------ ------
Total Hotel Sales........................... 2,315 1,866
------ ------
Department Costs
Rooms......................................... 348 285
Food & Beverage............................... 477 381
Other......................................... 80 63
------ ------
Total Department Costs...................... 905 729
------ ------
Department Profit............................... 1,410 1,137
Other Deductions................................ 488 401
------ ------
House Profit.................................. $ 922 $ 736
====== ======
</TABLE>
House profit generated by the Company's senior living communities for 1998
consists of (in millions):
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Sales............................................ $166 $47
Department Costs................................. 108 31
---- ---
House Profit................................... $ 58 $16
==== ===
</TABLE>
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements. The Company has considered the impact of EITF 97-2
on its financial statements and has determined that EITF 97-2 requires the
Company to include property-level sales and operating expenses of its hotels
and senior living communities in its statements of operations. The Company
will adopt EITF 97-2 in the fourth quarter of 1998 with retroactive effect in
prior periods to conform to the new presentation. Application of EITF 97-2 to
the consolidated financial statements would have increased both revenues and
operating expenses by approximately $1,501 million and $1,161 million,
respectively, for the thirty-six weeks ended September 11, 1998 and September
12, 1997, and would have had no impact on operating profit, net income or
earnings per share.
F-37
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
5. Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per common share is computed by dividing net income plus dividends by
the weighted average number of shares of common stock outstanding plus other
potentially dilutive securities. Diluted earnings per common share was not
adjusted for the impact of the Convertible Preferred Securities as they were
anti-dilutive for all periods presented.
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Weighted average number of common shares
outstanding.................................... 204.1 202.8
Assuming distribution of common shares granted
under the comprehensive stock plan, less shares
assumed purchased at average market price...... 4.2 4.8
Assuming distribution of common shares upon
redemption of Convertible Preferred
Securities..................................... -- --
Assuming distribution of common shares issuable
for warrants, less shares assumed purchased at
average market price........................... .1 .2
----- -----
Shares utilized for the calculation of diluted
earnings per share............................. 208.4 207.8
===== =====
</TABLE>
6. As of September 11, 1998, the Company had minority interests in 18
affiliates that own an aggregate of 240 properties, 20 of which are full-
service properties, managed primarily by Marriott International, Inc. The
Company's equity in earnings of affiliates was $1 million and $3 million,
respectively, for the thirty-six weeks ended September 11, 1998 and September
11, 1997.
Combined summarized operating results reported by affiliates follows:
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Revenues......................................... $ 369 $ 447
Operating expenses:
Cash charges (including interest).............. (223) (278)
Depreciation and other non-cash charges........ (101) (140)
----- -----
Income before extraordinary item................. 45 29
Extraordinary item--forgiveness of debt.......... 4 12
----- -----
Net income..................................... $ 49 $ 41
===== =====
</TABLE>
F-38
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In the first quarter of 1998, the Company obtained a controlling interest in
the partnership that owns the 1,671-room Atlanta Marriott Marquis for
approximately $239 million, including $164 million in assumed mortgage debt.
The Company previously owned a 1.3% general and limited partnership interest.
In the second quarter of 1998, the Company acquired the partnership that
owns the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24
million. The Company previously owned a 1% managing general partner interest
and held a note receivable interest of approximately $5 million.
7. In the first quarter of 1998, the Company acquired a controlling interest
in, and became the managing general partner for, the partnership that owns the
359-room Albany Marriott, the 350-room San Diego Marriott Mission Valley and
the 320-room Minneapolis Marriott Southwest for approximately $50 million.
Also, during the first quarter of 1998, the Company acquired the Gables at
Winchester in suburban Boston, a 124-unit senior living community, for $21
million and entered into conditional purchase agreements to acquire two
Marriott Brighton Gardens assisted living communities in Denver and Colorado
Springs, Colorado, for $35 million in 1999 after the anticipated completion of
construction, if they achieve certain operating performance criteria. All
three of these communities will be operated by Marriott Senior Living
Services, Inc. ("MSLS") under long-term operating agreements.
In the second quarter of 1998, the Company sold the 662-room New York
Marriott East Side for approximately $191 million and recorded a pre-tax gain
of approximately $40 million. The Company also sold the 191-room Napa Valley
Marriott for approximately $21 million and recorded a pre-tax gain of
approximately $10 million. Also, during the second quarter of 1998, the
Company acquired the 397-room Ritz-Carlton, Tysons Corner for approximately
$96 million and the 281-room Ritz-Carlton, Phoenix for approximately $75
million. In addition, the Company acquired the 487-room Torrance Marriott near
Los Angeles, California for approximately $52 million.
During the third quarter of 1998, the Company acquired the 308-room Ritz-
Carlton, Dearborn, Michigan for approximately $65 million, the 336-room Ritz-
Carlton, San Francisco for approximately $161 million and the 404-room Memphis
Marriott (which was converted to the Marriott brand upon acquisition) for
approximately $16 million.
8. In March 1997, the Company purchased 100% of the outstanding bonds
secured by a first mortgage on the San Francisco Marriott. The Company
purchased the bonds for $219 million, an $11 million discount to the face
value of $230 million. In connection with the redemption and defeasance of the
bonds, the Company recognized an extraordinary gain of $5 million, which
represents the $11 million discount and the write-off of deferred financing
fees, net of taxes.
9. The Company operates in two business segments in the lodging industry:
hotels and senior living communities. The Company's hotels are primarily
operated under the Marriott or Ritz-Carlton brands. The Company's senior
living communities are operated under Marriott brands.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest
expense. The Company's income taxes are included in the consolidated Federal
income tax return of the Company and its affiliates and is allocated based
upon the relative contribution to the Company's consolidated taxable income or
loss and changes in temporary differences. The allocation of income taxes is
not evaluated at the segment level and, therefore, the Company does not
believe the information is material to the condensed consolidated financial
statements.
F-39
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998
----------------------------------------------------
HOTELS SENIOR LIVING CORPORATE & OTHER CONSOLIDATED
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 922 $ 58 $ 60 $1,040
Operating profit........ 420 30 43 493
Interest income......... 35 1 -- 36
Interest expense........ (228) (17) -- (245)
Other................... (36) -- (73) (109)
Income (loss) before
income taxes........... 191 9 (25) 175
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
----------------------------------------------------
HOTELS SENIOR LIVING CORPORATE & OTHER CONSOLIDATED
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 736 $ 16 $ 16 $ 768
Operating profit
(loss)................. 303 6 (7) 304
Interest income......... 25 -- 12 37
Interest expense........ (186) (6) (6) (198)
Other................... (24) -- (53) (77)
Income (loss) before
income taxes........... 118 -- (52) 66
</TABLE>
As of September 11, 1998 and September 12, 1997, the Company's foreign
operations consist of four full-service hotel properties located in Canada and
two full-service hotel properties located in Mexico. There were no intercompany
sales between the properties and the Company. The following table presents
revenues for each of the geographical areas in which the Company operates (in
millions):
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
United States.................................... $1,009 $743
International.................................... 31 25
------ ----
Total.......................................... $1,040 $768
====== ====
</TABLE>
F-40
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
10. In the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," ("SFAS 130"). SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in
financial statements. The objective of SFAS 130 is to report a measure of all
changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner changes
in equity.
The Company's only component of other comprehensive income is the right to
receive up to 1.4 million shares of Host Marriott Services Corporation's
("HMSC") common stock or an equivalent cash value subsequent to exercise of
the options held by certain former and current employees of Marriott
International. For the thirty-six weeks ended September 11, 1998, the other
comprehensive loss was $3 million. For the thirty-six weeks ended September
11, 1998, the comprehensive loss was $51 million. For the thirty-six weeks
ended September 12, 1997, other comprehensive income was $8 million. For the
thirty-six weeks ended September 12, 1997, comprehensive income was $51
million. As of September 11, 1998, the Company's accumulated other
comprehensive income was approximately $7 million.
11. In the second quarter of 1998, the Company prepaid $92 million of 9%
unsecured debt provided by Marriott International related to the Company's
senior living communities.
12. In December 1996, Host Marriott Financial Trust (the "Issuer"), a
wholly-owned subsidiary trust of the Company, issued 11 million shares of 6
3/4% convertible quarterly income preferred securities (the "Convertible
Preferred Securities"), with a liquidation preference of $50 per share (for a
total liquidation amount of $550 million). The Convertible Preferred
Securities represent an undivided beneficial interest in the assets of the
Issuer. The payment of distributions out of moneys held by the Issuer and
payments on liquidation of the Issuer or the redemption of the Convertible
Preferred Securities are guaranteed by the Company to the extent the Issuer
has funds available therefor. This guarantee, when taken together with the
Company's obligations under the indenture pursuant to which the Debentures
were issued, the Debentures, the Company's obligations under the Trust
Agreement and its obligations under the indenture to pay costs, expenses,
debts and liabilities of the Issuer (other than with respect to the
Convertible Preferred Securities) provides a full and unconditional guarantee
of amounts due on the Convertible Preferred Securities. Proceeds from the
issuance of the Convertible Preferred Securities were invested in 6 3/4%
Convertible Subordinated Debentures (the "Debentures") due December 2, 2026
issued by the Company. The Issuer exists solely to issue the Convertible
Preferred Securities and its own common securities (the "Common Securities")
and invest the proceeds therefrom in the Debentures, which is its sole asset.
Separate financial statements of the Issuer are not presented because of the
Company's guarantee described above; the Company's management has concluded
that such financial statements are not material to investors and the Issuer is
wholly-owned and essentially has no independent operations.
Each of the Convertible Preferred Securities is convertible at the option of
the holder into shares of Company common stock at the rate of 2.6876 shares
per Convertible Preferred Security (equivalent to a conversion price of
$18.604 per share of Company common stock). The Debentures are convertible at
the option of the holders into shares of Company common stock at a conversion
rate of 2.6876 shares for each $50 in principal amount of Debentures. The
Issuer will only convert Debentures pursuant to a notice of conversion by a
holder of Convertible Preferred Securities.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and
F-41
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
payable quarterly in arrears thereafter. The distribution rate and the
distribution and other payment dates for the Convertible Preferred Securities
will correspond to the interest rate and interest and other payment dates on
the Debentures. The Company may defer interest payments on the Debentures for
a period not to exceed 20 consecutive quarters. If interest payments on the
Debentures are deferred, so too are payments on the Convertible Preferred
Securities. Under this circumstance, the Company will not be permitted to
declare or pay any cash distributions with respect to its capital stock or
debt securities that rank pari passu with or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result
of the acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.
F-42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying combined consolidated balance sheets of
Host Marriott Hotels (as defined in Note 1) as of January 2, 1998 and January
3, 1997, and the related combined consolidated statements of operations and
cash flows for each of the three fiscal years in the period ended January 2,
1998. These financial statements are the responsibility of Host Marriott
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the combined consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Host
Marriott Hotels as of January 2, 1998 and January 3, 1997, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended January 2, 1998, in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 2 to the combined consolidated financial
statements, in 1995 Host Marriott Hotels changed its method of accounting for
the impairment of long-lived assets.
Arthur Andersen LLP
Washington, D.C.
May 22, 1998
F-43
<PAGE>
HOST MARRIOTT HOTELS
COMBINED CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ASSETS
Property and Equipment, net...................................... $4,634 $3,805
Notes and Other Receivables, net (including amounts due from
affiliates of $23 million and $156 million, respectively)....... 54 297
Due from Managers................................................ 87 89
Investments in Affiliates........................................ 13 11
Other Assets..................................................... 271 246
Short-term Marketable Securities................................. 354 --
Cash and Cash Equivalents........................................ 494 704
------ ------
$5,907 $5,152
====== ======
LIABILITIES AND EQUITY
Debt
Senior Notes................................................... $1,585 $1,021
Mortgage Debt.................................................. 1,784 1,529
Other.......................................................... 97 97
Convertible Debt Obligation to Host Marriott Corporation....... 567 567
------ ------
4,033 3,214
Accounts Payable and Accrued Expenses............................ 59 74
Deferred Income Taxes............................................ 487 464
Other Liabilities................................................ 371 290
------ ------
Total Liabilities............................................ 4,950 4,042
Equity
Investments and Advances from Host Marriott Corporation........ 957 1,110
------ ------
$5,907 $5,152
====== ======
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-44
<PAGE>
HOST MARRIOTT HOTELS
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
REVENUES
Rooms................................................. $1,850 $1,302 $ 908
Food and beverage..................................... 776 515 363
Other................................................. 180 125 81
------ ------ -----
Total hotel revenues................................ 2,806 1,942 1,352
Net gains (losses) on property transactions........... (11) 1 (3)
Equity in earnings of affiliates...................... 5 3 --
Other................................................. 23 11 13
------ ------ -----
Total revenues...................................... 2,823 1,957 1,362
------ ------ -----
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................ 428 313 226
Food and beverage.................................... 592 406 284
Other department costs and deductions................ 693 506 368
Other hotel operating costs and expenses (including
Marriott International management fees of $162 mil-
lion, $101 million, and $67 million, respectively)... 649 461 281
Other (including a $60 million write-down of undevel-
oped land in 1995)................................... 29 38 89
------ ------ -----
Total operating costs and expenses.................. 2,391 1,724 1,248
------ ------ -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST.................................. 432 233 114
Minority interest....................................... (32) (6) (2)
Corporate expenses...................................... (45) (43) (36)
Interest expense (including interest on Convertible Debt
to Host Marriott Corporation of $38 million and $3
million in 1997 and 1996, respectively)................ (325) (240) (178)
Interest income......................................... 52 48 27
------ ------ -----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES.................................................. 82 (8) (75)
Benefit (provision) for income taxes.................... (35) (5) 13
------ ------ -----
INCOME (LOSS) FROM CONTINUING OPERATIONS................ 47 (13) (62)
DISCONTINUED OPERATIONS
Loss from discontinued operations (net of income tax
benefit of $3 million in 1995)....................... -- -- (8)
Provision for loss on disposal (net of income tax
benefit of $23 million in 1995)........................ -- -- (53)
------ ------ -----
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS................ 47 (13) (123)
Extraordinary items--Gain (loss) on extinguishment of
debt (net of income tax expense (benefit) of $1 million
in 1997 and ($10) million in 1995)..................... 3 -- (20)
------ ------ -----
NET INCOME (LOSS)....................................... $ 50 $ (13) $(143)
====== ====== =====
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-45
<PAGE>
HOST MARRIOTT HOTELS
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations................. $ 47 $ (13) $ (62)
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 231 168 122
Income taxes........................................... (20) (35) (35)
Amortization of deferred income........................ (4) (6) (7)
Net (gains) losses on property transactions............ 19 4 70
Equity in earnings of affiliates....................... (4) (3) --
Other.................................................. 62 49 33
Changes in operating accounts:
Other assets......................................... 57 9 (2)
Other liabilities.................................... 44 32 (9)
----- ----- ------
Cash from continuing operations........................ 432 205 110
Cash from (used in) discontinued operations............ -- (4) 32
----- ----- ------
Cash from operations................................... 432 201 142
----- ----- ------
INVESTING ACTIVITIES
Proceeds from sales of assets............................ 51 373 358
Less non-cash proceeds................................. -- (35) (33)
----- ----- ------
Cash received from sales of assets....................... 51 338 325
Acquisitions............................................. (359) (702) (392)
Capital expenditures:
Capital expenditures for renewals and replacements..... (129) (87) (56)
Lodging construction funded by project financing....... -- (3) (40)
New investment capital expenditures.................... (29) (69) (64)
Purchases of short-term marketable securities............ (354) -- --
Notes receivable collections............................. 6 13 43
Affiliate notes receivable and collections, net.......... (6) 21 2
Other.................................................... 13 (15) 26
----- ----- ------
Cash used in investing activities from continuing
operations............................................ (807) (504) (156)
Cash used in investing activities from discontinued
operations............................................ -- -- (52)
----- ----- ------
Cash used in investing activities...................... (807) (504) (208)
----- ----- ------
FINANCING ACTIVITIES
Issuances of debt........................................ 857 46 1,251
Issuances of Convertible Debt to Host Marriott
Corporation, net........................................ -- 550 --
Issuances of common stock by Host Marriott............... 6 454 13
Scheduled principal repayments........................... (90) (82) (100)
Debt prepayments......................................... (403) (173) (960)
Cash transfers to Host Marriott.......................... (226) (17) --
Other.................................................... 21 28 --
----- ----- ------
Cash from financing activities from continuing
operations............................................ 165 806 204
Cash used in financing activities from discontinued
operations............................................ -- -- (4)
----- ----- ------
Cash from financing activities......................... 165 806 200
----- ----- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (210) 503 134
CASH AND CASH EQUIVALENTS, beginning of year............. 704 201 67
----- ----- ------
CASH AND CASH EQUIVALENTS, end of year................... $ 494 $ 704 $ 201
===== ===== ======
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties............................................ $ 394 $ 696 $ 141
===== ===== ======
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-46
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to reorganize Host Marriott's current
business operations by spin-off of Host Marriott's senior living business
("Senior Living") and contribution of Host Marriott's hotels and certain other
assets and liabilities to a newly formed Delaware limited partnership, Host
Marriott, L.P. (the "Operating Partnership") Host Marriott will merge into HMC
Merger Corporation, a newly formed Maryland corporation (to be renamed "Host
Marriott Corporation" also referred to herein as "the REIT"), which will
qualify as a real estate investment trust ("REIT") and be the sole general
partner of the Operating Partnership. Host Marriott's contribution of its
hotels and certain assets and liabilities to the Operating Partnership (the
"Contribution") in exchange for units of limited partnership interests in the
Operating Partnership will be accounted for at Host Marriott's historical
basis.
The accompanying combined consolidated financial statements include the
accounts of the Host Marriott hotels and the assets and liabilities expected
to be included in the Contribution by Host Marriott to the Operating
Partnership upon its planned conversion to a REIT (the "REIT Conversion") . In
these combined consolidated financial statements, Host Marriott Hotels is
referred to as "Host Marriott Hotels" or the "Company." The combined
consolidated financial statements exclude the assets, liabilities, equity,
operations and cash flows related to Host Marriott's portfolio of 31 senior
living communities. After the REIT Conversion, Senior Living will own these
assets and lease the existing hotels from the Company.
In connection with the REIT Conversion, the Operating Partnership is
proposing to acquire the remaining interests in eight public limited
partnerships in which Host Marriott or its subsidiaries are general partners
that own or control 24 full-service hotels in exchange for units in the
Operating Partnership ("OP Units"), which could be exchangeable for notes of
the Operating Partnership or common stock in the REIT in certain
circumstances. Five of the partnerships (nine hotels) are already controlled
and consolidated by Host Marriott as are two of the hotels in another of the
partnerships for which a subsidiary of Host Marriott provided 100% non-
recourse financing for the acquisition of these two hotels. The Operating
Partnership is also proposing to acquire certain private partnerships in which
Host Marriott or its subsidiaries are general partners in exchange for OP
Units. Each OP Unit will be redeemable for cash in an amount equal to the
market value of a share of Host Marriott common stock or, at the election of
Host Marriott Corporation (the general partner), a share of Host Marriott
common stock, beginning one year after the issuance of the OP Unit.
However, consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of the Company, including final
Board approval, consent of shareholders, partners, bondholders, lenders, and
ground lessors of Host Marriott, its affiliates and other third parties.
Accordingly, there can be no assurance that the REIT Conversion will be
completed.
DESCRIPTION OF BUSINESS
As of January 2, 1998, the Company owned, or had controlling interests in,
95 upscale and luxury full-service hotel lodging properties generally located
throughout the United States and operated under the Marriott and Ritz-Carlton
brand names. Most of these properties are managed by Marriott International,
Inc. ("Marriott International"). At that date, the Company also held minority
interests in various partnerships that own 242 additional properties,
including 22 full-service hotel properties, managed by Marriott International.
On December 29, 1995, Host Marriott distributed to its shareholders through
a special tax-free dividend (the "Special Dividend") its food, beverage, and
merchandise concessions business at airports, on tollroads, and at arenas and
other attractions (the "Operating Group"). See Note 2 for a discussion of the
Special Dividend. The 1995 financial statements were restated to reflect the
Operating Group as discontinued operations.
F-47
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The structure of Host Marriott was substantially altered on October 8, 1993
(the "Marriott International Distribution Date") when the Company distributed
the stock of a wholly-owned subsidiary, Marriott International, Inc., in a
special dividend (the "Marriott International Distribution"). See Note 14 for
a description of the Marriott International Distribution and related
transactions.
An analysis of the activity in the "Investments and Advances from Host
Marriott Corporation" follows (in millions):
<TABLE>
<S> <C>
Balance, December 30, 1994.......................................... $ 710
Net loss............................................................ (143)
Distribution of Host Marriott Services Corporation.................. 91
Issuances of common stock and other activity of Host Marriott....... 17
------
Balance, December 29, 1995.......................................... 675
Net loss............................................................ (13)
Adjustment for distribution of Host Marriott Services Corporation... (4)
Cash transfers to Host Marriott..................................... (17)
Issuances of common stock and other activity of Host Marriott....... 469
------
Balance, January 3, 1997............................................ 1,110
Net income.......................................................... 50
Cash transfers to Host Marriott..................................... (226)
Issuance of common stock and other activity of Host Marriott........ 23
------
Balance, January 2, 1998............................................ $ 957
======
</TABLE>
The average balance in the "Investment and Advances from Host Marriott
Corporation" was $692 million for 1995, $893 million for 1996 and $1,034
million for 1997. The "Cash transfers to Host Marriott" reflects cash
transfers to Host Marriott for the purchase of the Senior Living assets which,
as contemplated, will be spun-off in conjunction with the REIT Conversion.
PRINCIPLES OF CONSOLIDATION
The combined consolidated financial statements include the accounts of the
Company and its subsidiaries and controlled affiliates. Investments in
affiliates over which the Company has the ability to exercise significant
influence, but does not control, are accounted for using the equity method.
All material intercompany transactions and balances have been eliminated.
FISCAL YEAR
The Company's fiscal year ends on the Friday nearest to December 31. Fiscal
years 1997 and 1995 included 52 weeks compared to 53 weeks for fiscal year
1996.
REVENUES AND EXPENSES
Revenues primarily represent sales generated by the Company's hotels. Other
hotel operating costs and expenses include depreciation, management fees, real
and personal property taxes, ground and equipment rent, insurance and certain
other costs.
EARNINGS (LOSS) PER OP UNIT
Basic and diluted earnings per OP Unit have been calculated based on the
number of Host Marriott common shares outstanding for all periods presented
because it is expected that upon the REIT Conversion the Operating Partnership
will issue OP Units to Host Marriott in exchange for the Contribution equal to
the number of shares
F-48
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of outstanding Host Marriott common stock, accordingly, the following
discussion of earnings (loss) per OP Unit is on a pro forma basis as if the
REIT Conversion and the Contribution had occurred.
Basic earnings (loss) per OP Unit are computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding of Host
Marriott. Diluted earnings (loss) per OP Unit are computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding plus other dilutive securities of Host Marriott. Diluted earnings
(loss) per OP Unit has not been adjusted for the impact of the Convertible
Debt Obligation to Host Marriott Corporation for 1997 and 1996 and for the
comprehensive stock plan and warrants for 1996 and 1995 as they are anti-
dilutive.
Basic and diluted (loss) earnings per OP Unit on a pro forma basis are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Basic earnings (loss) per OP Unit:
Continuing operations................................. $ .23 $(.07) $(.39)
Discontinued operations (net of income taxes)......... -- -- (.39)
Extraordinary items--Gain (loss) on extinguishment of
debt (net of income taxes)........................... .02 -- (.12)
----- ----- -----
Basic earnings (loss) per OP Unit..................... $ .25 $(.07) $(.90)
===== ===== =====
Diluted earnings (loss) per OP Unit:
Continuing operations................................. $ .23 $(.07) $(.39)
Discontinued operations (net of income taxes)......... -- -- (.39)
Extraordinary items--Gain (loss) on extinguishment of
debt (net of income taxes)........................... .01 -- (.12)
----- ----- -----
Diluted earnings (loss) per OP Unit................... $ .24 $(.07) $(.90)
===== ===== =====
A reconciliation of the number of shares utilized (based on Host Marriott
shares) for the calculation of dilutive earnings per OP Unit follows (in
millions):
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Weighted average number of common shares outstanding.... 203.1 188.7 158.3
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed purchased
at average market price................................ 4.8 -- --
Assuming distribution of common shares issuable for war-
rants, less shares assumed purchased at average market
price.................................................. .3 -- --
----- ----- -----
Shares utilized for the calculation of diluted earnings
per OP Unit............................................ 208.2 188.7 158.3
===== ===== =====
</TABLE>
INTERNATIONAL OPERATIONS
The combined consolidated statements of operations include the following
amounts related to non-U.S. subsidiaries and affiliates of Host Marriott:
revenues of $39 million and $18 million and loss before income taxes of $9
million and $2 million in 1997 and 1996, respectively. International revenues
and income before income taxes in 1995 were not material.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. For newly developed properties,
cost includes interest, rent and real estate taxes incurred during development
and construction. Replacements and improvements are capitalized.
F-49
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to ten
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.
Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire without further cost to the Company.
In cases where management is holding for sale particular hotel properties,
the Company assesses impairment based on whether the estimated sales price
less costs of disposal of each individual property to be sold is less than the
net book value. A property is considered to be held for sale when the Company
has made the decision to dispose of the property. Otherwise, the Company
assesses impairment of its real estate properties based on whether it is
probable that undiscounted future cash flows from each individual property
will be less than its net book value. If a property is impaired, its basis is
adjusted to its fair market value.
DEFERRED CHARGES
Deferred financing costs related to long-term debt are deferred and
amortized over the remaining life of the debt.
CASH, CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES
The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $103 million and $67 million at January 2,
1998 and January 3, 1997, respectively, of cash related to certain
consolidated partnerships, the use of which is restricted generally for
partnership purposes to the extent it is not distributed to the partners.
Short-term marketable securities include investments with a maturity of 91
days to one year at the date of purchase. The Company's short-term marketable
securities represent investments in U.S. government agency notes and high
quality commercial paper. The short-term marketable securities are categorized
as available for sale and, as a result, are stated at fair market value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents
and short-term marketable securities. The Company maintains cash and cash
equivalents and short-term marketable securities with various high credit-
quality financial institutions. The Company performs periodic evaluations of
the relative credit standing of these financial institutions and limits the
amount of credit exposure with any institution.
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.
SELF-INSURANCE PROGRAMS
Prior to the Marriott International Distribution Date, the Company was self-
insured for certain levels of general liability, workers' compensation and
employee medical coverage. Estimated costs of these self-insurance programs
were accrued at present values of projected settlements for known and
anticipated claims. The
F-50
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company discontinued its self-insurance programs for claims arising subsequent
to the Marriott International Distribution Date.
INTEREST RATE SWAP AGREEMENTS
The Company has entered into a limited number of interest rate swap
agreements to diversify certain of its debt to a variable rate or fixed rate
basis. The interest rate differential to be paid or received on interest rate
swap agreements is accrued as interest rates change and is recognized as an
adjustment to interest expense.
NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Company adopted Statements of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" during 1995. Adoption of these statements did not have a
material effect on the Company's continuing operations. See Note 2 for a
discussion of the adoption of SFAS No. 121 on discontinued operations.
During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." The adoption of SFAS No. 123 did not have a material effect on
the Company's combined consolidated financial statements. (See Note 10.)
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," SFAS
No. 129, "Disclosure of Information About Capital Structure" and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
adoption of these statements did not have a material effect on the Company's
combined consolidated financial statements and the appropriate disclosures
required by these statements have been incorporated herein. The Company will
adopt SFAS No. 130, "Reporting Comprehensive Income," in 1998 and does not
expect it to have a material effect on the Company's combined consolidated
financial statements.
2. HM SERVICES SPECIAL DIVIDEND
On December 29, 1995, Host Marriott distributed to its shareholders through
the Special Dividend all of the outstanding shares of common stock of Host
Marriott Services Corporation ("HM Services"), formerly a wholly-owned
subsidiary of Host Marriott, which, as of the date of the Special Dividend,
owned and operated food, beverage and merchandise concessions at airports, on
tollroads and at stadiums and arenas and other tourist attractions. The
Special Dividend provided Host Marriott shareholders with one share of common
stock of HM Services for every five shares of Host Marriott common stock held
by such shareholders on the record date of December 22, 1995. Host Marriott
recorded approximately $9 million of expenses related to the consummation of
the Special Dividend in 1995. Revenues for Host Marriott's discontinued
operations totaled $1,158 million in 1995. The provision for loss on disposal
includes the operating loss from discontinued operations from August 9, 1995
(measurement date) through December 29, 1995 of $44 million, net of taxes, and
estimated expenses related to the Special Dividend of $9 million.
Effective September 9, 1995, the Company adopted SFAS No. 121, which
requires that an impairment loss be recognized when the carrying amount of an
asset exceeds the sum of the undiscounted estimated future cash flows
associated with the asset. As a result of the adoption of SFAS No. 121, the
Company recognized a non-cash, pre-tax charge during the fourth quarter of
1995 of $47 million. Such charge has been reflected in discontinued operations
for fiscal year 1995.
For purposes of governing certain of the ongoing relationships between Host
Marriott and HM Services after the Special Dividend and to provide for an
orderly transition, Host Marriott and HM Services entered into various
F-51
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement and a Transitional Services Agreement.
Effective as of December 29, 1995, these agreements provide, among other
things, for the division between Host Marriott and HM Services of certain
assets and liabilities, including but not limited to liabilities related to
employee stock and other benefit plans and the establishment of certain
obligations for HM Services to issue shares upon exercise of warrants (see
Note 7) and to issue shares or pay cash to Host Marriott upon exercise of
stock options held by certain former employees of Host Marriott (see Note 10).
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Land and land improvements................................... $ 418 $ 349
Buildings and leasehold improvements......................... 4,325 3,507
Furniture and equipment...................................... 688 548
Construction in progress..................................... 38 82
------ ------
5,469 4,486
Less accumulated depreciation and amortization............... (835) (681)
------ ------
$4,634 $3,805
====== ======
</TABLE>
Interest cost capitalized in connection with the Company's development and
construction activities totaled $1 million in 1997, $3 million in 1996 and $5
million in 1995.
In 1997, the Company, through an agreement with the ground lessor of one of
its properties terminated its ground lease and recorded a $15 million loss on
the write-off of its investment, including certain transaction costs, which
has been included in net gains (losses) on property transactions in the
accompanying combined consolidated financial statements.
In 1996, the Company recorded additional depreciation expense of $15 million
as a result of a change in the estimated depreciable lives and salvage values
for certain hotel properties. Also, in 1996, the Company recorded a $4 million
charge to write down an undeveloped land parcel to its net realizable value
based on its expected sales value.
In 1995, the Company made a determination that its owned Courtyard and
Residence Inn properties were held for sale and recorded a $10 million charge
to write down the carrying value of five of these individual properties to
their estimated net realizable values. In the fourth quarter of 1995,
management instituted a program to liquidate certain non-income producing
assets and to reinvest the proceeds in the acquisition of full-service hotels.
As part of this program, management determined that a 174-acre parcel of
undeveloped land in Germantown, Maryland that was to be developed into an
office project over an extended period of time would no longer be developed
and instead decided to attempt to sell the property. Accordingly, the Company
recorded a pre-tax charge of $60 million in the fourth quarter of 1995 to
reduce the asset to its estimated sales value. In 1997, the Company sold a
portion of the land parcel at its approximate net book value of $11 million.
F-52
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES
Investments in and receivables from affiliates consist of the following:
<TABLE>
<CAPTION>
OWNERSHIP
INTERESTS 1997 1996
--------- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Equity investments
Hotel partnerships which own 22 full-service Marriott
Hotels, 120 Courtyard hotels, 50 Residence Inns and 50
Fairfield Inns operated by Marriott International, as
of January 2, 1998.................................... 1%-50% $13 $ 11
Notes and other receivables, net........................ -- 23 156
--- ----
$36 $167
=== ====
</TABLE>
Hotel properties owned by affiliates generally were acquired from the
Company in connection with limited partnership offerings. The Company or one
of its subsidiaries typically serve as a general partner of each partnership
and the hotels are operated by Marriott International under long-term
agreements.
In 1997, the Company acquired all of the outstanding interests in the
Chesapeake Hotel Limited Partnership ("CHLP") that owns six hotels and
acquired controlling interests in three affiliated partnerships for
approximately $510 million, including the assumption of approximately $395
million of debt. These affiliated partnerships included the partnerships that
own the 353-room Hanover Marriott and the 884-room Marriott's Desert Springs
Resort and Spa and the Marriott Hotel Properties Limited Partnership ("MHPLP")
that owns the 1,503-room Marriott Orlando World Center and a 50.5% interest in
the 624-room Marriott Harbor Beach Resort. Subsequent to year-end, the Company
obtained a controlling interest in the partnership that owns the 1,671-room
Atlanta Marriott Marquis for approximately $239 million, including the
assumption of $164 million of mortgage debt.
In 1996, the Company purchased controlling interests in four affiliated
partnerships for $640 million, including $429 million of existing debt. These
affiliated partnerships included the partnership that owns the 1,355-room San
Diego Marriott Hotel and Marina; the Marriott Hotel Properties II Limited
Partnership that owns the 1,290-room New Orleans Marriott, the 999-room San
Antonio Marriott Rivercenter, the 368-room San Ramon Marriott, and a 50%
limited partner interest in the 754-room Santa Clara Marriott; the Marriott
Suites Limited Partnership that owns four hotels; and the partnership that
owns the 510-room Salt Lake City Marriott.
Receivables from affiliates are reported net of reserves of $144 million at
January 2, 1998 and $227 million at January 3, 1997. Receivables from
affiliates at January 2, 1998 include a $10 million debt service guarantee for
the partnership that owns the Atlanta Marriott Marquis, which was repaid in
early 1998. Receivables from affiliates at January 3, 1997 included a $140
million mortgage note at 9% that amortizes through 2003, which is eliminated
in the consolidated financial statements in 1997. The Company has committed to
advance additional amounts to affiliates, if necessary, to cover certain debt
service requirements. Such commitments are limited, in the aggregate, to an
additional $60 million at January 2, 1998. Subsequent to January 2, 1998, this
amount was reduced to $20 million in connection with the refinancing and
acquisition of a controlling interest in the Atlanta Marriott Marquis. Net
amounts repaid to the Company under these commitments totaled $2 million and
$13 million in 1997 and 1996, respectively. Net amounts funded by the Company
totaled $10 million in 1997 and $8 million in 1995. There were no fundings in
1996.
F-53
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's pre-tax income from affiliates includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Interest income............................................... $11 $17 $16
Equity in net income.......................................... 5 3 --
--- --- ---
$16 $20 $16
=== === ===
</TABLE>
Combined summarized balance sheet information for the Company's affiliates
follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Property and equipment....................................... $1,980 $2,605
Other assets................................................. 283 331
------ ------
Total assets............................................... $2,263 $2,936
====== ======
Debt, principally mortgages.................................. $2,179 $2,834
Other liabilities............................................ 412 672
Partners' deficit............................................ (328) (570)
------ ------
Total liabilities and partners' deficit.................... $2,263 $2,936
====== ======
</TABLE>
Combined summarized operating results for the Company's affiliates follow:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues................................................ $ 603 $ 731 $ 759
Operating expenses:
Cash charges (including interest)..................... (376) (460) (495)
Depreciation and other non-cash charges............... (190) (229) (240)
----- ----- -----
Income before extraordinary items....................... 37 42 24
Extraordinary items--forgiveness of debt................ 40 12 181
----- ----- -----
Net income............................................ $ 77 $ 54 $ 205
===== ===== =====
</TABLE>
F-54
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of senior notes, mortgage notes, a convertible debt obligation
to Host Marriott and other debt, all of which are included in these financial
statements because the debt or replacement debt is expected to be contributed
to the Company upon the REIT conversion. In August 1998 the Company repaid the
Properties Notes, New Properties Note and Acquisition Notes described below.
Debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Properties Notes, with a rate of 9 1/2% due May 2005.......... $ 600 $ 600
New Properties Notes, with a rate of 8 7/8% due July 2007..... 600 --
Acquisitions Notes, with a rate of 9% due December 2007....... 350 350
Senior Notes, with an average rate of 9 3/4% at January 2,
1998, maturing through 2012.................................. 35 71
------ ------
Total Senior Notes.......................................... 1,585 1,021
------ ------
Mortgage debt (non-recourse) secured by $2.4 billion of real
estate assets, with an average rate of 8.5% at January 2,
1998, maturing through 2022.................................. 1,762 1,529
Line of Credit, secured by $500 million of real estate assets,
with a variable rate of Eurodollar plus 1.7% or Base Rate (as
defined) plus 0.7% at the option of the Company (7.6% at
January 2, 1998) due June 2004............................... 22 --
------ ------
Total Mortgage Debt......................................... 1,784 1,529
------ ------
Convertible debt obligation to Host Marriott, with a rate of
6.75%, due 2026 (see Note 6)................................. 567 567
Other notes, with an average rate of 7.4% at January 2, 1998,
maturing through 2017........................................ 89 86
Capital lease obligations..................................... 8 11
------ ------
Total Other................................................. 664 664
------ ------
$4,033 $3,214
====== ======
</TABLE>
In May 1995, HMH Properties, Inc. ("Properties"), a wholly-owned subsidiary
of Host Marriott Hospitality, Inc. ("Hospitality"), issued an aggregate of
$600 million of 9 1/2% senior secured notes (the "Properties Notes"). The
bonds were issued in conjunction with a concurrent $400 million offering by a
subsidiary of the discontinued HM Services' business at par, and have a final
maturity of May 2005. The net proceeds were used to defease, and subsequently
redeem, all of the senior notes issued by Host Marriott Hospitality, Inc. and
to repay borrowings under the line of credit with Marriott International. In
connection with the redemptions and defeasance, the Company recognized an
extraordinary loss in 1995 of $17 million, net of taxes, related to continuing
operations.
In December 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an
indirect, wholly-owned subsidiary of Host Marriott, issued $350 million of 9%
senior notes (the "Acquisitions Notes"). The Acquisitions Notes were issued at
par and have a final maturity of December 2007. A portion of the net proceeds
were utilized to repay in full the outstanding borrowings under the $230
million revolving line of credit (the "Acquisition Revolver"), which was then
terminated. In connection with the termination of the Acquisition Revolver,
the Company recognized an extraordinary loss in 1995 of $3 million, net of
taxes.
On July 10, 1997, Properties and Acquisitions completed consent
solicitations (the "Consent Solicitations") with holders of their senior notes
to amend certain provisions of their senior notes' indentures. The Consent
F-55
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Solicitations facilitated the merger of Acquisitions with and into Properties
(the "Properties Merger"). The amendments to the indentures also increased the
ability of Properties to acquire, through certain subsidiaries, additional
properties subject to non-recourse indebtedness and controlling interests in
corporations, partnerships and other entities holding attractive properties
and increased the threshold required to permit Properties to make
distributions to affiliates.
Concurrent with the Consent Solicitations and the Properties Merger,
Properties issued an aggregate of $600 million of 8 7/8% senior notes (the
"New Properties Notes") at par with a maturity of July 2007. Properties
received net proceeds of approximately $570 million, net of the costs of the
Consent Solicitations and the Offering, which will be used to fund future
acquisitions of, or the purchase of interests in, full-service hotels and
other lodging-related properties, as well as for general corporate purposes.
The Properties Notes, the Acquisitions Notes and the New Properties Notes
are guaranteed on a joint and several basis by certain of Properties'
subsidiaries and rank pari passu in right of payment with all other existing
future senior indebtedness of Properties. Properties was the owner of 58 of
the Company's 95 lodging properties at January 2, 1998.
The net assets of Properties at January 2, 1998 were approximately $518
million, substantially all of which were restricted to the payment of
dividends. The payment of dividends to the Company from net income is
restricted to the extent that cumulative EBITDA (Earnings Before Interest
Expense, Taxes, Depreciation and Amortization) as defined in the Indenture
exceeds 220% of cash interest expense (as defined). The indentures governing
the Properties Notes, the Acquisitions Notes and the New Properties Notes
contain covenants that, among other things, limit the ability to incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell stock of subsidiaries, and enter into certain mergers
and consolidations.
During 1997, Host Marriott, through a newly-created, wholly-owned
subsidiary, HMC Capital Resources Corporation ("Capital Resources"), entered
into a revolving line of credit agreement (the "Line of Credit") with a group
of commercial banks under which it may borrow up to $500 million for the
acquisition of lodging real estate and for Host Marriott's working capital
purposes. On June 19, 2000, any outstanding borrowings on the Line of Credit
convert to a term loan arrangement with all unpaid advances due June 19, 2004.
Borrowings under the Line of Credit bear interest at either the Eurodollar
rate plus 1.7% or the Base Rate (as defined in the agreement) plus 0.7%, at
the option of Host Marriott. An annual fee of 0.35% is charged on the unused
portion of the commitment. The Line of Credit was originally secured by six
hotel properties contributed to Capital Resources, with a carrying value of
approximately $500 million as of January 2, 1998, and is guaranteed by the
Company. As a result of this transaction, Host Marriott terminated its line of
credit with Marriott International. As of January 2, 1998, outstanding
borrowings on the Line of Credit were approximately $22 million as a result of
a borrowing to fund the acquisition of the Ontario Airport Marriott.
Host Marriott also purchased 100% of the outstanding bonds secured by a
first mortgage on the San Francisco Marriott in 1997. Host Marriott purchased
the bonds for $219 million, an $11 million discount to the face value of $230
million. In connection with the redemption and defeasance of the bonds, the
Company recognized an extraordinary gain of $5 million, which represents the
$11 million discount less the write-off of unamortized deferred financing
fees, net of taxes.
In 1997, Host Marriott incurred approximately $418 million of mortgage debt
in conjunction with the acquisition of 11 hotels.
In conjunction with the construction of the Philadelphia Marriott, which was
completed and opened in January 1995, the Company obtained first mortgage
financing from Marriott International for 60% of the construction and
development costs of the hotel. In the fourth quarter of 1996, Host Marriott
repaid the $109
F-56
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million mortgage, prior to the rate increasing to 10% per annum with an
additional 2% deferred, with the proceeds from the convertible preferred
securities offering discussed in Note 6. In the first quarter of 1997, Host
Marriott obtained $90 million in first mortgage financing from two insurance
companies secured by the Philadelphia Marriott. The mortgage bears interest at
a fixed rate of 8.49% and matures in April 2009.
In December 1997, Host Marriott successfully completed the refinancing of
the MHPLP mortgage debt for approximately $152 million. The new mortgage bears
interest at 7.48% and matures in January 2008. In connection with the
refinancing, the Company recognized an extraordinary loss of $2 million which
represents payment of a prepayment penalty and the write-off of unamortized
deferred financing fees, net of taxes.
At January 2, 1998, the Company was party to an interest rate exchange
agreement with a financial institution (the contracting party) with an
aggregate notional amount of $100 million. Under this agreement, the Company
collects interest based on specified floating interest rates of one month
LIBOR (rate of 6% at January 2, 1998) and pays interest at fixed rates (rate
of 7.99% at January 2, 1998). This agreement expires in 1998 in conjunction
with the maturity of the mortgage on the New York Marriott Marquis. Also in
1997, the Company was party to two additional interest rate swap agreements
with an aggregate notional amount of $400 million which expired in May 1997.
The Company realized a net reduction of interest expense of $1 million in
1997, $6 million in 1996 and $5 million in 1995 related to interest rate
exchange agreements. The Company monitors the creditworthiness of its
contracting parties by evaluating credit exposure and referring to the ratings
of widely accepted credit rating services. The Standard and Poors' long-term
debt rating for the contracting party is A-. The Company is exposed to credit
loss equal to the accrued interest receivable on the notional amount of
interest rate exchange agreements outstanding ($0 at January 2, 1998) in the
event of non-performance by the contracting party to the interest rate swap
agreements; however, the Company does not anticipate non-performance by the
contracting party.
Aggregate debt maturities at January 2, 1998, excluding capital lease
obligations, are (in millions):
<TABLE>
<S> <C>
1998.................................................................. $ 316
1999.................................................................. 28
2000.................................................................. 131
2001.................................................................. 132
2002.................................................................. 156
Thereafter............................................................ 3,262
------
$4,025
======
</TABLE>
Cash paid for interest for continuing operations, net of amounts capitalized
was $316 million in 1997, $220 million in 1996 and $177 million in 1995.
Deferred financing costs, which are included in other assets, amounted to $96
million and $61 million, net of accumulated amortization, as of January 2,
1998 and January 3, 1997, respectively. Amortization of deferred financing
costs totaled $7 million, $5 million and $4 million in 1997, 1996 and 1995,
respectively.
6. CONVERTIBLE DEBT OBLIGATION TO HOST MARRIOTT CORPORATION
The obligation for the $567 million of 6 3/4% Convertible Subordinated
Debentures (the "Debentures") has been pushed down to these financial
statements because it is expected that upon the REIT Conversion the Operating
Partnership will assume primary liability for repayment of the Debentures of
Host Marriott underlying the Convertible Preferred Securities of the Host
Marriott Financial Trust (the "Issuer"), a wholly-owned subsidiary trust of
Host Marriott. The common securities of Host Marriott Financial Trust will not
be contributed to the Operating Partnership and therefore Host Marriott
Financial Trust will not be consolidated by the Operating Partnership. Upon
conversion by a Convertible Preferred Securities holder, the REIT will issue
shares of its common stock which will be delivered to such holder. Upon the
issuance of such shares by the REIT, the Operating Partnership will issue to
the REIT the number of OP Units equal to the number of shares of the REIT
common stock in exchange for the Debentures.
F-57
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1996, the Issuer issued 11 million shares of 6 3/4% convertible
quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by Host Marriott to the extent the Issuer has funds
available therefor. This guarantee, when taken together with Host Marriott
obligations under the indenture pursuant to which the Debentures were issued,
the Debentures, Host Marriott's obligations under the Trust Agreement and its
obligations under the indenture to pay costs, expenses, debts and liabilities
of the Issuer (other than with respect to the Convertible Preferred
Securities) provides a full and unconditional guarantee of amounts due on the
Convertible Preferred Securities. Proceeds from the issuance of the
Convertible Preferred Securities were invested in the Debentures due December
2, 2026 issued by Host Marriott. The Issuer exists solely to issue the
Convertible Preferred Securities and its own common securities (the "Common
Securities") and invest the proceeds therefrom in the Debentures. The note
receivable from Host Marriott for the Debentures is the Issuer's sole asset.
Separate financial statements of the Issuer are not presented because of Host
Marriott's guarantee described above; Host Marriott's management has concluded
that such financial statements are not material to investors and the Issuer is
wholly-owned and essentially has no independent operations.
Each of the Convertible Preferred Securities is convertible at the option of
the holder into shares of Host Marriott common stock at the rate of 2.6876
shares per Convertible Preferred Security (equivalent to a conversion price of
$18.604 per share of Company common stock). The Debentures are convertible at
the option of the holders into shares of Host Marriott common stock at a
conversion rate of 2.6876 shares for each $50 in principal amount of
Debentures. The conversion rate is subject to adjustments in certain events,
including (i) payment of dividends (and other distributions) on Host common
stock by Host in shares of Host common stock; (ii) distributions to all
holders of Host common stock of rights or warrants entitling such holders (for
a period not to exceed 45 days) to subscribe for or purchase Host common stock
at an exercise price less than the market price of Host common stock; (iii)
subdivisions and combinations of Host common stock; (iv) payment of dividends
(and other distributions) on Host common stock consisting of indebtedness of
Host, capital stock or other securities, assets or cash (other than certain
cash dividends at an annualized rate of up to 12.5% of the market price of
Host common stock); (v) payments for Host common stock by Host or any of its
subsidiaries in respect of a tender or exchange offer (other than an odd-lot
offer) at a price per share in excess of 110% of the market price of Host
common stock; (vi) consummation by Host of certain mergers, a consolidation, a
sale of all or substantially all of its assets, a recapitalization or certain
reclassifications of Host common stock. The distribution of the capital stock
of Crestline to all holders of Host REIT common stock would, and certain other
elements of the REIT Conversion (such as other distributions of Host's
accumulated earnings and profits) will, result in an adjustment to the
conversion price of the Debentures. The REIT Conversion could result in a
material adjustment to the conversion price of the Debentures and the
Convertible Preferred Securities depending upon the ultimate amount of the E&P
Distribution and the value of Host REIT Common Stock. The Issuer will only
convert Debentures pursuant to a notice of conversion by a holder of
Convertible Preferred Securities. During 1997 and 1996, no shares were
converted into common stock.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and payable
quarterly in arrears thereafter. The distribution rate and the distribution
and other payment dates for the Convertible Preferred Securities will
correspond to the interest rate and interest and other payment dates on the
Debentures. Host Marriott may defer interest payments on the Debentures for a
period not to exceed 20 consecutive quarters. If interest payments on the
Debentures are deferred, so too are payments on the Convertible Preferred
Securities. Under this circumstance, Host Marriott will not be permitted to
declare or pay any cash distributions with respect to its capital stock or
debt securities that rank pari passu with or junior to the Debentures.
F-58
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by Host Marriott of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result
of the acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.
7. SHAREHOLDERS' EQUITY OF HOST MARRIOTT
It is expected that upon the REIT Conversion that the Company will issue OP
Units to Host Marriott in exchange for the Contribution equal to the number of
shares of outstanding Host Marriott common stock. Additionally, limited
partnership units issued to partners of the eight public limited partnerships
and five private limited partnerships will be convertible on a one for one
basis into a share of stock of Host Marriott for each OP Unit owned or at the
election of Host Marriott Trust, in an amount equal to the market value of
such shares beginning one year after the issuance of the OP Unit.
Six hundred million shares of common stock of Host Marriott, with a par
value of $1 per share, are authorized, of which 203.8 million and 202.0
million were issued and outstanding as of January 2, 1998 and January 3, 1997,
respectively. One million shares of no par value preferred stock are
authorized with none outstanding. During 1995, substantially all outstanding
shares of such preferred stock were converted into approximately five million
shares of Host Marriott common stock with the remainder defeased.
On March 27, 1996, Host Marriott completed the issuance of 31.6 million
shares of common stock for net proceeds of nearly $400 million.
In connection with a class action settlement, Host Marriott issued warrants
to purchase up to 7.7 million shares of Host Marriott's common stock at $8.00
per share through October 8, 1996 and $10.00 per share thereafter. During
1996, 6.8 million warrants were exercised at $8.00 per share and an equivalent
number of shares of Host Marriott common stock were issued. During 1997,
approximately 60,000 warrants were exercised at $10.00 per share and an
equivalent number of shares of Host Marriott common stock were issued. As of
January 2, 1998, there were approximately 550,000 warrants outstanding.
In February 1989, the Board of Directors of Host Marriott adopted a
shareholder rights plan under which a dividend of one preferred stock purchase
right was distributed for each outstanding share of Host Marriott's common
stock. Each right entitles the holder to buy 1/1,000th of a share of a newly
issued series of junior participating preferred stock of Host Marriott at an
exercise price of $150 per share. The rights will be exercisable 10 days after
a person or group acquires beneficial ownership of at least 20%, or begins a
tender or exchange offer for at least 30%, of Host Marriott's common stock.
Shares owned by a person or group on February 3, 1989 and held continuously
thereafter are exempt for purposes of determining beneficial ownership under
the rights plan. The rights are non-voting and will expire on February 2,
1999, unless exercised or previously redeemed by Host Marriott for $.01 each.
If Host Marriott is involved in a merger or certain other business
combinations not approved by the Board of Directors, each right entitles its
holder, other than the acquiring person or group, to purchase common stock of
either Host Marriott or the acquiror having a value of twice the exercise
price of the right.
8. INCOME TAXES
The accompanying financial statements reflect the deferred income taxes
related to the expected future tax consequences of those temporary differences
specifically allocable to the Company based on the Contribution. Upon the REIT
Conversion and the Contribution it is expected that the Company will be a
limited partnership and taxable income or loss will be allocated among its
partners. Further, Host Marriott expects to qualify as a REIT and will
allocate its taxable income or loss to its shareholders. Accordingly, upon the
REIT Conversion
F-59
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and the Contribution, the Company will not have a Federal tax provision or a
state tax provision in many states and in accordance with Statement of
Financial Accounting Standards No. 109 the Company will record an adjustment
to the tax provision in the fiscal year during which the REIT Conversion takes
place for the tax effect of the reversal of certain of the Company's deferred
taxes.
Total deferred tax assets and liabilities at January 2, 1998 and January 3,
1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets......................................... $ 159 $ 139
Deferred tax liabilities.................................... (646) (603)
------ ------
Net deferred income tax liability......................... $ (487) $ (464)
====== ======
</TABLE>
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of January 2, 1998 and January 3, 1997 follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Investments in affiliates................................... $ (310) $ (303)
Property and equipment...................................... (179) (135)
Safe harbor lease investments............................... (65) (73)
Deferred tax gain........................................... (92) (92)
Reserves.................................................... 103 97
Alternative minimum tax credit carryforwards................ 41 26
Other, net.................................................. 15 16
------ ------
Net deferred income tax liability........................... $ (487) $ (464)
====== ======
</TABLE>
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current-- Federal............................................ $18 $(2) $ 7
-- State..................................................... 4 3 3
-- Foreign................................................... 3 3 --
--- --- ----
25 4 10
--- --- ----
Deferred-- Federal........................................... 8 2 (23)
-- State..................................................... 2 (1) --
--- --- ----
10 1 (23)
--- --- ----
$35 $ 5 $(13)
=== === ====
</TABLE>
At January 2, 1998, Host Marriott had approximately $41 million of
alternative minimum tax credit carryforwards available which do not expire.
Through 1997, Host Marriott settled with the Internal Revenue Service
("IRS") substantially all issues for tax years 1979 through 1993. Host
Marriott expects to resolve any remaining issues with no material impact on
the combined consolidated financial statements. Host Marriott made net
payments to the IRS of approximately $10 million and $45 million in 1997 and
1996, respectively, related to these settlements. Certain adjustments totaling
approximately $2 million and $11 million in 1996 and 1995, respectively, were
made to the tax provision related to those settlements.
F-60
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- -----
<S> <C> <C> <C>
Statutory Federal tax rate............................. 35.0% (35.0)% (35.0)%
State income taxes, net of Federal tax benefit......... 4.9 21.7 2.5
Tax credits............................................ (2.7) -- (0.1)
Additional tax on foreign source income................ 6.0 40.8 --
Tax contingencies...................................... -- 25.0 14.6
Permanent items........................................ 0.1 9.0 --
Other, net............................................. (0.6) 1.0 0.7
---- ----- -----
Effective income tax rate.............................. 42.7% 62.5% (17.3)%
==== ===== =====
</TABLE>
As part of the Marriott International Distribution and the Special Dividend,
Host Marriott, Marriott International and HM Services entered into tax-sharing
agreements which reflect each party's rights and obligations with respect to
deficiencies and refunds, if any, of Federal, state or other taxes relating to
the businesses of Host Marriott, Marriott International and HM Services prior
to the Marriott International Distribution and the Special Dividend.
Cash paid for income taxes, including IRS settlements, net of refunds
received, was $56 million in 1997, $40 million in 1996 and $22 million in
1995.
9. LEASES
The Company leases certain property and equipment under non-cancelable
operating and capital leases. Future minimum annual rental commitments for all
non-cancelable leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN MILLIONS)
<S> <C> <C>
1998....................................................... $ 2 $ 115
1999....................................................... 2 111
2000....................................................... 1 108
2001....................................................... 1 106
2002....................................................... 1 103
Thereafter................................................. 5 1,358
--- ------
Total minimum lease payments............................... 12 $1,901
======
Less amount representing interest.......................... (4)
---
Present value of minimum lease payments.................... $ 8
===
</TABLE>
As discussed in Note 12, Host Marriott sold and leased back 37 of its
Courtyard properties in 1995 and an additional 16 Courtyard properties in 1996
to Hospitality Properties Trust. Additionally, in 1996, Host Marriott sold and
leased back 18 of its Residence Inns to Hospitality Properties Trust. These
leases, which are accounted for as operating leases and are included above,
have initial terms expiring through 2012 for the Courtyard properties and 2010
for the Residence Inn properties, and are renewable at the option of the
Company. Minimum rent payments are $51 million annually for the Courtyard
properties and $17 million annually for the Residence Inn properties, and
additional rent based upon sales levels are payable to the owner under the
terms of the leases.
Leases also include long-term ground leases for certain hotels, generally
with multiple renewal options. Certain leases contain provision for the
payment of contingent rentals based on a percentage of sales in excess of
stipulated amounts.
F-61
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Certain of the lease payments included in the table above relate to
facilities used in the Company's former restaurant business. Most leases
contain one or more renewal options, generally for five or 10-year periods.
Future rentals on leases have not been reduced by aggregate minimum sublease
rentals of $124 million payable to the Company under non-cancelable subleases.
The Company remains contingently liable at January 2, 1998 on certain leases
relating to divested non-lodging properties. Such contingent liabilities
aggregated $110 million at January 2, 1998. However, management considers the
likelihood of any substantial funding related to these leases to be remote.
Rent expense consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rentals on operating leases........................... $ 98 $83 $34
Additional rentals based on sales............................. 20 16 17
---- --- ---
$118 $99 $51
==== === ===
</TABLE>
10. EMPLOYEE STOCK PLANS
It is expected that upon the REIT Conversion the Company will issue OP Units
to Host Marriott in exchange for the Contribution equal to the number of
shares of outstanding Host Marriott common stock. Additionally, OP Units
issued to partners of the eight public limited partnerships and five private
limited partnerships will be convertible on a one for one basis into shares of
Host Marriott stock for each OP Unit owned or, at the election of Host
Marriott Trust, in an amount equal to the market value of such shares
beginning one year after the issuance of the OP Unit.
At January 2, 1998, Host Marriott has two stock-based compensation plans
which are described below. Under the comprehensive stock plan (the
"Comprehensive Plan"), Host Marriott may award to participating employees (i)
options to purchase Host Marriott common stock, (ii) deferred shares of Host
Marriott's common stock and (iii) restricted shares of Host Marriott's common
stock. In addition, Host Marriott has an employee stock purchase plan (the
"Employee Stock Purchase Plan"). The principal terms and conditions of the two
plans are summarized below.
Total shares of common stock reserved and available for issuance under
employee stock plans at January 2, 1998 are:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Comprehensive Plan............................................. 28
Employee Stock Purchase Plan................................... 3
---
31
===
</TABLE>
Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. Options granted before May 11, 1990 expire 10 years after the
date of grant and nonqualified options granted on or after May 11, 1990 expire
up to 15 years after the date of grant. Most options vest ratably over each of
the first four years following the date of the grant. In connection with the
Marriott International Distribution, Host Marriott issued an equivalent number
of Marriott International options and adjusted the exercise prices of its
options, then outstanding, based on the relative trading prices of shares of
the common stock of the two companies.
F-62
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Host Marriott continues to account for expense under its plans under the
provisions of Accounting Principle Board Opinion 25 and related
interpretations as permitted under SFAS No. 123. Accordingly, no compensation
cost has been recognized for its fixed stock options under the Comprehensive
Plan and its Employee Stock Purchase Plan.
For purposes of the following disclosures required by SFAS No. 123, the fair
value of each option granted has been estimated on the date of grant using an
option-pricing model with the following weighted average assumptions used for
grants in 1997, 1996 and 1995, respectively: risk-free interest rate of 6.2%,
6.6% and 6.8%, respectively, volatility of 35%, 36% and 37%, respectively,
expected lives of 12 years and no dividend yield. The weighted average fair
value per option granted during the year was $13.13 in 1997, $8.68 in 1996 and
$5.76 in 1995.
Pro forma compensation cost for 1997, 1996 and 1995 would have reduced
(increased) net income (loss) by approximately $330,000, ($150,000) and
($5,000), respectively. Basic and diluted earnings per share on a pro forma
basis for Host Marriott were not impacted by the pro forma compensation cost
in 1997, 1996 and 1995.
The effects of the implementation of SFAS No. 123 are not representative of
the effects on reported net income in future years because only the effects of
stock option awards granted in 1995, 1996 and 1997 have been considered.
In connection with the Special Dividend, the then outstanding options held
by current and former employees of Host Marriott were redenominated in both
Host Marriott and HM Services stock and the exercise prices of the options
were adjusted based on the relative trading prices of shares of the common
stock of the two companies. For all options held by certain current and former
employees of Marriott International, the number and exercise price of the
options were adjusted based on the trading prices of shares of the Host
Marriott's common stock immediately before and after the Special Dividend.
Therefore, the options outstanding reflect these revised exercise prices.
Pursuant to the Distribution Agreement between the Company and HM Services,
Host Marriott has the right to receive up to 1.4 million shares of HM
Services' common stock or an equivalent cash value subsequent to exercise of
the options held by certain former and current employees of Marriott
International. As of January 2, 1998, Host Marriott valued this right at
approximately $20 million, which is included in other assets. A summary of the
status of Host Marriott's stock option plan for 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- -------------- ------------- -------------- ------------- --------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balance, at beginning of
year................... 8.3 $ 4 10.0 $ 4 11.7 $ 4
Granted................. .1 20 .2 13 -- --
Exercised............... (1.6) 4 (1.9) 4 (2.3) 4
Forfeited/Expired....... -- -- -- -- (.3) 4
Adjustment for Special
Dividend............... -- -- -- -- .9 4
---- ---- ----
Balance, at end of
year................. 6.8 4 8.3 4 10.0 4
==== ==== ====
Options exercisable at
year-end............... 6.4 7.6 8.5
</TABLE>
F-63
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at January 2, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
SHARES WEIGHTED AVERAGE SHARES
OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
RANGE OF AT CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES JANUARY 2, 1998 LIFE PRICE JANUARY 2, 1998 PRICE
- --------------- --------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
1-3 4.4 9 $ 2 4.4 $ 2
4-6 1.7 4 6 1.7 6
7-9 .4 12 9 .3 9
10-12 .1 14 12 -- --
13-15 .1 14 15 -- --
19-22 .1 15 20 -- --
--- ---
6.8 6.4
=== ===
</TABLE>
Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. Deferred stock incentive plan shares granted
in 1990 and prior years generally vest in annual installments commencing one
year after the date of grant and continuing for 10 years. Employees also could
elect to forfeit one-fourth of their deferred stock incentive plan award in
exchange for accelerated vesting over a 10-year period. Host Marriott accrues
compensation expense for the fair market value of the shares on the date of
grant, less estimated forfeitures. In 1997, 1996 and 1995, 14,000, 13,000 and
158,000 shares were granted, respectively, under this plan. The compensation
cost that has been charged against income for deferred stock was $1 million in
1995 and was not material in 1996 and 1997. The weighted average fair value
per share granted during each year was $15.81 in 1997, $11.81 in 1996 and
$8.49 in 1995.
In 1993, 3,537,000 restricted stock plan shares under the Comprehensive Plan
were issued to officers and key executives to be distributed over the next
three to 10 years in annual installments based on continued employment and the
attainment of certain performance criteria. Host Marriott recognizes
compensation expense over the restriction period equal to the fair market
value of the shares on the date of issuance adjusted for forfeitures, and
where appropriate, the level of attainment of performance criteria and
fluctuations in the fair market value of Host Marriott's common stock. In 1997
and 1996, 198,000 and 2,511,000 shares of additional restricted stock plan
shares were granted to certain key employees under terms and conditions
similar to the 1993 grants. Approximately 161,000 and 500,000 shares were
forfeited in 1996 and 1995, respectively. There were no shares forfeited in
1997. Host Marriott recorded compensation expense of $13 million, $11 million
and $5 million in 1997, 1996 and 1995, respectively, related to these awards.
The weighted average fair value per share granted during each year was $16.88
in 1997 and $14.01 in 1996. There were no restricted stock plan shares granted
in 1995.
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at the lower of market value
at the beginning or end of the plan year.
11. PROFIT SHARING AND POSTEMPLOYMENT BENEFIT PLANS
Host Marriott contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements
and electing participation in the plans. The amount to be matched by Host
Marriott is determined annually by the Board of Directors. Host Marriott
provides medical benefits to a limited number of retired employees meeting
restrictive eligibility requirements. Amounts for these items were not
material in 1995 through 1997.
F-64
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. ACQUISITIONS AND DISPOSITIONS
In 1998, the Company acquired, or purchased controlling interests in six
full-service hotels totaling 3,270 rooms for an aggregate purchase price of
approximately $388 million and entered into an agreement to acquire a
controlling interest in the 397-room Ritz-Carlton in Tysons Corner, Virginia.
In April 1998, Host Marriott reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire interests in 12 world-class luxury
hotels in the U.S. and certain other assets in a transaction valued at
approximately $1.735 billion, including the assumption of two mortgages, one
of which is secured by a thirteenth hotel. The Company expects to pay
approximately $862 million in cash and assumed debt and to issue approximately
43.7 million Operating Partnership units. Each OP Unit will be exchangeable
for one share of Host Marriott common stock (or its cash equivalent). Upon
completion of the acquisition, Blackstone will own approximately 18% of the
outstanding shares of Host Marriott common stock on a fully converted basis.
The Blackstone portfolio consists of two Ritz-Carlton, three Four Seasons, one
Grand Hyatt, three Hyatt Regencies and four Swissotel properties and a
mortgage on a third Four Seasons.
In 1998, the Company sold two hotels totaling 854 rooms for approximately
$212 million.
In 1997, the Company acquired eight full-service hotels totaling 3,600 rooms
for approximately $145 million. In addition, the Company acquired controlling
interests in nine full-service hotels totaling 5,024 rooms for approximately
$621 million, including the assumption of approximately $418 million of debt.
The Company also completed the acquisition of the 504-room New York Marriott
Financial Center, after acquiring the mortgage on the hotel for $101 million
in late 1996.
In 1996, the Company acquired six full-service hotels totaling 1,964 rooms
for an aggregate purchase price of approximately $189 million. In addition,
the Company acquired controlling interests in 17 full-service hotels totaling
8,917 rooms for an aggregate purchase price of approximately $1.1 billion,
including the assumption of approximately $696 million of debt. The Company
also purchased the first mortgage of the 504-room New York Marriott Financial
Center for approximately $101 million.
In 1995, the Company acquired nine full-service hotels totaling
approximately 3,900 rooms in separate transactions for approximately $390
million.
During the first and third quarters of 1995, 37 of the Company's Courtyard
properties were sold and leased back from Hospitality Properties Trust for
approximately $330 million. The Company received net proceeds from the two
transactions of approximately $297 million and will receive approximately $33
million upon expiration of the leases. A deferred gain of $14 million on the
sale/leaseback transactions is being amortized over the initial term of the
leases.
In the first and second quarters of 1996, the Company completed the sale and
leaseback of 16 of its Courtyard properties and 18 of its Residence Inn
properties for $349 million. The Company received net proceeds of
approximately $314 million and will receive approximately $35 million upon
expiration of the leases. A deferred gain of $45 million on the sale/leaseback
transactions is being amortized over the initial term of the leases.
F-65
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's summarized, unaudited combined consolidated pro forma results
of operations, assuming the above transactions, the refinancings and new debt
activity discussed in Note 5 occurred, along with the purchase of the
remaining interests in the eight public partnerships and five private
partnerships, the contribution and the REIT Conversion, on December 30, 1995,
are as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Revenues...................................................... $3,512 $3,267
Operating profit.............................................. 529 454
Income (loss) before extraordinary items...................... 37 (42)
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial assets and liabilities and other
financial instruments are shown below:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets
Short-term marketable securities......... $ 354 $ 354 $ -- $ --
Receivables from affiliates.............. 23 26 156 174
Notes receivable......................... 31 48 141 155
Other.................................... 20 20 13 13
Financial liabilities
Debt, net of capital leases.............. 3,458 3,492 2,636 2,654
Other financial instruments
Obligation to Host Marriott for
Convertible Preferred Securities........ 550 638 550 595
Interest rate swap agreements............ -- -- -- 1
Affiliate debt service commitments......... -- -- -- --
</TABLE>
Short-term marketable securities and the obligation to Host Marriott for
Convertible Preferred Securities are valued based on quoted market prices.
Receivables from affiliates, notes and other financial assets are valued based
on the expected future cash flows discounted at risk-adjusted rates.
Valuations for secured debt are determined based on the expected future
payments discounted at risk-adjusted rates. The fair values of the Line of
Credit and other notes are estimated to be equal to their carrying value.
Senior Notes are valued based on quoted market prices.
The Company is contingently liable under various guarantees of obligations
of certain affiliates (affiliate debt service commitments) with a maximum
commitment of $60 million at January 2, 1998 and $117 million at January 3,
1997. A fair value is assigned to commitments with expected future fundings.
The fair value of the commitments represents the net expected future payments
discounted at risk-adjusted rates. Such payments are accrued on an
undiscounted basis.
The fair value of interest rate swap agreements is based on the estimated
amount the Company would pay or receive to terminate the swap agreements. The
aggregate notional amount of the agreements was $100 million at January 2,
1998 and $525 million at January 3, 1997.
14. MARRIOTT INTERNATIONAL DISTRIBUTION AND RELATIONSHIP WITH MARRIOTT
INTERNATIONAL
On October 8, 1993 (the "Marriott International Distribution Date"),
Marriott Corporation distributed, through a special tax-free dividend (the
"Marriott International Distribution"), to holders of Marriott
F-66
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Corporation's common stock (on a share-for-share basis), approximately 116.4
million outstanding shares of common stock of an existing wholly-owned
subsidiary, Marriott International, resulting in the division of Marriott
Corporation's operations into two separate companies. The distributed
operations included the former Marriott Corporation's lodging management,
franchising and resort timesharing operations, senior living service
operations, and the institutional food service and facilities management
business. Host Marriott retained the former Marriott Corporation's airport and
tollroad food, beverage and merchandise concessions operations, as well as
most of its real estate properties. Effective at the Marriott International
Distribution Date, Marriott Corporation changed its name to Host Marriott
Corporation.
Host Marriott and Marriott International have entered into various
agreements in connection with the Marriott International Distribution and
thereafter which provide, among other things, that (i) the majority of the
Company's hotel lodging properties are managed by Marriott International under
agreements with initial terms of 15 to 20 years and which are subject to
renewal at the option of Marriott International for up to an additional 16 to
30 years (see Note 15); (ii) 10 of the Company's full-service properties are
operated under franchise agreements with Marriott International with terms of
15 to 30 years; (iii) Marriott International guarantees the Company's
performance in connection with certain loans and other obligations ($107
million at January 2, 1998); (iv) the Company borrowed and repaid $109 million
of first mortgage financing for construction of the Philadelphia Marriott (see
Note 5); (v) Marriott International provided the Company with $70 million of
mortgage financing in 1995 for the acquisition of three full-service
properties by the Company at an average interest rate of 8.5% (Marriott
International subsequently sold one of the loans in November 1996); (vi)
Marriott International and the Company formed a joint venture and Marriott
International provided the Company with $29 million in debt financing at an
average interest rate of 12.7% and $28 million in preferred equity in 1996 for
the acquisition of two full-service properties in Mexico City, Mexico; (vii)
in 1995, the Company also acquired a full-service property from a partnership
in which Marriott International owned a 50% interest; and (viii) Marriott
International provides certain limited administrative services.
In 1997, 1996 and 1995, Host Marriott paid to Marriott International $162
million, $101 million and $67 million, respectively, in hotel management fees;
$19 million, $18 million and $21 million, respectively, in interest and
commitment fees under the debt financing and line of credit provided by
Marriott International and $3 million, $4 million and $12 million,
respectively, for limited administrative services. Host Marriott also paid
Marriott International $4 million, $2 million and $1 million, respectively, in
franchise fees in 1997, 1996 and 1995.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of Host Marriott if certain events involving a change in
control of Host Marriott occur.
15. HOTEL MANAGEMENT AGREEMENTS
Most of the Company's hotels are subject to management agreements (the
"Agreements") under which Marriott International manages most of the Company's
hotels, 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 Agreements generally provide for payment of base management fees equal to
one to four percent of sales and incentive management fees generally equal to
20% to 50% of Operating Profit (as defined in the Agreements) over a priority
return (as defined) to the Company, with total incentive management fees not
to exceed 20% of cumulative Operating Profit, or 20% of current year Operating
Profit. In the event of early termination of the Agreements, Marriott
International will receive additional fees based on the unexpired term and
expected future base and incentive management fees. The Company has the option
to terminate certain management agreements if specified performance thresholds
are not satisfied. 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.
F-67
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of the 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.
The Company is obligated to provide the manager with sufficient funds to
cover the cost of (a) certain non-routine repairs and maintenance to the
hotels which are normally capitalized; and (b) replacements and renewals to
the hotels' property and improvements. Under certain circumstances, the
Company will be required to establish escrow accounts for such purposes under
terms outlined in the Agreements.
The Company has entered into franchise agreements with Marriott
International for ten hotels. Pursuant to these franchise agreements, the
Company generally pays a franchise fee based on a percentage of room sales and
food and beverage sales as well as certain other fees for advertising and
reservations. Franchise fees for room sales vary from four to six percent of
sales, while fees for food and beverage sales vary from two to three percent
of sales. The terms of the franchise agreements are from 15 to 30 years.
The Company has entered into management agreements with The Ritz-Carlton
Hotel Company, LLC ("Ritz-Carlton"), an affiliate of Marriott International,
to manage four of the Company's hotels. 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 sales and incentive management fees are generally equal to 20% of available
cash flow or operating profit, as defined in the agreements.
The Company has also entered into management agreements with hotel
management companies other than Marriott International and Ritz-Carlton for 12
of its hotels (10 of which are franchised under the Marriott brand). These
agreements generally provide for an initial term of 10 to 20 years with
renewal terms at the option of either party of up to an additional one to 15
years. These agreements generally provide for payment of base management fees
equal to one to three percent of sales. Seven of the 12 agreements also
provide for incentive management fees generally equal to 15 to 20 percent of
available cash flow, as defined in the agreements.
At January 2, 1998 and January 3, 1997, $75 million and $76 million,
respectively, have been advanced to the hotel managers for working capital and
are included in "Due From Managers" in the accompanying combined consolidated
balance sheets.
16. LITIGATION
The Company is from time-to-time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In the fourth quarter of 1997, the Company reached a settlement in a lawsuit
against Trinity Industries and others for claims related to construction of
the New York Marriott Marquis. In settlement of the lawsuit, the Company and
its affiliate received a cash settlement of approximately $70 million, the
majority of which was considered a recovery of construction costs and $10
million of which has been recorded as other revenues in the accompanying
combined consolidated financial statements.
F-68
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates in the full-service hotel segment of the lodging
industry. The Company's hotels are primarily operated under the Marriott or
Ritz-Carlton brands, contain an average of nearly 500 rooms, as well as supply
other amenities such as meeting space and banquet facilities; a variety of
restaurants and lounges; gift shops; and swimming pools. They are typically
located in downtown, airport, suburban and resort areas throughout the United
States.
As of January 2, 1998, the Company's foreign operations consist of four
full-service hotel properties located in Canada and two full-service hotel
properties located in Mexico. There were no intercompany sales between the
properties and the Company. The following table presents revenues and long-
lived assets for each of the geographical areas in which the Company operates
(in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States...... $2,732 $4,412 $1,908 $3,587 $1,359 $2,842
International...... 91 222 49 218 3 40
------ ------ ------ ------ ------ ------
Total............ $2,823 $4,634 $1,957 $3,805 $1,362 $2,882
====== ====== ====== ====== ====== ======
</TABLE>
18. SUBSEQUENT EVENTS (UNAUDITED)
On August 5, 1998, Properties issued $1.7 billion of 7 7/8% senior notes
issued in two series, consisting of $500 million due 2005 and $1.2 billion due
2008 (the "New Senior Notes"). The New Senior Notes are guaranteed by Host
Marriott and Hospitality and certain subsidiaries of Properties and are
secured by pledges of equity interests in certain subsidiaries of Properties.
The Operating Partnership will assume the New Senior Notes in connection with
the REIT Conversion and the guarantee by Host Marriott will terminate on the
Effective Date.
The indenture under which the New Senior Notes were issued contains
covenants restricting the ability of Properties and certain of its
subsidiaries to incur indebtedness, acquire or sell assets or make investments
in other entities, and make distributions to equityholders of Properties and
(following the REIT Conversion) the Operating Partnership. The New Senior
Notes also contain a financial covenant requiring the maintenance of a
specified ratio of unencumbered assets to unsecured debt.
On August 5, 1998, Properties entered into a $1.25 billion credit facility
(the "New Credit Facility") provided by a syndicate of financial institutions
(the "Lenders") led by Bankers Trust Company. The New Credit Facility provides
the Company with (i) a $350 million term loan facility (subject to increases
as provided in the succeeding paragraph) and (ii) a $900 million revolving
credit facility. The New Credit Facility will have an initial term of three
years with two one-year options to extend. The proceeds of the New Credit
Facility, along with the proceeds from the New Senior Notes, were used to fund
the purchase of $1.55 billion of senior notes of Properties at the initial
closing on August 5, 1998, and repay $22 million of outstanding borrowings
under a line of credit provided by the Lenders to certain subsidiaries of the
Company.
The term loan facility was funded on the closing date of the New Credit
Facility. The $350 million term loan facility may be increased by up to $250
million after the initial closing and will be available, subject to terms and
conditions thereof and to the commitment of sufficient Lenders, in up to two
drawings to be made on or prior to the second anniversary of the closing of
the New Credit Facility. The Lenders will advance funds under the revolving
credit facility as requested by the Company with minimum borrowing amounts and
frequency limitations to be agreed upon, subject to customary conditions
including, but not limited to, (i) no
F-69
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
existing or resulting default or event of default under the New Credit
Facility and (ii) continued accuracy of representations and warranties in all
material respects.
The interest rate applicable to the New Credit Facility and the unused
commitment fee applicable to the revolving portion of the New Credit Facility
are calculated based on a spread over LIBOR that will fluctuate based on the
quarterly recalculation of a leverage ratio set forth in the New Credit
Facility. The New Credit Facility provides that in the event that the Company
achieves one of several investment grade long-term unsecured indebtedness
ratings, the spread over LIBOR applicable to the New Credit Facility will be
fixed based on the particular rating achieved. If the Company elects to
exercise its one-year extensions, the Company will be required to amortize
approximately 22.5% per annum of the principal amount outstanding under the
New Credit Facility at the end of the initial three-year term.
The Company's obligations under the New Credit Facility are guaranteed,
subject to certain conditions, on a senior basis by Host Marriottt Hospitality
and certain of Properties' existing and future subsidiaries. The New Credit
Facility will be assumed by the Operating Partnership in connection with the
REIT Conversion and the guarantee of Host Marriott will then terminate. In
addition, certain subsidiaries of Host Marriott other than Properties and its
subsidiaries may, under certain circumstances, guarantee the obligations under
the New Credit Facility in the future. Borrowings under the New Credit
Facility will rank pari passu with the New Senior Notes and other existing and
future senior indebtedness of the Company. The New Credit Facility is secured,
on an equal and ratable basis, with the New Senior Notes by a pledge of the
capital stock of certain direct and indirect subsidiaries of Properties. In
addition, the New Credit Facility may, under certain circumstances in the
future, be secured by a pledge of capital stock of certain subsidiaries of
Host Marriott other than Properties and its subsidiaries.
The New Credit Facility includes financial and other covenants that require
the maintenance of certain ratios with respect to, among other things, maximum
leverage, limitations on indebtedness, minimum net worth and interest and
fixed charge coverage and restrict payment of distributions and investments,
acquisitions and sales of assets by the Company.
F-70
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
SEPTEMBER 11, 1998
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (SEE NOTE 12)
ASSETS ---------- -------------
<S> <C> <C>
Property and Equipment, net.......................... $5,288 $5,288
Notes and Other Receivables, net (including amounts
due from affiliates of $111 million)................ 29 29
Due from Managers.................................... 83 83
Investments in Affiliates............................ 18 18
Other Assets......................................... 321 321
Short-term Marketable Securities..................... 36 36
Cash and Cash Equivalents............................ 512 287
------ ------
$6,287 $6,062
====== ======
LIABILITIES AND EQUITY
Debt
Senior Notes....................................... $1,748 $1,748
Mortgage Debt...................................... 1,818 1,818
Other.............................................. 445 445
Convertible Debt Obligation to Host Marriott
Corporation........................................ 567 567
------ ------
4,578 4,578
Accounts Payable and Accrued Expenses................ 62 62
Deferred Income Taxes................................ 464 464
Other Liabilities.................................... 437 437
------ ------
Total Liabilities................................ 5,541 5,541
Equity
Investments and Advances from Host Marriott Corpo-
ration............................................ 746 521
------ ------
$6,287 $6,062
====== ======
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-71
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND SEPTEMBER 12, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
REVENUES
Rooms........................................................ $1,514 $1,246
Food and beverage............................................ 642 500
Other........................................................ 159 120
------ ------
Total hotel revenues....................................... 2,315 1,866
Net gains (losses) on property transactions.................. 53 3
Equity in earnings of affiliates............................. 1 3
Other........................................................ 6 10
------ ------
Total revenues............................................. 2,375 1,882
------ ------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms...................................................... 348 285
Food and beverage.......................................... 477 381
Other department costs and deductions...................... 80 63
Other hotel operating costs and expenses (including Marriott
International management fees of $138 million and $111
million, respectively)...................................... 990 834
------ ------
Total hotel operating costs and expenses................. 1,895 1,563
Other........................................................ 15 21
------ ------
Total operating costs and expenses....................... 1,910 1,584
------ ------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE EXPENSES,
REIT CONVERSION EXPENSES AND INTEREST......................... 465 297
Minority interest.............................................. (36) (24)
Corporate expenses............................................. (30) (26)
REIT Conversion expenses....................................... (14) --
Interest expense (including interest on Convertible Debt to
Host Marriott Corporation of $26 million in 1998 and 1997).... (253) (217)
Interest income................................................ 38 36
------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.............. 170 66
Provision for income taxes..................................... (72) (28)
------ ------
INCOME BEFORE EXTRAORDINARY ITEM............................... 98 38
Extraordinary item--Gain (loss) on extinguishment of debt (net
of
taxes of $80 million in 1998 and $3 million in 1997).......... (148) 5
------ ------
NET INCOME..................................................... $ (50) $ 43
====== ======
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-72
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND SEPTEMBER 12, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations.............................. $ 98 $ 38
Adjustments to reconcile to cash from operations:
Depreciation and amortization................................ 167 153
Income taxes................................................. 50 --
Gains on sales of hotel properties........................... (50) --
Equity in (earnings) losses of affiliates...................... (1) (4)
Changes in operating accounts.................................. (35) 74
Other.......................................................... 31 43
------- -----
Cash from operations....................................... 260 304
------- -----
INVESTING ACTIVITIES
Proceeds from sales of assets.................................. 211 35
Acquisitions................................................... (607) (236)
Capital expenditures:
Renewals and replacements.................................... (108) (86)
New development projects..................................... (32) --
New investment capital expenditures.......................... (19) (22)
Purchases of short-term marketable securities.................. (134) --
Sales of short-term marketable securities...................... 451 --
Notes receivable collections................................... 4 5
Affiliate collections, net..................................... (78) (1)
Other.......................................................... (12) 13
------- -----
Cash used in investing activities.......................... (324) (292)
------- -----
FINANCING ACTIVITIES
Cash transferred to Host Marriott.............................. (63) (210)
Issuances of debt.............................................. 2,004 652
Issuances of common stock by Host Marriott..................... 2 4
Scheduled principal repayments................................. (39) (51)
Debt prepayments............................................... (1,631) (240)
Costs of extinguishment of debt................................ (175) --
Other.......................................................... (16) 24
------- -----
Cash from financing activities............................. 82 179
------- -----
INCREASE IN CASH AND CASH EQUIVALENTS.......................... $ 18 $ 191
======= =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or pur-
chase of
controlling interests in, certain hotel properties.......... $ 164 $ 287
======= =====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-73
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to restructure Host Marriott's current
business operations by the spin-off of Host Marriott's senior living
business (Crestline Capital Corporation, "Crestline") and the contribution
of Host Marriott's hotels and certain other assets and liabilities to a
newly formed Delaware limited partnership, Host Marriott, L.P. (the
"Operating Partnership") whose sole general partner will be HMC Merger
Corporation (to be renamed "Host Marriott Corporation"), a newly formed
Maryland corporation that will merge into Host Marriott Corporation, a
Delaware corporation and will qualify as a real estate investment trust
("REIT"). Host Marriott's contribution of its hotels and certain assets and
liabilities to the Operating Partnership (the "Contribution") in exchange
for units of limited partnership interests in the Operating Partnership
will be accounted for at Host Marriott's historical basis.
The accompanying condensed combined consolidated financial statements
include the accounts of the Host Marriott hotels and the assets and
liabilities expected to be included in the Contribution by Host Marriott to
the Operating Partnership upon its planned conversion to a REIT (the "REIT
Conversion"). In these condensed combined consolidated financial
statements, Host Marriott Hotels is referred to as "Host Marriott Hotels"
or the "Company." The condensed combined consolidated financial statements
exclude the assets, liabilities, equity, operations and cash flows related
to Host Marriott's portfolio of 31 senior living communities. After the
REIT Conversion, Crestline will own these assets and lease the existing
hotels from the Company.
In June 1998, as part of the REIT Conversion, Host Marriott and the
Operating Partnership filed a preliminary Prospectus/Consent Solicitation
with the Securities and Exchange Commission. This Prospectus/Consent
Solicitation Statement describes a proposal whereby the Operating
Partnership will acquire by merger (the "Mergers") eight limited
partnerships (the "Partnerships") that own full-service hotels in which
Host Marriott or its subsidiaries are general partners. As more fully
described in the Prospectus/Consent Solicitation Statement, limited
partners of those Partnerships that participate in the Mergers will receive
OP Units, or at their election, unsecured notes due December 15, 2005
issued by the Operating Partnership ("Notes") or common stock in the REIT,
in exchange for their partnership interests in such partnerships. The
Prospectus/Consent Solicitation period expires on December 12, 1998, unless
extended.
The REIT expects to qualify as a real estate investment trust under federal
income tax law beginning January 1, 1999. However, consummation of the REIT
Conversion is subject to significant contingencies that are outside the
control of Host Marriott, including final Board of Directors approval,
consents of shareholders, partners, bondholders, lenders and ground lessors
of Host Marriott, its affiliates and other third parties. Accordingly,
there can be no assurance that the REIT Conversion will be completed or
that it will be effective as of January 1, 1999. If the REIT Conversion is
not completed on January 1, 1999, the effectiveness of REIT election could
be delayed until January 1, 2000, which would result in the Company
continuing to pay a substantial amount of corporate-level income taxes in
1999.
On April 20, 1998, Host Marriott and certain of its subsidiaries filed a
shelf registration on Form S-3 (the "Shelf Registration") with the
Securities and Exchange Commission for the issuance of up to $2.5 billion
in securities, which may include debt, equity or a combination thereof.
Host Marriott utilized $1.7 billion of the capacity under this Shelf
Registration to issue the New Senior Notes (defined below) and anticipates
that any net proceeds from the sale of additional offered securities will
be used for refinancing of Host Marriott's indebtedness, acquisitions and
general corporate purposes.
On August 5, 1998, HMH Properties, Inc. ("HMH Properties"), an indirect
wholly-owned subsidiary of Host Marriott, which owns 71 of Host Marriott's
hotels, purchased substantially all of its (i) $600 million in 9 1/2%
senior notes due 2005, (ii) $350 million in 9% senior notes due 2007 and
(iii) $600 million in 8 7/8% senior notes due 2007 (collectively, the "Old
Senior Notes"). Concurrently with each offer to
F-74
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purchase, HMH Properties successfully solicited consents (the "1998 Consent
Solicitations") from registered holders of the Old Senior Notes to certain
amendments to eliminate or modify substantially all of the restrictive
covenants and certain other provisions contained in the indentures pursuant
to which the Old Senior Notes were issued. HMH Properties simultaneously
utilized the Shelf Registration to issue an aggregate of $1.7 billion in
new senior notes (the "New Senior Notes"). The New Senior Notes were issued
in two series, $500 million of 7 7/8% Series A notes due in 2005 and $1.2
billion of 7 7/8% Series B notes due in 2008. Approximately $21 million of
the Old Senior Notes remain outstanding. The 1998 Consent Solicitations
facilitated the merger of HMC Capital Resources Holdings Corporation
("Capital Resources"), a wholly-owned subsidiary of the Company, with and
into HMH Properties. Capital Resources, the then owner of eight of Host
Marriott's hotel properties, was the obligor under the $500 million
revolving credit facility (the "Old Credit Facility").
In conjunction with the issuance of the New Senior Notes, HMH Properties
entered into a $1.25 billion credit facility (the "New Credit Facility")
with a group of commercial banks. The New Credit Facility has an initial
three year term with two one-year extension options. Borrowings under the
New Credit Facility generally bear interest at the Eurodollar rate plus
1.75% (7.5% at September 11, 1998). The interest rate and commitment fee
(0.35% at September 11, 1998) on the unused portion of the Credit Facility
fluctuates based on certain financial ratios. The New Senior Notes and the
New Credit Facility are guaranteed by Host Marriott and its wholly-owned
subsidiary, Host Marriott Hospitality, Inc. and certain subsidiaries of HMH
Properties and are secured by pledges of equity interests in certain
subsidiaries of HMH Properties. The New Senior Notes and the New Credit
Facility will be assumed by the Operating Partnership in connection with
the REIT Conversion and the guarantee of the Company is expected to
terminate upon the consummation of the REIT Conversion. As of September 11,
1998, $350 million was outstanding under the New Credit Facility.
The New Credit Facility replaces the Company's Old Credit Facility. The net
proceeds from the offering and borrowings under the New Credit Facility
were used by Host Marriott to purchase substantially all of the Old Senior
Notes, to make repayments outstanding under the Old Credit Facility and to
make bond premium and consent payments totaling approximately $175 million.
These costs, along with the write-off of deferred financing fees of
approximately $52 million related to the Old Senior Notes and the Old
Credit Facility, will be recorded as a pre-tax extraordinary loss on the
extinguishment of debt in the third quarter of 1998. The New Credit
Facility and the indenture under which the New Senior Notes were issued
contain covenants restricting the ability of HMH Properties and certain of
its subsidiaries to incur indebtedness, grant liens on their assets,
acquire or sell assets or make investments in other entities, and make
distributions to equityholders of HMH Properties, Host Marriott, and
(following the REIT Conversion) the Operating Partnership and Host REIT.
The New Credit Facility and the New Senior Notes also contain certain
financial covenants relating to, among other things, maintaining certain
levels of tangible net worth and certain ratios of EBITDA to interest and
fixed charges, total debt to EBITDA, unencumbered assets to unsecured debt,
and secured debt to total debt.
The accompanying condensed combined consolidated financial statements have
been prepared by the Company without audit. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed combined consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's audited financial statements for the three fiscal
years in the period ended January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed combined
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of September 11,
1998 and the results of operations and cash flows for the thirty-six weeks
ended
F-75
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
September 11, 1998 and September 12, 1997. Interim results are not
necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations.
2. In April 1998, Host Marriott reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire controlling interests in 12 luxury
hotels and a first mortgage interest in another hotel in the U.S. and
certain other assets. The Company expects to pay approximately $862 million
in cash and assumed debt and to issue approximately 43.7
million Operating Partnership units ("OP Units") of the Operating
Partnership (based upon a negotiated rate of $20.00 per OP Unit) and
distribute up to 15% of the shares of Crestline to be formed as part of the
Company's reorganization. Each OP Unit will be exchangeable for one share
of Host Marriott common stock (or its cash equivalent). Upon completion of
the acquisition, Blackstone will own approximately 16% of the outstanding
shares of Host Marriott common stock on a fully converted basis. The
Blackstone portfolio consists of two Ritz-Carlton, two Four Seasons, one
Grand Hyatt, three Hyatt Regency, four Swissotel properties, and a mortgage
note on a third Four Seasons property.
The Blackstone transaction is expected to close immediately after the REIT
Conversion. At that time, Blackstone's hotels and other assets will be
contributed to the Operating Partnership and the hotels leased to
subsidiaries of Crestline. The hotels will continue to be managed on behalf
of the lessees under the existing management contracts. Consummation of the
Blackstone transaction is also subject to certain conditions, including
consummation of the REIT Conversion no later than March 31, 1999, and Host
Marriott qualifying as a REIT for 1999.
3. Revenues primarily represent sales generated by the Company's hotels. Other
hotel operating costs and expenses include depreciation, management fees,
real and personal property taxes, ground and equipment rent, insurance and
certain other costs.
4. Basic and diluted earnings per OP Unit have been calculated based on the
number of Host Marriott common shares outstanding for all periods presented
because it is expected that upon the REIT Conversion the Operating
Partnership will issue OP Units to Host Marriott in exchange for the
Contribution equal to the number of shares of outstanding Host Marriott
common stock. Accordingly, the following discussion of earnings per OP Unit
is on a pro forma basis as if the REIT Conversion and Contribution had
occurred.
Basic earnings per OP Unit is computed by dividing net income by the
weighted average number of shares of common stock outstanding of Host
Marriott. Diluted earnings per OP Unit is computed by dividing net income
plus dividends by the weighted average number of shares of common stock
outstanding plus other potentially dilutive securities of Host Marriott.
Diluted earnings per OP Unit was not adjusted for the impact of the
Convertible Debt Obligation to Host Marriott Corporation in 1997 as they
were anti-dilutive.
Basic and diluted earnings per OP Unit on a pro forma basis are as follows:
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
Basic earnings per OP Unit:
Income before extraordinary item............. $ .48 $.19
Extraordinary item--Gain (loss) on
extinguishment of debt (net of income
taxes)...................................... (.73) .02
----- ----
Basis earnings per OP Unit................. $(.25) $.21
===== ====
Diluted earnings per OP Unit:
Income before extraordinary item............. $ .47 $.18
Extraordinary item--Gain (loss) on
extinguishment of debt (net of income
taxes)...................................... (.71) .02
----- ----
Diluted earnings per OP Unit............... $(.24) $.20
===== ====
</TABLE>
F-76
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per OP Unit follows:
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Weighted average number of common shares
outstanding..................................... 204.1 202.8
Assuming distribution of common shares granted
under the comprehensive stock plan, less shares
assumed purchased at average market price....... 4.2 4.8
Assuming distribution of common shares upon
redemption of Convertible Debt to Host Marriott
Corporation..................................... -- --
Assuming distribution of common shares issuable
for warrants, less shares assumed purchased at
average market price............................ .1 .2
----- -----
Shares utilized for the calculation of diluted
earnings per OP Unit.......................... 208.4 207.8
===== =====
</TABLE>
5. As of September 11, 1998, the Company had minority interests in 18
affiliates that own an aggregate of 240 properties, 20 of which are full-
service properties, managed primarily by Marriott International, Inc. The
Company's equity in earnings of affiliates was $1 million and $3 million
for the thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively.
Combined summarized operating results reported by affiliates follows:
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Revenues......................................... $369 $447
Operating expenses:
Cash charges (including interest).............. (223) (278)
Depreciation and other non-cash charges........ (101) (140)
---- ----
Income (loss) before extraordinary item.......... 45 29
Extraordinary item--forgiveness of debt.......... 4 12
---- ----
Net income................................... $ 49 $ 41
==== ====
</TABLE>
In the first quarter of 1998, the Company obtained a controlling interest
in the partnership that owns the 1,671-room Atlanta Marriott Marquis for
approximately $239 million, including $164 million in assumed mortgage
debt. The Company previously owned a 1.3% general and limited partnership
interest.
In second quarter of 1998, the Company acquired the partnership that owns
the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24 million.
The Company previously owned a 1% managing general partner interest and
held a note receivable interest.
6. In the first quarter of 1998, the Company acquired a controlling interest
in, and became the managing general partner for, the partnership that owns
the 359-room Albany Marriott, the 350-room San Diego Marriott Mission
Valley and the 320-room Minneapolis Marriott Southwest for approximately
$50 million.
In the second quarter of 1998, the Company acquired the 397-room Ritz-
Carlton, Tysons Corner for $96 million and the 281-room Ritz-Carlton,
Phoenix for $75 million. In addition, the Company acquired the 487- room
Torrance Marriott near Los Angeles, California for $52 million. Also in the
second quarter of 1998, the Company sold the 662-room New York Marriott
East Side for approximately $191 million and recorded a pre-tax gain of
approximately $40 million. The Company also sold the 191-room Napa Valley
Marriott for approximately $21 million and recorded a pre-tax gain of
approximately $10 million.
F-77
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the third quarter of 1998, the Company acquired the 308-room Ritz-
Carlton, Dearborn for approximately $65 million, the 336-room Ritz-Carlton,
San Francisco for approximately $161 million and the 404-room Memphis
Marriott (which was converted to the Marriott brand upon acquisition) for
approximately $16 million.
7. In March 1997, Host Marriott purchased 100% of the outstanding bonds
secured by a first mortgage on the San Francisco Marriott Hotel. Host
Marriott purchased the bonds for $219 million, an $11 million discount to
the face value of $230 million. In connection with the redemption and
defeasance of the bonds, the Company recognized an extraordinary gain of $5
million, which represents the $11 million discount and the write-off of
deferred financing fees, net of taxes.
8. The Company operates in the full-service hotel segment of the lodging
industry. The Company's hotels are primarily operated under the Marriott or
Ritz-Carlton brands.
As of September 11, 1998 and September 12, 1997, the Company's foreign
operations consist of four full-service hotel properties located in Canada
and two full-service hotel properties located in Mexico. There were no
intercompany sales between the properties and the Company. The following
table presents revenues for each of the geographical areas in which the
Company operates (in millions):
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------------------
SEPTEMBER 11, 1998 SEPTEMBER 12, 1997
------------------ ------------------
<S> <C> <C>
United States....................... $1,009 $743
International....................... 31 25
------ ----
Total........................... $1,040 $768
====== ====
</TABLE>
9. In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," ("SFAS 130"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in
financial statements. The objective of SFAS 130 is to report a measure of
all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner
changes in equity.
The Company's only component of other comprehensive income is the right to
receive up to 1.4 million shares of Host Marriott Services Corporation's
("HMSC") common stock or an equivalent cash value subsequent to exercise of
the options held by certain former and current employees of Marriott
International. For the thirty-six weeks ended September 11, 1998, other
comprehensive loss was $3 million and consisted of the unrealized loss on
the appreciation of the HMSC common stock. For the thirty-six weeks ended
September 11, 1998, comprehensive loss was $51 million. For the thirty-six
weeks ended September 12, 1997, other comprehensive income was $8 million.
For thirty-six weeks ended September 12, 1997, comprehensive income was $51
million. As of September 11, 1998 and January 2, 1998, the Company's
accumulated other comprehensive income of approximately $7 million and $10
million, respectively, was included in Investments and Advances from Host
Marriott Corporation.
10. The obligation for the Convertible Subordinated Debentures (the
"Debentures") has been pushed down to these financial statements because
it is expected that upon the REIT Conversion the Operating Partnership
will assume primary liability for repayment of the Debentures of Host
Marriott underlying the Convertible Preferred Securities of Host Marriott
Financial Trust (the "Issuer"), a wholly-owned subsidiary trust of Host
Marriott. The common securities of Host Marriott Financial Trust will not
be contributed to the Operating Partnership and therefore Host Marriott
Financial Trust will not be consolidated by the Operating Partnership.
Upon conversion by a Convertible Preferred Securities holder, the REIT
will issue shares of its
F-78
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock which will be delivered to such holder. Upon the issuance of
such shares by the REIT, the Operating Partnership will issue to the REIT
the number of OP Units equal to the number of shares of the REIT common
stock in exchange for the Debentures.
In December 1996, the Issuer issued 11 million shares of 6 3/4% convertible
quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by Host Marriott to the extent the Issuer has
funds available therefor. This guarantee, when taken together with Host
Marriott obligations under the indenture pursuant to which the Debentures
were issued, the Debentures, Host Marriott's obligations under the Trust
Agreement and its obligations under the indenture to pay costs, expenses,
debts and liabilities of the Issuer (other than with respect to the
Convertible Preferred Securities) provides a full and unconditional
guarantee of amounts due on the Convertible Preferred Securities. Proceeds
from the issuance of the Convertible Preferred Securities were invested in
the Debentures due December 2, 2026 issued by Host Marriott. The Issuer
exists solely to issue the Convertible Preferred Securities and its own
common securities (the "Common Securities") and invest the proceeds
therefrom in the Debentures. The note receivable from Host Marriott for the
Debentures is the Issuer's sole asset. Separate financial statements of the
Issuer are not presented because of Host Marriott's guarantee described
above; Host Marriott's management has concluded that such financial
statements are not material to investors and the Issuer is wholly-owned and
essentially has no independent operations.
Each of the Convertible Preferred Securities is convertible at the option
of the holder into shares of Host Marriott common stock at the rate of
2.6876 shares per Convertible Preferred Security (equivalent to a
conversion price of $18.604 per share of Company common stock). The
Debentures are convertible at the option of the holders into shares of Host
Marriott common stock at the conversion rate of 2.6876 shares for each $50
in principal amount of Debentures. The conversion rate is subject to
adjustments in certain events, including (i) payment of dividends (and
other distributions) on Host common stock by Host in shares of Host common
stock; (ii) distributions to all holders of Host common stock of rights or
warrants entitling such holders (for a period not to exceed 45 days) to
subscribe for or purchase Host common stock at an exercise price less than
the market price of Host common stock; (iii) subdivisions and combinations
of Host common stock; (iv) payment of dividends (and other distributions)
on Host common stock consisting of indebtedness of Host, capital stock or
other securities, assets or cash (other than certain cash dividends at an
annualized rate of up to 12.5% of the market price of Host common stock);
(v) payments for Host common stock by Host or any of its subsidiaries in
respect of a tender or exchange offer (other than an odd-lot offer) at a
price per share in excess of 110% of the market price of Host common stock;
(vi) consummation by Host of certain mergers, a consolidation, a sale of
all or substantially all of its assets, a recapitalization or certain
reclassifications of Host common stock. The distribution of the capital
stock of Crestline to all holders of Host REIT common stock would, and
certain other elements of the REIT Conversion (such as other distributions
of Host's accumulated earnings and profits) will, result in an adjustment
to the conversion price of the Debentures. The REIT Conversion could result
in a material adjustment to the conversion price of the Debentures and the
Convertible Preferred Securities dependent upon the ultimate amount of the
E&P Distribution and the value of Host REIT common stock. The Issuer will
only convert Debentures pursuant to a notice of conversion by a holder of
Convertible Preferred Securities. During 1998 and 1997, no shares were
converted into common stock.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997,
F-79
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and payable quarterly in arrears thereafter. The distribution rate and the
distribution and other payment dates for the Convertible Preferred
Securities will correspond to the interest rate and interest and other
payment dates on the Debentures. Host Marriott may defer interest payments
on the Debentures for a period not to exceed 20 consecutive quarters. If
interest payments on the Debentures are deferred, so too are payments
on the Convertible Preferred Securities. Under this circumstance, Host
Marriott will not be permitted to declare or pay any cash distributions
with respect to its capital stock or debt securities that rank pari passu
with or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by Host Marriott of
the Debentures after December 2, 1999. Upon repayment at maturity or as a
result of the acceleration of the Debentures upon the occurrence of a
default, the Debentures shall be subject to mandatory redemption, from
which the proceeds will be applied to redeem Convertible Preferred
Securities and Common Securities, together with accrued and unpaid
distributions.
11. In the second quarter of 1998, on behalf of Crestline, Host Marriott
prepaid $92 million of 9% unsecured debt provided by Marriott
International. In the First Three Quarters 1998, the $92 million note and
an additional $14.8 million intercompany note were forgiven and treated
as a capital contribution to Crestline.
12. The pro forma September 11, 1998 balance sheet reflects the $225 million
earnings and profit distribution which is expected to be made by the end
of the fiscal year in connection with the REIT Conversion. The amount of
the earnings and profits distribution will be based upon Host Marriott's
accumulated earnings and profit for tax purposes at the time of the REIT
Conversion.
F-80
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheet of HMC Senior
Communities, Inc. ("HMCSC"), which is the senior living communities' business
of Host Marriott Corporation, as defined in Note 1 to the consolidated
financial statements, as of January 2, 1998, and the related consolidated
statements of operations, shareholder's equity and cash flows for the period
from June 21, 1997 (inception) through January 2, 1998. These consolidated
financial statements are the responsibility of Host Marriott 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 generally accepted auditing
standards. Those standards require that we plan and perform an 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 HMCSC as
of January 2, 1998 and the results of its operations and its cash flows for
the period from June 21, 1997 (inception) through January 2, 1998 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
May 1, 1998
F-81
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED BALANCE SHEET
JANUARY 2, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net.......................................... $633,840
Other assets......................................................... 1,332
Restricted cash...................................................... 10,686
Cash and cash equivalents............................................ 17,644
--------
Total assets....................................................... $663,502
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt................................................................. $349,934
Deferred income taxes................................................ 58,705
Accounts payable and other accrued liabilities....................... 15,543
Amounts due to Marriott International, net........................... 3,172
Accrued interest..................................................... 4,906
Due to Host Marriott Corporation..................................... 2,151
Deferred revenue..................................................... 2,027
--------
Total liabilities.................................................. 436,438
--------
Shareholder's equity:
Common stock, 100 shares authorized, issued and outstanding, no par
value............................................................... --
Additional paid-in capital........................................... 226,706
Retained earnings.................................................... 358
--------
Total shareholder's equity......................................... 227,064
--------
Total liabilities and shareholder's equity....................... $663,502
========
</TABLE>
See Notes to Consolidated Financial Statements.
F-82
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES.............................................................. $ 36,900
--------
OPERATING COSTS AND EXPENSES
Depreciation and amortization......................................... 10,635
Base management fees to Marriott International........................ 6,481
Property taxes........................................................ 3,626
Other................................................................. 187
--------
Total operating costs and expenses.................................. 20,929
--------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............... 15,971
Corporate expenses.................................................... (2,304)
Interest expense...................................................... (13,396)
Interest income....................................................... 336
--------
INCOME BEFORE INCOME TAXES............................................ 607
Provision for income taxes............................................ (249)
--------
NET INCOME............................................................ $ 358
========
</TABLE>
See Notes to Consolidated Financial Statements.
F-83
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Balance, June 21, 1997.............................. $-- $ -- $--
Common stock issued............................... -- -- --
Capital contributions by Host Marriott Corpora-
tion............................................. -- 226,706 --
Net income........................................ -- -- 358
---- -------- ----
Balance, January 2, 1998............................ $-- $226,706 $358
==== ======== ====
</TABLE>
See Notes to Consolidated Financial Statements.
F-84
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 358
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization..................................... 10,635
Change in amounts due to Marriott International................... 10,073
Change in amounts due to Host Marriott............................ 2,151
Equity in earnings of affiliate................................... (997)
Change in other operating accounts................................ 3,156
---------
Cash provided by operating activities............................... 25,376
---------
INVESTING ACTIVITIES
Capital expenditures.............................................. (33,345)
Increase in capital improvement reserve........................... (67)
---------
Cash used in investing activities................................... (33,412)
---------
FINANCING ACTIVITIES
Contribution of cash.............................................. 7,319
Repayments of debt................................................ (2,142)
Issuances of debt................................................. 20,407
Change in financing reserves...................................... 96
---------
Cash provided by financing activities............................... 25,680
---------
Increase in cash and cash equivalents............................... 17,644
Cash and cash equivalents, beginning of period...................... --
---------
Cash and cash equivalents, end of period............................ $ 17,644
=========
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott Corporation:
Property and equipment............................................ $ 601,033
Other assets...................................................... 9,892
Debt assumed...................................................... (331,669)
Other liabilities................................................. (9,479)
Deferred revenue.................................................. (2,054)
Deferred income taxes............................................. 58,435
Expansion costs paid by Host Marriott Corporation, which have been
included in additional paid-in capital........................... 10,099
</TABLE>
See Notes to Consolidated Financial Statements.
F-85
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On June 21, 1997, Host Marriott Corporation ("Host Marriott") acquired all
of the outstanding stock of Forum Group Inc. ("Forum Group") from Marriott
Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott International,
Inc. ("Marriott International") and concurrently contributed all of the assets
and liabilities of Forum Group to HMC Senior Communities, Inc. ("HMCSC"). In
connection with the acquisition, Forum Group assigned to Marriott
International its interest as manager under long-term operating agreements
(See Note 6).
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spinning-off
HMCSC to the shareholders of Host Marriott, and contributing Host Marriott's
hotels and certain other assets and liabilities to a newly formed Delaware
limited partnership, Host Marriott, L.P., whose sole general partner would be
Host Marriott Trust, a newly formed Maryland real estate investment trust.
Host Marriott subsequently determined that Host Marriott would merge into HMC
Merger Corporation, a Maryland corporation (to be renamed "Host Marriott
Corporation"), which would qualify as a REIT and be the general partner of the
Operating Partnership. After the proposed reorganization, HMCSC will lease
hotels from Host Marriott, L.P. and Marriott International will continue to
manage the hotels under long- term management agreements.
Consummation of the reorganization is subject to significant contingencies,
including final Board approval and consent of shareholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates and
other third parties. Accordingly, there can be no assurance that the
reorganization will be completed.
The accompanying consolidated financial statements include the historical
accounts of HMCSC, representing 31 senior living communities (the
"Communities") located in 13 states, expected to be spun-off as part of the
reorganization described above.
HMCSC operates as a unit of Host Marriott utilizing Host Marriott's
employees, insurance and administrative services. HMCSC has no employees.
Periodically, certain operating expenses, capital expenditures and other cash
requirements of HMCSC are paid by Host Marriott and charged directly or
allocated to HMCSC. Certain general and administrative costs of Host Marriott
are allocated to HMCSC using a variety of methods, principally including Host
Marriott's specific identification of individual cost items and otherwise
through allocations based upon estimated levels of effort devoted by its
general and administrative departments to individual entities or relative
measures of size of the entities based on assets. In the opinion of
management, the methods for allocating corporate, general and administrative
expenses and other direct costs are reasonable. It is not practical to
estimate the costs that would have been incurred by HMCSC if it had been
operated on a stand-alone basis.
The consolidated financial statements present the financial position,
results of operations and cash flows of HMCSC beginning on June 21, 1997 (the
date Host Marriott acquired the stock of the Forum Group) through January 2,
1998. Host Marriott's basis in the assets and liabilities of HMCSC has been
carried over to these financial statements. All material intercompany
transactions and balances between HMCSC and its subsidiaries have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of HMCSC and its
subsidiaries and controlled affiliates. Investments in affiliates over which
HMCSC has the ability to exercise significant influence, but does not control,
are accounted for using the equity method. All material intercompany
transactions and balances have been eliminated.
F-86
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fiscal Year
HMCSC's fiscal year ends on the Friday nearest to December 31.
Revenues
Revenues represent house profit from the Communities. House profit reflects
the net revenues flowing to HMCSC as property owner and represents gross
community operating sales less property-level expenses excluding depreciation
and amortization, real and personal property taxes, insurance, management fees
and certain other costs which are classified as operating costs and expenses
in the accompanying statement of operations.
Resident fees and health care service revenues are generated primarily from
monthly charges for independent living units and daily charges for assisted
living suites and nursing beds, and are recognized monthly based on the terms
of the residents' agreements. Advance payments received for services are
deferred until the services are provided. Included in resident fees revenue is
ancillary revenue, which is generated on a "fee for service" basis for
supplemental items requested by residents and is recognized as the services
are provided.
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursements under these contractual arrangements are subject
to retroactive adjustments based on agency reviews. Revenues from health care
services are recorded net of estimated contractual allowances in the
accompanying consolidated financial statements. Management believes that
reserves recorded are adequate to cover any adjustments arising from
retroactive adjustments.
HMCSC has considered the impact of EITF 97-2 on its financial statements and
has determined that it requires HMCSC to include property-level revenues and
operating expenses of its senior living communities in its statements of
operations. HMCSC will adopt EITF 97-2 in the fourth quarter of 1998 with
retroactive effect in prior periods to conform to the new presentation. The
effect of this change will be to increase 1997 revenues and operating costs
and expenses by approximately $74.1 million and will have no impact on
operating profit or net income. See Note 3.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
date of purchase are considered cash equivalents.
Property and Equipment
Property and equipment is recorded at cost, or if contributed by Host
Marriott, is recorded at Host Marriott's basis. Replacements and improvements
that extend the useful life of property and equipment are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to 10
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.
In cases where management is holding for sale a particular Community, HMCSC
assesses impairment based on whether the estimated sales price less cost of
disposal of each individual property to be sold is less than the net book
value. A property is considered to be held for sale when a decision is made to
dispose of the Community. Otherwise, impairment is assessed based on whether
it is probable that undiscounted future cash flows from each Community will be
less than its net book value. If a Community is impaired, its basis is
adjusted to its fair value.
F-87
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk
Financial instruments that potentially subject HMCSC to significant
concentration of credit risk consist principally of cash and cash equivalents.
HMCSC maintains cash and cash equivalents with various high credit-quality
financial institutions and limits the amount of credit exposure with any
institution.
Working Capital
Pursuant to the terms of HMCSC's Operating Agreements (see Note 6), HMCSC is
required to provide Marriott International with working capital and supplies
to meet the operating needs of the Communities. Marriott International
converts cash advanced by HMCSC into other forms of working capital consisting
primarily of operating cash, inventories, resident deposits and trade
receivables and payables which are maintained and controlled by Marriott
International. Upon the termination of the Operating Agreements, Marriott
International is required to convert working capital and supplies into cash
and return it to HMCSC. As a result of these conditions, the individual
components of working capital and supplies controlled by Marriott
International are not reflected in the accompanying consolidated balance
sheet.
Deferred Revenue
Monthly fees deferred for the non-refundable portion of the entry fees are
included as deferred revenue in the accompanying balance sheet. These amounts
are recognized as revenue as health care services are performed over the
expected term of the residents' contracts.
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.
New Accounting Standards
In 1997, the Company adopted Statement of Financial Accounting Standards No.
129 "Disclosure of Information About Capital Structure." The adoption of this
statement did not have a material effect on these consolidated financial
statements.
F-88
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. REVENUES
House profit generated by the Communities consist of the following for the
period from June 21, 1997 (inception) through January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Community Sales
Routine.......................................................... $ 99,989
Ancillary........................................................ 10,980
--------
Total Community Sales.......................................... 110,969
--------
Department Costs
Routine.......................................................... 64,516
Ancillary........................................................ 9,553
--------
Total Department Costs......................................... 74,069
--------
Department Profit
Routine.......................................................... 35,473
Ancillary........................................................ 1,427
--------
Revenues....................................................... $ 36,900
========
</TABLE>
Community sales consist of routine and ancillary sales. Routine sales are
generated from monthly charges for independent living units and daily charges
for assisted living suites and nursing beds, and are recognized monthly based
on the terms of the residents' agreements. Advance payments received for
services are deferred until the services are provided. Ancillary sales are
generated on a "fee for service" basis for supplementary items requested by
residents, and are recognized as the services are provided.
Total sales include amounts estimated by management to be reimbursable
through Medicare, Medicaid and other third party payor agreements. Medicare
and Medicaid represented 11% and 3%, respectively, of sales for the period
from June 21, 1997 (inception) through January 2, 1998. Reimbursement
arrangements are subject to audit and retroactive adjustment. Provisions are
made for potential adjustments that may result. To the extent those provisions
vary from settlements, sales are charged or credited when the adjustments
become final. Changes in the estimate of amounts reimbursable by third party
payors from prior years resulted in the recognition of $1,689,000 of
additional sales for the period from June 21, 1997 (inception) through January
2, 1998. In management's opinion, any adjustments related to current and prior
years' operations will be immaterial to current and future financial
statements. Audits under the reimbursement agreements have been completed
through fiscal year 1996 and there were no material audit adjustments.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at January 2, 1998 (in
thousands):
<TABLE>
<S> <C>
Land and land improvements...................................... $102,714
Buildings and leasehold improvements............................ 518,056
Furniture and equipment......................................... 23,705
--------
644,475
Less accumulated depreciation and amortization.................. (10,635)
--------
$633,840
========
</TABLE>
F-89
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, LTJ Senior Communities Corporation ("LTJ"), a wholly owned
subsidiary of HMCSC, acquired 49% of the remaining 50% interest in Leisure
Park Venture Limited Partnership (the "Partnership") which owns a 418-unit
retirement community in New Jersey for approximately $23 million, including
the assumption of approximately $15 million of debt. Subsequent to this
acquisition, HMCSC indirectly owns a 99% interest in the Partnership. Marriott
International owns the remaining 1% limited partner interest.
In the first quarter of 1998, LTJ also acquired the Gables of Winchester in
suburban Boston, a 124-unit upscale senior living community, for $21 million
and entered into conditional purchase agreements for two Marriott Brighton
Gardens assisted living communities with the Summit Companies of Denver,
Colorado. After the anticipated completion of construction in the first
quarter of 1999, HMCSC may acquire these two 160-unit properties located in
Denver and Colorado Springs, Colorado, for approximately $35 million, if they
achieve certain operating performance criteria. All three of these communities
will be operated by Marriott International under long-term operating
agreements.
5. RESTRICTED CASH
Restricted cash consists of the following at January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Debt service reserve fund........................................ $ 1,528
Fixed asset reserve fund......................................... 4,300
Real estate tax reserve fund..................................... 3,590
Insurance reserve fund........................................... 1,268
-------
$10,686
=======
</TABLE>
The debt service, fixed asset, real estate tax and insurance reserve funds
consist of cash transferred into segregated escrow accounts out of sales
generated by the Communities, pursuant to HMCSC's secured debt agreements.
These funds are periodically disbursed by the collateral agent to pay for debt
service, capital expenditures, insurance premiums and real estate taxes
relating to the secured properties. In some cases, to ensure prompt payment,
HMCSC utilizes its unrestricted cash to pay for capital expenditures,
insurance premiums and real estate taxes and is subsequently reimbursed for
such payments out of funds held in the appropriate escrow account.
6. OPERATING AGREEMENTS
The Communities are subject to operating agreements (the "Operating
Agreements") which provide for Marriott International to operate the
Communities, generally for an initial term of 25 to 30 years with renewal
terms subject to certain performance criteria at the option of Marriott
International of up to an additional five to ten years. The Operating
Agreements provide for payment of base management fees generally equal to five
to eight percent of gross sales and incentive management fees generally equal
to zero to 20% of Operating Profit (as defined in the Operating Agreements)
over a priority return to HMCSC. In the event of early termination of the
Operating Agreements, Marriott International will receive additional fees
based on the unexpired term and expected future base and incentive management
fees. HMCSC has the option to terminate certain, but not all, management
agreements if specified performance thresholds are not satisfied. No Operating
Agreement with respect to a single Community is cross-collateralized or cross-
defaulted to any other Operating Agreement, and any single Operating Agreement
may be terminated following a default by HMCSC or Marriott International,
although such termination will not trigger the cancellation of any other
Operating Agreement.
F-90
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of the Operating Agreements, Marriott International is
required to furnish the Communities with certain services ("Central
Administrative Services") which are provided on a central or regional basis to
all properties in the Marriott Retirement Community System. These services
include the development and operation of computer systems, computer payroll
and accounting services, marketing and public relations services, and such
additional services as may from time-to-time be performed more efficiently on
a central or regional level. The Operating Agreements require payment of
Central Administrative Services fees equal to 2% of gross sales beginning in
the third quarter of 1998.
Marriott International is required under the Operating Agreements to deduct
an amount from gross sales and place the funds into an interest-bearing
reserve account to cover the cost of (a) certain routine repairs and
maintenance to the Communities which are normally capitalized and (b)
replacements and renewals to the Communities' property and improvements. The
annual payment amount (expressed as a percentage of gross sales) generally
will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through
2007, and 3.5% thereafter. The amount contributed for the period June 21, 1997
(inception) through January 2, 1998 was $2,025,000. The Operating Agreements
provide that HMCSC shall provide Marriott International with sufficient funds
to cover the cost of certain major or non-routine repairs, alterations,
improvements, renewals and replacements to the Communities which are required
to maintain a competitive, efficient and economical operating condition in
accordance with Marriott standards or for the continued safe and orderly
operation of the Communities.
7. AMOUNTS DUE TO MARRIOTT INTERNATIONAL
The components of the amounts due to Marriott International, net, at January
2, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Community operating expenses payable to Marriott International..... $ 7,648
Management fees payable to Marriott International.................. 1,262
Community working capital due to HMCSC............................. (6,093)
Other, net......................................................... 355
-------
Total............................................................ $ 3,172
=======
</TABLE>
F-91
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT
Debt consists of the following at January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Mortgage Debt:
Secured by eight Communities with $232 million of assets, with an
interest rate of 10.01%, maturing through 2020 (balance includes
fair value adjustment of $15.5 million)............................ $137,713
Secured by nine Communities with $110 million of assets, with an
interest rate of 9.93%, maturing through 2001 (balance includes
fair value adjustment of $2.6 million)............................. 49,353
Secured by one Community with $29 million of assets, with an average
rate of 7.45%, maturing through 1999 (repaid in 1998).............. 26,403
--------
213,469
--------
Notes payable to Marriott International, with a rate of 9%, maturing
through 2001 (repaid in 1998)........................................ 92,195
--------
Other notes:
Revenue Bonds with a rate of 5.875%, maturing through 2027.......... 14,700
Other notes, with an average rate of 6.6%, maturing through December
2027............................................................... 18,943
Capital lease obligations........................................... 10,627
--------
44,270
--------
Total debt........................................................ $349,934
========
</TABLE>
Debt maturities at January 2, 1998, excluding the unamortized fair value
adjustments of approximately $18 million resulting from recording the
mortgages at their fair value on June 21, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 54,515
1999............................................................. 30,197
2000............................................................. 4,503
2001............................................................. 88,043
2002............................................................. 2,504
Thereafter....................................................... 152,046
--------
$331,808
========
</TABLE>
In conjunction with the acquisition of Forum Group Inc., HMCSC recorded the
debt assumed at its fair value, which exceeded the face value by approximately
$19 million. HMCSC is amortizing this adjustment to interest expense over the
remaining life of the related debt. The amortization for the period from June
21, 1997 (inception) through January 2, 1998 totaled $834,000. Cash paid for
interest for the period from June 21, 1997 (inception) through January 2, 1998
totaled $8,183,000.
In conjunction with the June 21, 1997 acquisition of Forum Group Inc., HMCSC
assumed approximately $197 million in mortgage debt, $11 million in capital
lease obligations (see Note 9), as well as issued $72 million in notes payable
to Marriott International. Subsequent to the acquisition, HMCSC issued
additional notes payable to Marriott International for additional expansion
units totaling approximately $20 million. These notes were guaranteed by Host
Marriott. In the second quarter of 1998, Host Marriott repaid the $92 million
in notes payable to Marriott International.
F-92
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, in connection with the acquisition of the remaining 50%
interest in the Leisure Park Venture Limited Partnership (see Note 4), HMCSC
assumed approximately $15 million of debt.
The net assets of seventeen of the Communities are subject to mortgage debt
which places restrictions on their assets. The net assets of the Communities
totaled approximately $150 million at January 2, 1998. The indentures
governing these mortgages contain covenants that, among other things, require
maintenance of segregated cash collection of all rents, separate cash reserves
for debt service, property improvements, real estate taxes and insurance,
limit the ability to incur additional indebtedness, issue stock or admit
additional partners, pay dividends or make certain distributions, enter into
or cancel leases, enter into certain transactions with affiliates or sell
certain assets.
During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of the debt was recorded as a
capital contribution to HMCSC, there was no gain or loss on the prepayment.
9. LEASES
HMCSC leases certain property under non-cancelable capital and operating
leases. Future minimum annual rental commitments for all non-cancelable leases
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998................................................... $ 1,274 $ 278
1999................................................... 1,287 278
2000................................................... 1,300 278
2001................................................... 1,320 278
2002................................................... 1,338 278
Thereafter............................................. 13,672 3,062
------- ------
Total minimum lease payments........................... 20,191 $4,452
======
Less amount representing interest...................... (9,564)
-------
Present value of minimum lease payments................ $10,627
=======
</TABLE>
HMCSC leases two communities under capital leases expiring in 2016. Upon the
expiration of the lease or anytime prior to lease expiration, HMCSC has the
first right of refusal (the "Option") to submit a counter offer to any
acceptable bona fide offer from a third party within 30 days of notice from
the lessor. If HMCSC fails to exercise its Option, then the lessor may proceed
with the sale of the leased property and all assets therein.
HMCSC also has one long-term operating ground lease which expires in 2013.
The operating lease includes three renewal options exercisable in 5 year
increments through the year 2028.
Rent expense for the period from June 21, 1997 (inception) through January
2, 1998 was $141,000.
10. INCOME TAXES
Total deferred tax assets and liabilities as of January 2, 1998 were as
follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets................................................ $ 15,125
Deferred tax liabilities........................................... (73,830)
--------
Net deferred income tax liability................................ $(58,705)
========
</TABLE>
F-93
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of January 2, 1998 was as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment............................................. $(68,687)
Debt adjustment to fair value at acquisition....................... 7,591
Other, net......................................................... 2,391
--------
Net deferred income tax liability................................ $(58,705)
========
</TABLE>
The provision for income taxes consists of the following for the period from
June 21, 1997 (inception) through January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Current--Federal..................................................... $ (25)
--State........................................................... (5)
-----
(30)
-----
Deferred--Federal.................................................... 238
--State........................................................... 41
-----
279
-----
$249
=====
</TABLE>
A reconciliation of the statutory Federal tax rate to HMCSC's effective
income tax rate for the period from June 21, 1997 (inception) through January
2, 1998 follows:
<TABLE>
<S> <C>
Statutory federal tax rate............................................. 35.0%
State income taxes, net of federal tax benefit......................... 6.0
----
41.0%
====
</TABLE>
HMCSC is included in the consolidated federal income tax return of Host
Marriott and its affiliates (the "Group") for the period from June 21, 1997
(inception) through January 2, 1998. Tax expense is allocated to HMCSC 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
all periods presented that is substantially equal to the expense that would
have been recognized if HMCSC had filed separate tax returns. HMCSC reimburses
Host Marriott for the allocable share of current taxes payable relating to the
period that HMCSC has been included in Host Marriott's consolidated federal
income tax return.
11. COMMITMENTS AND CONTINGENCIES
On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court for the Southern
District of Indiana (the "Indiana Court") against the general partner of one
of HMCSC's subsidiary partnerships, Forum Retirement Partners, L.P. alleging
breach of the partnership agreement, breach of fiduciary duty, fraud, insider
trading and civil conspiracy/aiding and abetting. On February 4, 1998, the
Plaintiff, MSLS, the general partner, Forum Group and HMCSC entered into a
Settlement and Release Agreement (the "Settlement Agreement"), pursuant to
which Host Marriott agreed to purchase, at a price of $4.50 per unit, the
partnership units of each limited partner electing to join in the Settlement
Agreement.
F-94
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
HMCSC held 79% of the outstanding limited partner units in the partnership at
that time. HMCSC also agreed to pay as much as an additional $1.25 per unit to
the settling limited partners, under certain conditions, in the event that
HMCSC within three years following the date of settlement initiates a tender
offer for the purchase of units not presently held by HMCSC or the settling
limited partners. On February 5, 1998, the Indiana Court entered an order
approving the dismissal of the Plaintiff's case.
In connection with the Settlement Agreement on March 25, 1998, HMCSC
acquired 1,000,894 limited partner unit shares for approximately $4,504,000.
The purchase price of the shares approximated fair value and accordingly, no
portion of the purchase price has been expensed. As a result of this purchase,
HMCSC's ownership interest in the partnership was increased to approximately
86%.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
HMCSC believes the carrying amount of its financial instruments (excluding
property indebtedness) approximates their fair value due to the relatively
short maturity of these instruments. There is no quoted market value available
for any of HMCSC's financial instruments.
Valuations of debt are determined based on expected future payments
discounted at risk-adjusted rates. The debt was adjusted to its fair value in
conjunction with Host Marriott's acquisition of the Communities on June 21,
1997. As of January 2, 1998, the fair value of debt approximated its carrying
value.
F-95
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 11, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
</TABLE>
<TABLE>
<S> <C> <C>
Property and equipment, net...................................... $649,528
Amounts due from Marriott International, net..................... 4,097
Other assets..................................................... 14,290
Cash and cash equivalents........................................ 26,504
--------
Total assets................................................... $694,419
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt............................................................. $213,034
Deferred income taxes............................................ 61,376
Due to Host Marriott Corporation, net............................ 12,989
Accounts payable and other accrued liabilities................... 13,639
Deferred revenue................................................. 1,310
--------
Total liabilities.............................................. 302,348
--------
Shareholder's equity:
Common stock, 100 shares authorized, issued and outstanding, no
par value....................................................... --
Additional paid-in capital....................................... 386,627
Retained earnings................................................ 5,444
--------
Total shareholder's equity..................................... 392,071
--------
Total liabilities and shareholder's equity..................... $694,419
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-96
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND THE TWELVE WEEKS ENDED
SEPTEMBER 12, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-SIX TWELVE
WEEKS ENDED WEEKS ENDED
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
REVENUES.......................................... $ 57,800 $16,036
-------- -------
OPERATING COSTS AND EXPENSES
Depreciation and amortization..................... 14,759 4,866
Base management fees to Marriott International.... 9,408 3,159
Property taxes and insurance...................... 4,773 1,462
Other............................................. 863 251
-------- -------
Total operating costs and expenses.............. 29,803 9,738
-------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND IN-
TEREST........................................... 27,997 6,298
Corporate expenses................................ (2,937) (954)
Interest expense.................................. (17,560) (6,035)
Interest income................................... 1,120 240
-------- -------
INCOME (LOSS) BEFORE INCOME TAXES................. 8,620 (451)
Benefit (provision) for income taxes.............. (3,534) 185
-------- -------
NET INCOME (LOSS)................................. $ 5,086 $ (266)
======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-97
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND THE TWELVE WEEKS ENDED
SEPTEMBER 12, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-SIX TWELVE WEEKS
WEEKS ENDED ENDED
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ 5,086 $ (266)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 14,759 4,866
Change in amounts due to Marriott Internation-
al............................................. (5,353) 9,259
Change in amounts due to Host Marriott Corpora-
tion........................................... 10,507 5,096
Equity in earnings of affiliate................. 51 (19)
Change in other operating accounts.............. (6,026) 2,551
------- -------
Cash provided by operating activities............. 19,024 21,487
------- -------
INVESTING ACTIVITIES
Capital expenditures............................ (8,007) (18,409)
Increase in capital improvement reserve......... 478 386
------- -------
Cash used in investing activities................. (7,529) (18,022)
------- -------
FINANCING ACTIVITIES
Repayments (issuances) of debt.................. (3,502) 19,191
Change in financing reserves.................... 867 2,205
------- -------
Cash used in financing activities................. (2,635) 21,396
------- -------
Increase in cash and cash equivalents............. 8,860 9,571
Cash and cash equivalents, beginning of period.... 17,644 6,401
------- -------
Cash and cash equivalents, end of period.......... $26,504 $15,972
======= =======
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott Corporation:
Property and equipment........................ $22,439 --
Other......................................... 4,084 --
Mortgage debt paid by Host Marriott........... 26,403 --
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-98
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. On June 21, 1997, Host Marriott Corporation ("Host Marriott") acquired
all of the outstanding stock of Forum Group Inc. ("Forum Group"), from
Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott
International, Inc. ("Marriott International") and concurrently contributed
all of the assets and liabilities of Forum Group, Inc. to HMC Senior
Communities, Inc. ("HMCSC"). In connection with the acquisition, Forum Group
assigned to Marriott International its interest as manager under long-term
operating agreements.
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spinning-off Host
Marriott's senior living business ("Senior Living") into a separate
corporation, the Senior Living Communities Company and contributing Host
Marriott's hotels and certain other assets and liabilities to a newly formed
Delaware limited partnership, Host Marriott, L.P., whose sole general partner
will be HMC Merger Corporation (to be renamed "Host Marriott Corporation"), a
newly formed Maryland Corporation that will merge into Host Marriott, a
Delaware corporation, and will qualify as a real estate investment trust
("REIT") (the "REIT Conversion"). After the proposed REIT Conversion, HMCSC
will lease hotels from Host Marriott, L.P. and Marriott International will
continue to manage the hotels under long term management agreements.
Consummation of the REIT Conversion is subject to significant contingencies,
including final Board approval, consent of shareholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates and
other third parties. Accordingly, there can be no assurance that the REIT
Conversion will be completed.
The accompanying consolidated financial statements include the historical
accounts of HMCSC, representing 31 senior living communities (the
"Communities") located in 13 states, expected to be spun-off as part of the
REIT Conversion described above.
The accompanying condensed consolidated financial statements have been
prepared by HMCSC without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted. HMCSC
believes the disclosures made are adequate to make the information presented
not misleading. However, the condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's audited financial statements for the
period from June 21, 1997 (inception) through January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of September 11, 1998 and the
results of operations and cash flows for the thirty-six weeks ended September
11, 1998 and the twelve weeks ended September 12, 1997. Interim results are
not necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations.
2. Revenues represent house profit from the Communities. House profit
reflects the net revenues flowing to HMCSC as property owner and represents
gross community operating sales less property-level expenses excluding
depreciation and amortization, real and personal property taxes, insurance,
management fees and certain other costs which are classified as operating
costs and expenses.
Resident fees and health care service revenues are generated primarily from
monthly charges for independent living units and daily charges for assisted
living suites and nursing beds, and are recognized monthly based on the terms
of the residents' agreements. Advance payments received for services are
deferred until the services are provided. Included in resident fees revenue is
ancillary revenue, which is generated on a "fee for service" basis for
supplemental items requested by residents and is recognized as the services
are provided.
F-99
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursements under these contractual arrangements are subject
to retroactive adjustments based on agency reviews. Revenues and receivables
from health care services are recorded net of estimated contractual allowances
in the accompanying consolidated financial statements. Management believes
that reserves recorded are adequate to cover any adjustments arising from
retroactive adjustments.
House profit generated by the Communities consist of the following for the
thirty-six weeks ended September 11, 1998 and the twelve weeks ended September
12, 1997 (in thousands):
<TABLE>
<CAPTION>
THIRTY-SIX TWELVE WEEKS
WEEKS ENDED ENDED
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
Community Sales
Routine........................................... $149,581 $42,249
Ancillary......................................... 16,410 4,265
-------- -------
Total Community Sales........................... 165,991 46,514
-------- -------
Department Costs
Routine........................................... 94,709 26,821
Ancillary......................................... 13,482 3,658
-------- -------
Total Department Costs.......................... 108,191 30,479
-------- -------
Department Profit
Routine........................................... 54,872 15,428
Ancillary......................................... 2,928 607
-------- -------
Revenues........................................ $ 57,800 $16,035
======== =======
</TABLE>
HMCSC has considered the impact of EITF 97-2 on its financial statements and
has determined that it requires HMCSC to include property-level revenues and
operating expenses of its senior living communities in its statements of
operations. HMCSC will adopt EITF 97-2 in the fourth quarter of 1998 with
retroactive effect in prior periods to conform to the new presentation. The
effect of this change will be to increase revenues and operating costs and
expenses for the thirty-six weeks ended September 11, 1998 and the twelve
weeks ended September 12, 1997 by approximately $108 million and $30 million,
respectively, and will have no impact on operating profit or net income.
3. In the first quarter of 1998, HMCSC also acquired the Gables of
Winchester in suburban Boston, a 124-unit upscale senior living community, for
$21 million and entered into conditional purchase agreements for two Marriott
Brighton Gardens assisted living communities from the Summit Companies of
Denver, Colorado. After the anticipated completion of construction in the
first quarter of 1999, HMCSC may acquire these two 160-unit properties located
in Denver and Colorado Springs, Colorado, for approximately $35 million, if
they achieve certain operating performance criteria. All three of these
communities will be operated by Marriott International under long-term
operating agreements.
4. During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of debt was recorded as a capital
contribution to HMCSC. In the second quarter of 1998, Host Marriott prepaid
$92 million of 9% unsecured debt provided by Marriott International related to
the Communities. Host Marriott then held a $92 million note which was forgiven
and treated as a capital contribution to HMCSC, along with an additional $14.8
million in intercompany notes, in the third quarter of 1998.
5. During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of debt was recorded as a capital
contribution to HMCSC.
F-100
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Host Marriott L.P.
We have audited the accompanying balance sheet of Host Marriott, L.P. (the
"Partnership"), a Delaware limited partnership as of June 19, 1998. This
balance sheet is the responsibility of the Partnership's management. Our
responsibility is to express an opinion on the balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Partnership as of June 19,
1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
August 5, 1998
F-101
<PAGE>
HOST MARRIOTT, L.P.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 11, JUNE 19,
1998 1998
------------- --------
(UNAUDITED)
<S> <C> <C>
Cash..................................................... $ -- $ --
===== =====
PARTNERS' CAPITAL
General partner.......................................... $ 1 $ 1
Limited partner.......................................... 99 99
----- -----
100 100
Less: subscription receivable............................ (100) (100)
----- -----
$ -- $ --
===== =====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-102
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO BALANCE SHEET
SEPTEMBER 11, AND JUNE 19, 1998
NOTE 1. ORGANIZATION
On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to reorganize Host Marriott's current
business operations through the spin-off of Host Marriott's senior living
business ("SLC") and the contribution of Host Marriott's hotels and certain
other assets and liabilities to a newly formed Delaware limited partnership,
Host Marriott, L.P. (the "Operating Partnership") whose sole general partner
will be HMC Merger Corporation, a newly formed Maryland corporation that will
merge into Host Marriott Corporation, a Delaware corporation subsequent to the
contribution. HMC Merger Corporation (to be renamed "Host Marriott
Corporation"), expects to qualify as a REIT and will be the general partner of
the Operating Partnership. Host Marriott's contribution of its hotels and
certain assets and liabilities to the Operating Partnership (the
"Contribution") in exchange for units of limited partnership interests in the
Operating Partnership will be accounted for at Host Marriott's historical
basis.
The accompanying balance sheets of the Operating Partnership includes its
accounts as of September 11, and June 19, 1998. The assets and liabilities of
the Host Marriott Hotels will be included in the Contribution by Host Marriott
to the Operating Partnership in connection with its planned conversion to a
REIT (the "REIT Conversion"), anticipated to become effective January 1, 1999.
In June 1998, as part of the REIT Conversion, the Operating Partnership
filed a preliminary Prospectus/Consent Solicitation with the Securities and
Exchange Commission. This Prospectus/Consent Solicitation Statement describes
a proposal whereby the Operating Partnership will acquire by merger (the
"Mergers") eight public limited partnerships (the "Partnerships") that own or
control 24 full-service hotels in which Host Marriott or its subsidiaries are
general partners. As more fully described in the Prospectus/Consent
Solicitation Statement, limited partners of those Partnerships that
participate in the Mergers will receive OP Units, and may at their election,
exchange such OP Units for unsecured notes due December 15, 2005 issued by the
Operating Partnership ("Notes") or common shares of the REIT.
However, the consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of Host Marriott, including final
Board of Directors approval, consents of shareholders, partners, bondholders,
lenders and ground lessors of Host Marriott, its affiliates and other third
parties. Accordingly, there can be no assurance that the REIT Conversion or
the Contribution will be completed.
On April 20, 1998, Host Marriott and certain of its subsidiaries filed a
shelf registration on Form S-3 (the "Shelf Registration") with the Securities
and Exchange Commission for $2.5 billion in securities, which may include
debt, equity or a combination thereof. Host Marriott anticipates that any net
proceeds from the sale of offered securities will be used for refinancing of
Host Marriott's indebtedness, potential future acquisitions and general
corporate purposes.
On August 5, 1998, HMH Properties, Inc. ("HMH Properties"), an indirect
wholly-owned subsidiary of Host Marriott, which owns 61 of Host Marriott's
hotels, purchased substantially all of its (i) $600 million in 9 1/2% senior
notes due 2005, (ii) $350 million in 9% senior notes due 2007 and (iii) $600
million in 8 7/8% senior notes due 2007 (collectively, the "Old Senior
Notes"). Concurrently with each offer to purchase, HMH Properties solicited
consents (the "1998 Consent Solicitations") from registered holders of the Old
Senior Notes to certain amendments to eliminate or modify substantially all of
the restrictive covenants and certain other provisions contained in the
indentures pursuant to which the Old Senior Notes were issued. HMH Properties
simultaneously utilized the Shelf Registration to issue an aggregate of $1.7
billion in senior notes (the "New Senior Notes"). The New Senior Notes were
issued in two series, $500 million of 7 7/8 Series A notes due in 2005 and
$1.2 billion of 7 7/8 Series B notes due in 2008. The 1998 Consent
Solicitations facilitated the merger
F-103
<PAGE>
of HMC Capital Resources Holdings Corporation ("Capital Resources"), a wholly-
owned subsidiary of the Company, with and into HMH Properties. Capital
Resources, the owner of eight of Host Marriott's hotel properties, was the
obligor under the $500 million credit facility (the "Old Credit Facility").
In conjunction with the issuance of the New Senior Notes, HMH Properties
entered into a $1.25 billion credit facility (the "New Credit Facility") with
a group of commercial banks. The New Credit Facility will initially have a
three year term with two one year extension options. Borrowings under the New
Credit Facility generally bear interest at the Eurodollar rate plus 1.75%. The
interest rate and commitment fee (currently 0.35% on the unused portion of the
New Credit Facility) fluctuate based on certain financial ratios.
The New Credit Facility and the indenture under which the New Senior Notes
were issued contain covenants restricting the ability of HMH Properties and
certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and make
distributions to equityholders of HMH Properties, Host Marriott, and
(following the REIT Conversion) the Operating Partnership and Host REIT.
Following the REIT Conversion, the New Credit Facility permits the Operating
Partnership to make distributions to holders of OP Units, including Host REIT,
in an aggregate amount for every four fiscal quarters equal to the greater of
(i) 85% of adjusted funds from operations plus the net proceeds of equity
offerings and (ii) the minimum amount necessary to permit Host REIT to
maintain its status as a REIT and to satisfy certain other requirements,
provided that no specified default or event of default has occurred under the
New Credit Facility and is continuing. The New Credit Facility also permits
the Operating Partnership to make distributions to Host REIT sufficient to
enable Host REIT to make the E&P Distribution.
Following the REIT Conversion, the indenture permits the Operating
Partnership to make distributions to holders of OP Units, including Host REIT,
in amounts equal to the greater of (i) 95% of FFO plus net proceeds of equity
offerings (provided that no event of default under the indenture has occurred
and is continuing and the Operating Partnership is able to incur debt under
the applicable indenture covenants) or (ii) an amount sufficient to permit
Host REIT to maintain its status as a REIT and satisfy certain other
requirements (provided that no event of default under the indenture has
occurred and is continuing and the Operating Partnership has a consolidated
debt to adjusted total assets ratio that is less than a specified level). The
indenture also permits the Operating Partnership to make distributions to Host
REIT sufficient to enable Host REIT to make the E&P Distribution.
The New Credit Facility and the New Senior Notes also contain certain
financial covenants relating to, among other things, maintaining certain
levels of tangible net worth and certain ratios of EBITDA to interest and
fixed charges, total debt to EBITDA, unencumbered assets to unsecured debt,
and secured debt to total debt.
The New Credit Facility replaces the Company's Old Credit Facility. The net
proceeds from the offering and borrowings under the New Credit Facility were
used by Host Marriott to purchase substantially all of the Old Senior Notes to
repay amounts outstanding under the Old Credit Facility and to make bond
premium and consent payments totaling approximately $175 million. These costs,
along with the write-off of deferred financing fees of approximately $52
million related to the Old Senior Notes and the Old Credit Facility, were
recorded as a pre-tax extraordinary loss on the extinguishment of debt in the
third quarter of 1998. The New Senior Notes and the New Credit Facility are
guaranteed by Host Marriott and its wholly owned subsidiary, Host Marriott
Hospitality, Inc. and certain subsidiaries of HMH Properties and are secured
by pledges of equity interests in certain subsidiaries of HMH Properties.
F-104
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Host Marriott Corporation
We have audited the accompanying balance sheet of HMC Merger Corporation
(the "Company"), a Maryland corporation, as of September 28, 1998. This
balance sheet is the responsibility of the Company's officers. Our
responsibility is to express an opinion on the balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Company as of September 28,
1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
September 29, 1998
F-105
<PAGE>
HMC MERGER CORPORATION
BALANCE SHEET
AS OF SEPTEMBER 28, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Cash................................................................... $ --
=====
EQUITY
Common shares, no par value, 100 shares authorized, issued and
outstanding........................................................... --
Additional paid-in capital............................................. 100
Less: subscription receivable.......................................... (100)
-----
$ --
=====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-106
<PAGE>
HMC MERGER CORPORATION
NOTES TO BALANCE SHEET
SEPTEMBER 28, 1998
NOTE 1. ORGANIZATION
On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to reorganize Host Marriott's current
business operations through the spin-off of Host Marriott's senior living
business ("Crestline") and the contribution of Host Marriott's hotels and
certain other assets and liabilities to a newly formed Delaware limited
partnership, Host Marriott, L.P. (the "Operating Partnership") whose sole
general partner will be HMC Merger Corporation (the "Company"), a newly formed
Maryland corporation that will merge with Host Marriott Corporation, a
Delaware corporation subsequent to the Contribution. Host Marriott's
contribution of its hotels and certain assets and liabilities to the Operating
Partnership (the "Contribution") in exchange for units of limited partnership
interests in the Operating Partnership will be accounted for at Host
Marriott's historical basis. The accompanying balance sheet of the Company
includes its accounts as of September 28, 1998, its formation date. Subsequent
to the REIT Conversion, it is expected that the sole asset of the Company will
be its 74% ownership of the Operating Partnership.
In June 1998, as part of the REIT Conversion, the Operating Partnership
filed a preliminary Prospectus/Consent Solicitation with the Securities and
Exchange Commission. This Prospectus/Consent Solicitation Statement describes
a proposal whereby the Operating Partnership will acquire by merger (the
"Mergers") eight public limited partnerships (the "Partnerships") that own or
control 24 full-service hotels in which Host Marriott or its subsidiaries are
general partners. As more fully described in the Prospectus/Consent
Solicitation Statement, limited partners of those Partnerships that
participate in the Mergers will receive OP Units and may, at their election,
exchange such OP Units received for unsecured notes due December 15, 2005
issued by the Operating Partnership ("Notes") or common shares of the Company.
The consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of Host Marriott, including final
Board of Directors approval, consents of shareholders, partners, bondholders,
lenders and ground lessors of Host Marriott, its affiliates and other third
parties. Accordingly, there can be no assurance that the REIT Conversion or
the Contribution will be completed.
F-107
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF THE COMPANY
Given the structure of Host Marriott's Consent Solicitation, the Mergers and
the REIT Conversion may take a variety of different forms. The variations are
dependent in part on the number and identity of the Partnerships that elect to
merge and whether limited partners elect to tender their Partnership Interests
for OP Units or Notes in connection with the REIT Conversion.
In light of the number of possible variations, the General Partners are not
able to describe all possible combinations of Hotel Partnerships that could
compose the Company. However, to assist Limited Partners in analyzing the
Mergers and the REIT Conversion, the General Partners have prepared four
separate sets of unaudited pro forma financial statements to show the impact
of the Mergers and the REIT Conversion assuming the following four scenarios:
. All Partnerships participate and no Notes are issued ("100%
Participation with No Notes Issued")
. All Partnerships participate with Notes issued with respect to 100% of
the OP Units allocable to each Partnership ("100% Participation with
Notes Issued")
. No Partnerships participate ("No Partnership Participation")
. REIT 2000 Scenario (see below)
There is no minimum condition to participation in the Mergers and the
Company does not believe that the presentation of additional scenarios is
relevant to investors or required. These presentations do not purport to
represent what combination will result from the Mergers and the REIT
Conversion, but instead are designed to illustrate what the composition would
have been under the above scenarios. Furthermore, the unaudited pro forma
financial statements do not purport to represent what the results of
operations or cash flows would actually have been if the Mergers and the REIT
Conversion had in fact occurred on such date or at the beginning of such
period or to project the results of operations or cash flows for any future
date or period.
Host intends to use its best efforts to cause the REIT Conversion to be
completed as soon as possible, but there is no assurance that it will be
completed during 1998 in time for Host REIT to elect REIT status effective
January 1, 1999, or at all. If the REIT Conversion does not occur in 1998, but
the conditions to the REIT Conversion are otherwise satisfied, the
effectiveness of Host REIT's election could be delayed to January 1, 2000,
which could cause the Blackstone Acquisition (which is conditioned, among
other things, on consummation of the REIT Conversion by March 31, 1999 and
Host REIT qualifying as a REIT for 1999) not to be consummated. Accordingly, a
separate column (the "REIT 2000 Pro Forma") has been included for each
presentation that assumes that the REIT Conversion occurs on January 1, 1999,
the Blackstone Acquisition does not occur and Host does not become a REIT
until January 1, 2000.
The unaudited pro forma financial statements are based upon available
information and upon certain assumptions, as set forth in the notes to the
unaudited pro forma financial statements, that the Company believes are
reasonable under the circumstances. Rental revenue is recognized only for
Leases to be entered at or prior to completion of the REIT Conversion.
The unaudited pro forma statements of operations of the Company reflect the
following transactions for the First Three Quarters 1998 and the fiscal year
ended January 2, 1998 as if such transactions had been completed at the
beginning of the fiscal year:
Acquisitions, Dispositions and Other Activities
. Blackstone Acquisition
. 1998 Senior Note Refinancing
. 1998 acquisition of, or purchase of controlling interests in, eleven
full-service properties
F-108
<PAGE>
. 1998 purchase of minority interests in two full-service hotels
. 1998 disposition of two full-service properties
. 1997 acquisition of, or purchase of controlling interests in, 18 full-
service properties
. 1997 refinancing or repayment of mortgage debt for three full-service
properties
REIT Conversion Activities
. 1998 deconsolidation of the assets and liabilities contributed to the
Non-Controlled Subsidiary, including the sale of certain furniture and
equipment to the Non-Controlled Subsidiary
. 1998 Mergers
. 1998 acquisition of minority interests in four private Partnerships in
exchange for OP Units
. 1998 lease of certain hotel properties to Crestline and conversion of
revenues and certain operating expenses to rental income
. 1998 adjustment to remove deferred taxes resulting from the change in
tax status related to the REIT Conversion
. 1998 earnings and profits cash distribution
. 1998 contribution of notes receivable to Crestline
The unaudited pro forma balance sheet as of September 11, 1998 reflects all
of the above 1998 transactions except for the acquisition of, or purchase of
controlling interests in, 11 full-service properties the 1998 Senior Note
Refinancing, the contribution of notes receivable to Crestline and the
disposition of two full-service properties which occurred prior to September
11, 1998, and were already reflected in the historical balance sheet. The
unaudited pro forma balance sheet as of September 11, 1998 also reflects (a)
the distribution of the Initial E&P Distribution (which includes the Crestline
common stock) to Host stockholders, which Host intends to declare if the
Agreement is approved by Host stockholders at the Special Meeting and the
Board of Directors of Host determines that the conditions to the Merger have
been or likely will be satisfied or waived (and, in particular, that the
transactions constituting the REIT Conversion which impact Host REIT's status
as a REIT for federal income tax purposes have occurred or are reasonably
likely to occur), and (b) the Leases even though the Merger and other
transactions comprising the REIT Conversion may be delayed or possibly never
consummated.
Limited partners should bear in mind that the assumptions regarding the
number and identity of participating Partnerships, the number of OP Units to
be issued and price per OP Unit are outside the control of Host Marriott and
have been made for illustrative purposes only. The unaudited pro forma
financial statements and accompanying notes should be read in conjunction with
the historical consolidated financial statements of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere herein.
The Emerging Issues Task Force (EITF) reached a concensus in May 1998 on
Issue 98-9, "Accounting for Contingent Rents in Interim Financial Periods"
("EITF 98-9"). EITF 98-9 requires a lessor to defer recognition of contingent
rental income in interim periods until the specified target that triggers the
contingent rental income is achieved. The accompanying pro forma financial
statements reflect the application of EITF 98-9 to the interim periods. EITF
98-9 will have no impact on the full-year rental income recorded by the
Company.
F-109
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 11, 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS, EXCEPT OP UNITS AMOUNTS)
<TABLE>
<CAPTION>
ACQUISITIONS
---------------------------
DISPOSITIONS AND OTHER
ACTIVITIES
---------------------------
A B
HOST DISTRI- HOST BLACK- DEBT
MARRIOTT BUTION MARRIOTT STONE REPAYMENT
CORPORATION ADJUST- HOTELS ACQUI- ACQUIS- &
HISTORICAL MENTS HISTORICAL SITION ITIONS REFINANCING
----------- ------- ---------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $5,937 $(649) $5,288 $1,450 $ $--
Notes and other
receivables, net....... 32 (3) 29 63 -- --
Due from managers....... 88 (5) 83 5 -- --
Investments in
affiliates............. 18 -- 18 -- -- --
Other assets............ 319 2 321 -- --
Receivable from Lessee
for working capital.... -- -- -- -- -- --
Cash, cash equivalents
and short-term
marketable
securities............. 575 (27) 548 (262) -- --
------ ----- ------ ------ ---- ----
$6,969 $(682) $6,287 $1,256 $-- $--
====== ===== ====== ====== ==== ====
LIABILITIES AND EQUITY
Debt(I)................. $4,224 $(213) $4,011 $ 600 $-- $--
Convertible debt
obligation to Host
Marriott Corporation... -- 567 567 -- -- --
Accounts payable and
accrued expenses....... 70 (8) 62 -- -- --
Deferred income taxes... 526 (62) 464 -- -- --
Other liabilities....... 447 (10) 437 -- --
------ ----- ------ ------ ---- ----
Total liabilities....... 5,267 274 5,541 600
Convertible Preferred
Securities............. 550 (550) -- -- -- --
Limited Partner
interests of third
parties at redemption
value (on a pro forma
basis 70.3 million OP
Units
outstanding)(J)........ -- -- -- 656 -- --
Equity
General Partner (on a
pro forma basis .2
million OP Units
outstanding)(J)
Limited Partner
interests of Host REIT
(on a pro forma basis
204.3 million OP Units
outstanding)(J)........ 1,152 (406) 746 -- -- --
------ ----- ------ ------ ---- ----
$6,969 $(682) $6,287 $1,256 $-- $--
====== ===== ====== ====== ==== ====
Book value per OP Unit
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------
C D E F K G H L
EARNINGS DEFERRED REIT
NON- PRIVATE & PROFITS CONTRI- LEASE TAX 2000
CONTROLLED PARTNER- DISTRIBU- BUTION TO CONVER- ADJUST- PRO PRO
SUBSIDIARIES MERGERS SHIPS TION(1) CRESTLINE SION MENT FORMA FORMA
------------ ------- -------- --------- --------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $(290) $560 $ 61 $ -- $-- $-- $ -- $7,069 $5,619
Notes and other
receivables, net....... 214 (3) -- -- -- -- -- 303 240
Due from managers....... (1) 12 -- -- -- (85) -- 14 14
Investments in
affiliates............. 9 -- -- -- -- -- -- 27 27
Other assets............ 5 23 (11) -- -- -- -- 338 338
Receivable from Lessee
for working capital.... -- -- -- -- -- 85 -- 85 80
Cash, cash equivalents
and short-term
marketable
securities............. (8) 7 (11) (150) (15) -- -- 109 371
------------ ------- -------- --------- --------- ------- -------- ------ ------
$ (71) $599 $ 39 $(150) $(15) $-- $ -- $7,945 $6,689
============ ======= ======== ========= ========= ======= ======== ====== ======
LIABILITIES AND EQUITY
Debt(I)................. $ (39) $323 $-- $ 75 $-- $ -- $ -- $4,970 $4,370
Convertible debt
obligation to Host
Marriott Corporation... -- -- -- -- -- -- -- 567 567
Accounts payable and
accrued expenses....... (1) 9 -- -- -- -- -- 70 70
Deferred income taxes... 6 -- -- -- -- -- (195) 275 470
Other liabilities....... (37) (21) (6) -- 7 320 -- 700 657
------------ ------- -------- --------- --------- ------- -------- ------ ------
Total liabilities....... (71) 311 (6) 75 7 320 (195) 6,582 6,134
Convertible Preferred
Securities............. -- -- -- -- -- -- --
Limited Partner
interests of third
parties at redemption
value (on a pro forma
basis 70.3 million OP
Units
outstanding)(J)........ -- 288 45 -- -- -- -- 989 333
Equity
General Partner (on a
pro forma basis .2
million OP Units
outstanding)(J)
Limited Partner
interests of Host REIT
(on a pro forma basis
204.3 million OP Units
outstanding)(J)........ -- -- -- (225) (22) (320) 195 374 222
------------ ------- -------- --------- --------- ------- -------- ------ ------
$ (71) $599 $ 39 $(150) $(15) $-- $ -- $7,945 $6,689
============ ======= ======== ========= ========= ======= ======== ====== ======
Book value per OP Unit $ 4.96 $ 2.40
====== ======
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
F-110
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
100% PARTICIPATION WITH NO NOTES ISSUED
A. Represents the adjustment to record the spin-off of Crestline and:
. Reduce property and equipment by $649 million
. Reduce receivables by $3 million related to certain Crestline notes held
by the Company
. Reduce due from managers by $5 million
. Increase other assets by $2 million
. Reduce cash, cash equivalents and short-term marketable securities by
$27 million
. Reduce debt by $213 million
. Reduce accounts payable and accrued expenses by $8 million
. Reduce deferred income taxes by $62 million
. Reduce other liabilities by $10 million
. Reduce equity by $406 million
. Eliminate the $550 million Convertible Preferred Securities of Host
Marriott which remain an obligation of Host REIT
. Record the $567 million of Convertible Debt Obligation to Host Marriott
which is eliminated in consolidation on the historical financial
statements of Host Marriott Corporation
B. Represents the adjustment to record the Blackstone Acquisition of 12
full-service properties (5,520 rooms) and a mortgage note secured by a
thirteenth full-service property including the issuance of 43.7 million OP
Units as determined through negotiations between the Company and Blackstone:
. Record property and equipment of $1,450 million
. Record mortgage note receivable of $63 million
. Record increase in due from managers of $5 million
. Record the use of cash of $262 million
. Record the assumption of mortgage debt of $600 million
. Record the issuance of 43.7 million OP Units with an estimated fair
value of $656 million using an assumed Host Marriott stock price of
$15.00 (which includes the value of Crestline since Blackstone will
receive shares of Crestline in addition to OP Units)
The purchase price of the Blackstone properties and mortgage note was
determined based on the estimated fair value of the 43.7 million OP Units to
be issued. The number of units to be issued will not increase or decrease
depending on the stock price of Host Marriott at the time of closing of the
acquisition.
C. Represents the adjustment to record the investment in the Non-Controlled
Subsidiaries and to reflect the sale of certain hotel furniture and equipment
to the Non-Controlled Subsidiary:
. Record decrease in property and equipment of $290 million, including
$180 million of hotel furniture and equipment sold to the Non-Controlled
Subsidiaries
. Record receivable from Non-Controlled Subsidiaries for the furniture and
equipment loan of $180 million, and transfer of other notes totaling $34
million
. Record decrease in due from managers of $1 million
. Record investment in the Non-Controlled Subsidiaries of $9 million
. Record increase in other assets of $5 million
. Record decrease in cash of $8 million
. Record decrease in debt of $39 million of debt transferred to the Non-
Controlled Subsidiaries.
. Record decrease in accounts payable and accrued expenses of $1 million
. Record increase in deferred taxes of $6 million
. Record decrease in other liabilities of $37 million
D. Represents the adjustment to record the Mergers:
. Record property and equipment of $560 million
F-111
<PAGE>
. Record decrease in notes receivable of $3 million
. Record increase in due from managers of $12 million
. Record other assets of $23 million
. Record cash of $7 million
. Record debt of $323 million
. Record accounts payable and accrued expenses of $9 million
. Record decrease in other liabilities of $21 million
. Record the issuance of 23.0 million OP Units totaling approximately $288
million
The purchase price and number of OP Units expected to be issued to the
limited partners of each Partnership is (in millions, except OP Units in
thousands):
<TABLE>
<CAPTION>
INCREASE TO
PURCHASE NUMBER OF PROPERTY
PRICE OP UNITS AND EQUIPMENT
-------- --------- -------------
<S> <C> <C> <C>
Atlanta Marquis................................ $ 24 1,921 $ 24
Desert Springs................................. 37 2,943 36
Hanover........................................ 5 434 5
MHP............................................ 73 5,832 54
MHP II......................................... 84 6,684 78
Chicago Suites................................. 11 888 38
MDAH........................................... 45 3,595 162
PHLP........................................... 9 725 163
---- ------ ----
$288 23,022 $560
==== ====== ====
</TABLE>
The number of OP Units was determined based on the purchase price and an
estimated price of an OP Unit of $12.50 which is based upon the recent trading
range of Host Marriott Corporation's stock as adjusted for the proposed
dividend of Crestline to its shareholders. The purchase price was determined
based on the fair market value of the net assets to be acquired.
The purchase price for minority interests (Atlanta Marquis, Desert Springs,
Hanover, MHP and MHP2) was allocated to property to the extent that the
purchase price exceeded the minority interest liability recorded. The purchase
price for the other three partnerships that are presently not consolidated was
allocated in accordance with APB Opinion No. 16 with the debt of each
partnership recorded at estimated fair value, all assets and liabilities,
except for property being recorded at historical carrying values of each
partnership with the residual allocated to property. The amounts allocated to
property are in all cases less than estimated current replacement cost.
E. Represents the adjustment to record the purchase of the remaining
minority interests in four Private Partnerships:
. Record property and equipment of $61 million
. Record decrease in other assets of $11 million
. Record use of cash of $11 million
. Record decrease in minority interest liabilities of $6 million
. Record the issuance of 3.6 million OP Units totaling approximately $45
million
F. Represents the estimated $225 million cash payment of the earnings and
profits distribution to shareholders of Host Marriott including a draw on the
New Credit Facility of $75 million.(/1/)
G. Represents the adjustment to record the transfer of working capital to
Crestline related to the leasing of the Operating Partnership's hotels by
decreasing working capital and recording a receivable from the lessee of $85
million and the adjustment to record deferred revenue of $320 million in
connection with the application of EITF 98-9 to the Company's rental income.
F-112
<PAGE>
H. Represents the adjustment to record the effect on deferred taxes for the
change in tax status resulting from the REIT Conversion by decreasing deferred
taxes and increasing equity by $195 million.
I. The Company's pro forma aggregate debt maturities at September 11, 1998,
excluding $8 million of capital lease obligations and the $8 million debt
discount recorded in conjunction with the Senior Notes Refinancing, are (in
millions):
<TABLE>
<S> <C>
1998.................................................................. $ 439
1999.................................................................. 131
2000.................................................................. 134
2001.................................................................. 99
2002.................................................................. 150
Thereafter............................................................ 4,584
------
$5,537
======
</TABLE>
J. The number of OP Units includes the following (in millions):
<TABLE>
<S> <C>
Limited Partner interests of Host REIT................................. 204.3
General Partner interests of Host REIT................................. 0.2
Limited Partner interests of Partnerships.............................. 23.0
Limited Partner interests of Private Partnerships...................... 3.4
Limited Partner interests of Blackstone Group.......................... 43.7
-----
Total OP Units....................................................... 274.6
=====
</TABLE>
K. Represents the adjustment to record the contribution of $15 million in
cash to Crestline as a reduction in equity and to record the contribution of
an investment of $7 million in a joint venture which holds a mortgage note
from a consolidated subsidiary of Host.
L. The "REIT 2000 Pro Forma" assumes that the REIT Conversion occurs on
January 1, 1999, the Blackstone Acquisition does not occur, Host does not
become a REIT until January 1, 2000 and no Notes issued. The amounts reflect
the "Pro Forma" column less the amounts in column B--"Blackstone Acquisition"
and the reduction in other liabilities and increase in equity for the deferred
revenue of $43 million related to the application of EITF 98-9 to the
Blackstone properties.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The actual amount of the
distribution will be based in part upon the estimated amount of Host's
accumulated earnings and profits for tax purposes. To the extent that the
distributions made in connection with the Initial E&P Distribution are
not sufficient to eliminate Host's estimated accumulated earnings and
profits, Host REIT will make one or more additional taxable distributions
to its shareholders (in the form of cash or securities) prior to the last
day of its first full taxable year as a REIT (currently expected to be
December 31, 1999) in an amount intended to be sufficient to eliminate
such earnings and profits, and the Operating Partnership will make
corresponding distributions to all holders of OP Units (including Host
REIT) in an amount sufficient to permit Host REIT to make such additional
distributions.
F-113
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------------------------------------------
A B C E G
HOST HOST
MARRIOTT MARRIOTT 1998
CORPORATION DISTRIBUTION HOTELS BLACKSTONE ACQUISI- BOND
HISTORICAL ADJUSTMENT HISTORICAL ACQUISITION TIONS DISPOSITIONS REFINANCING
----------- ------------ ---------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $-- $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 922 -- 922 122 43 (6) --
Equity in
earnings
(losses) of
affiliates..... 1 -- 1 -- -- -- --
Other revenues.. 117 (58) 59 -- -- (50) --
----- ---- ----- ----------- ----------- ----------- -----------
Total revenues.. 1,040 (58) 982 122 43 (56) --
----- ---- ----- ----------- ----------- ----------- -----------
OPERATING COSTS
AND EXPENSES
Hotels.......... 502 -- 502 52 23 (3) --
Other........... 45 (30) 15 -- -- -- --
----- ---- ----- ----------- ----------- ----------- -----------
Total operating
costs and
expenses....... 547 (30) 517 52 23 (3) --
----- ---- ----- ----------- ----------- ----------- -----------
OPERATING
PROFIT......... 493 (28) 465 70 20 (53) --
Minority
interest....... (36) -- (36) -- (1) 1 --
Corporate
expenses....... (33) 3 (30) -- -- -- --
REIT Conversion
expenses....... (14) -- (14) -- -- -- --
Interest
expense........ (245) (8) (253) (36) (1) 1 (28)
Dividends on
Convertible
Preferred
Securities..... (26) 26 -- -- -- -- --
Interest
income......... 36 2 38 (6) (16) (1) --
----- ---- ----- ----------- ----------- ----------- -----------
Income (loss)
before income
taxes.......... 175 (5) 170 28 2 (52) (28)
Benefit
(provision) for
income taxes... (75) 3 (72) (11) (1) 21 11
----- ---- ----- ----------- ----------- ----------- -----------
Income (loss)
before
extraordinary
items.......... $ 100 $ (2) $ 98 $ 17 $ 1 $ (31) $ (17)
===== ==== ===== =========== =========== =========== ===========
Basic loss per
OP Unit........
Ratio of
earnings to
fixed charges.. 1.7x 1.8x
===== =====
Deficiency of
earnings to
fixed charges
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------------------
H J K L P/N I/M O Q
REIT
NON- EARNINGS OTHER LEASE INCOME 2000
CONTROLLED PRIVATE & PROFITS REIT CONVER- TAX PRO PRO
SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES SION ADJUSTMENT FORMA FORMA
---------- ------- ------------ --------------- ---------- -------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $ -- $ -- $ -- $ 540 $ -- $ 540 $ 468
Hotel revenues.. (14) 56 -- -- -- (1,123) -- -- --
Equity in
earnings
(losses) of
affiliates..... (3) -- -- -- -- -- -- (2) (2)
Other revenues.. (5) -- -- -- -- -- -- 4 4
---------- ------- ------------ --------------- ---------- -------- ---------- ------ ------
Total revenues.. (22) 56 -- -- -- (583) -- 542 470
---------- ------- ------------ --------------- ---------- -------- ---------- ------ ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (12) 36 2 -- -- (224) -- 376 336
Other........... -- -- -- -- -- -- -- 15 15
---------- ------- ------------ --------------- ---------- -------- ---------- ------ ------
Total operating
costs and
expenses....... (12) 36 2 -- -- (224) -- 391 351
---------- ------- ------------ --------------- ---------- -------- ---------- ------ ------
OPERATING
PROFIT......... (10) 20 (2) -- -- (359) -- 151 119
Minority
interest....... 3 18 1 -- -- -- -- (14) (14)
Corporate
expenses....... -- -- -- -- -- -- -- (30) (30)
REIT Conversion
expenses....... -- -- -- -- 14 -- -- -- --
Interest
expense........ 3 (21) -- (4) -- -- -- (339) (303)
Dividends on
Convertible
Preferred
Securities..... -- -- -- -- -- -- -- --
Interest
income......... 2 1 -- (5) (2) 13 -- 24 30
---------- ------- ------------ --------------- ---------- -------- ---------- ------ ------
Income (loss)
before income
taxes.......... (2) 18 (1) (9) 12 (346) -- (208) (198)
Benefit
(provision) for
income taxes... 1 (7) -- 4 (5) 138 (69) 10 10
---------- ------- ------------ --------------- ---------- -------- ---------- ------ ------
Income (loss)
before
extraordinary
items.......... $ (1) $ 11 $ (1) $ (5) $ 7 $ (208) $ (69) $(198) $(188)
========== ======= ============ =============== ========== ======== ========== ====== ======
Basic loss per
OP Unit........ $(.72) $(.81)
====== ======
Ratio of
earnings to
fixed charges.. N/A N/A
====== ======
Deficiency of
earnings to
fixed charges $(190) $(180)
====== ======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-114
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
--------------------------------------------------
A B C D E
HOST HOST
MARRIOTT DISTRIBUTION MARRIOTT
CORPORATION ADJUST- HOTELS BLACKSTONE 1998 1997
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS
----------- ------------ ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 1,093 -- 1,093 148 112 89 (23)
Equity in
earnings of
affiliates..... 5 -- 5 -- -- -- --
Other revenues.. 49 (37) 12 -- -- --
------ ----- ------ ----- ----- ----- -----
Total revenues.. 1,147 (37) 1,110 148 112 89 (23)
------ ----- ------ ----- ----- ----- -----
OPERATING COSTS
AND EXPENSES
Hotels.......... 649 -- 649 101 62 42 (10)
Other........... 49 (20) 29 -- -- -- --
------ ----- ------ ----- ----- ----- -----
Total operating
costs and
expenses....... 698 (20) 678 101 62 42 (10)
------ ----- ------ ----- ----- ----- -----
OPERATING
PROFIT......... 449 (17) 432 47 50 47 (13)
Minority
interest....... (32) -- (32) -- (4) 5 (1)
Corporate
expenses....... (47) 2 (45) -- -- -- --
Interest
expense........ (302) (23) (325) (48) (12) (12) 3
Dividends on
Convertible
Preferred
Securities..... (37) 37 -- -- -- -- --
Interest
income......... 52 -- 52 (7) (14) (14) --
------ ----- ------ ----- ----- ----- -----
Income (loss) before
income taxes... 83 (1) 82 (8) 20 26 (11)
Benefit
(provision) for
income taxes... (36) 1 (35) 3 (8) (10) 4
------ ----- ------ ----- ----- ----- -----
Income (loss)
before
extraordinary
items ......... $ 47 $ -- $ 47 $ (5) $ 12 $ 16 $ (7)
====== ===== ====== ===== ===== ===== =====
Basic earnings
per OP Unit.....
Ratio of
earnings to
fixed charges... 1.3x 1.3x
====== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
----------------------------------------------------------------------------------
F/G H J K L I/M O Q
EARNINGS REIT
DEBT NON- PRIVATE & PROFITS LEASE INCOME 2000
REPAYMENT CONTROLLED PARTNER- DISTRI- OTHER REIT CONVER- TAX PRO PRO
& REFINANCING SUBSIDIARY MERGERS SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA FORMA
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $ -- $ -- $ -- $ -- $ 1,135 $ -- $1,135 $998
Hotel revenues.. -- (17) 74 -- -- -- (1,476) -- -- --
Equity in
earnings of
affiliates..... -- (12) -- -- -- -- -- -- (7) (7)
Other revenues.. -- (9) -- -- -- -- -- -- 3 3
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
Total revenues.. -- (38) 74 -- -- -- (341) -- 1,131 994
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... -- (9) 51 2 -- -- (288) -- 600 513
Other........... -- (18) -- -- -- -- -- -- 11 11
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
Total operating
costs and
expenses....... -- (27) 51 2 -- -- (288) -- 611 524
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
OPERATING
PROFIT......... -- (11) 23 (2) -- -- (53) -- 520 470
Minority
interest....... -- 4 17 1 -- -- -- -- (10) (10)
Corporate
expenses....... -- 1 -- -- -- -- -- -- (44) (44)
Interest
expense........ (48) 5 (25) -- (6) -- -- -- (468) (420)
Dividends on
Convertible
Preferred
Securities..... -- -- -- -- -- -- -- -- -- --
Interest
income......... (3) 4 1 -- (8) -- 18 -- 29 36
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
Income (loss) before
income taxes... (51) 3 16 (1) (14) -- (35) -- 27 32
Benefit
(provision) for
income taxes... 20 (3) (6) -- 6 -- 14 14 (1) (2)
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
Income (loss)
before
extraordinary
items ......... $ (31) $ -- $ 10 $ (1) $ (8) $-- $ (21) $ 14 $ 26 $ 30
============= ========== ======= ======== ========= ========== ======== ========== ======= ======
Basic earnings
per OP Unit..... $ .09 $.13
======= ======
Ratio of
earnings to
fixed charges... 1.1x 1.1x
======= ======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-115
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
ASSUMING 100% PARTICIPATION WITH NO NOTES ISSUED
A. Represents the adjustment to reduce revenues, operating expenses,
corporate expenses, interest expense, interest income and income taxes for the
spin-off of Crestline.
B. Represents the adjustment to record the historical revenues, operating
expenses, interest expense, income taxes and to reduce interest income
associated with the acquisition of the equity and debt interests for the
Blackstone Acquisition.
C. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1998 acquisition of, or purchase of
controlling interests in 11 full-service properties.
D. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1997 acquisition of, or purchase of
controlling interests in, 18 full-service properties.
E. Represents the adjustment to record historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income for the 1998 sale of the New York Marriott East Side and the
Napa Valley Marriott, including the elimination of the non-recurring gains on
the sales totalling $50 million and related taxes of $20 million in 1998.
F. Represents the adjustment to reduce the interest expense, interest income
and to record income taxes associated with the refinancing or payoff of
mortgage debt for three full-service properties (Marriott's Orlando World
Center, the Philadelphia Marriott and the San Francisco Marriott).
G. Represents the adjustment to record interest expense and related
amortization of deferred financing fees, reduce interest income, and to record
income taxes as a result of the Senior Note Refinancing. The adjustment
excludes the extraordinary loss of $148 million, net of taxes, related to the
Senior Note Refinancing resulting from the write-off of deferred financing
fees and the payment of bond tender and consent fees.
H. Represents the adjustment for revenues, operating expenses, minority
interest, interest expense, corporate expenses, income taxes and interest
income to deconsolidate the Non-Controlled Subsidiary and reflect the
Company's share of income as equity in earnings of affiliate.
I. Represents the adjustment to reduce depreciation expense of $18 million
and $26 million for First Three Quarters 1998 and fiscal year 1997 related to
certain furniture and equipment sold to the Non-Controlled Subsidiary, record
interest income of $9 million and $13 million for First Three Quarters 1998
and fiscal year 1997 earned on the 7%, $180 million in notes from the Non-
Controlled Subsidiaries and reduce the lease payment to the Company from the
Lessee.
J. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, interest income and income
taxes associated with the Mergers, including three partnerships not previously
consolidated by the Company.
K. Represents the adjustment to record additional depreciation expense and
the decrease in minority interest expense related to the purchase of the
remaining minority interests in the Private Partnerships.
L. Represents the adjustment to reduce interest income, record interest
expense and income taxes for the estimated $225 million cash payment of the
earnings and profits distribution to shareholders of Host Marriott including a
draw on the New Credit Facility of $75 million.(1)
F-116
<PAGE>
M. Represents the adjustment to remove hotel revenues, management fees and
other expenses of $224 million and $288 million, respectively, for First Three
Quarters 1998 and fiscal year 1997, and to record rental revenues associated
with the leasing of certain hotel properties to Crestline and other lessees
and interest income of $3 million and $5 million for First Three Quarters 1998
and fiscal year 1997 earned on the 6%, $85 million in notes from Crestline.
First Three Quarters 1998 included a $320 million reduction to rental income
to record deferred revenue for percentage rents in accordance with EITF 98-9.
Management believes the change to the lease structure described above will not
impact hotel operating results because the hotel manager and asset management
function will remain unchanged. Rental revenues under the Leases are based on
the greater of Percentage Rent or Minimum Rent. Total rent in the pro forma
statement of operations is calculated based on the historical gross sales of
the property and the negotiated rental rates and thresholds by property as if
the leases were entered into on the first day of fiscal year 1997. There are
generally three sales categories utilized in the rent calculation: rooms, food
and beverage and other. For rooms and food and beverage, there are three tiers
of rent with two thresholds, while the other category generally has two tiers
of rent and one threshold. The percentage rent thresholds are increased
annually on the first day of each year after the initial lease year based on a
blended increase of the Consumer Price Index ("CPI") and a wage and benefit
index. For purposes of the pro formas, 1997 is the assumed initial lease year
and the blended increase applied to the thresholds at January 3, 1998 is
assumed to be 3%. Minimum rent is expressed as a fixed dollar amount that
increases annually on the first day of each year after the initial lease year
as 50% of the CPI increase. Accordingly, the 1998 rent thresholds and minimum
rent included in the pro formas were adjusted as of January 3, 1998 for the
1997 increases in the indices. Rental revenues is recognized only for leases
to be executed with Crestline at or prior to completion of the REIT
Conversion. The execution of the leases is dependent upon the distribution of
the Crestline common stock to the Company's stockholders, which is subject to
contingencies that are outside the control of the Company, including consent
of shareholders, lenders, debt holders, partners and ground lessors of Host.
The Company believes that negotiations with third parties to complete the REIT
Conversion will not result in any material change to the leases. The table
below details gross sales, minimum rent and total rent for all full-service
properties to be leased and summarized amounts for the limited-service
properties to be subleased:
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FIRST THREE QUARTERS 1998
------------------- ------------------------------
TOTAL
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL RENT
PROPERTY SALES RENT RENT SALES RENT RENT RECOGNIZED
- -------- ----- ------- ----- ----- ------- ----- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Grand Hotel Resort and Golf
Club...................... $23.4 $2.8 $4.2 $18.0 $2.0 $3.7 $2.0
Scottsdale Suites.......... 11.9 3.0 5.0 8.2 2.1 3.4 2.1
The Ritz-Carlton, Phoenix.. 23.3 4.6 7.2 17.3 3.2 5.5 3.2
Coronado Island Resort..... 22.0 2.1 2.1 16.2 1.5 3.6 1.5
Costa Mesa Suites.......... 9.7 1.9 3.3 7.2 1.3 2.3 1.3
Desert Springs Resort and
Spa....................... 103.3 21.3 30.3 80.3 15.0 22.6 15.0
Manhattan Beach............ 16.3 2.4 4.8 12.2 1.7 3.6 1.7
Marina Beach .............. 21.1 4.6 7.1 16.9 3.2 6.2 3.2
Newport Beach.............. 33.5 5.5 8.7 24.0 3.9 6.8 3.9
Newport Beach Suites....... 11.0 2.6 4.1 8.0 1.8 3.0 1.8
Ontario Airport............ 12.1 1.8 3.4 8.3 1.3 2.2 1.3
San Diego Marriott Hotel
and Marina................ 103.3 38.0 39.6 78.6 26.7 31.1 26.7
San Diego Mission Valley... 16.7 3.4 5.1 12.6 2.4 5.6 2.5
San Francisco Airport...... 43.8 8.2 13.2 32.2 5.8 9.5 5.8
San Francisco Fisherman's
Wharf..................... 17.8 4.0 6.4 12.1 2.8 4.3 2.8
San Francisco Moscone
Center.................... 120.2 20.7 37.9 90.5 14.6 28.5 14.6
San Ramon.................. 19.7 4.4 5.1 14.4 3.1 4.0 3.1
Santa Clara................ 47.3 7.8 16.5 37.2 5.5 13.5 8.8
The Ritz-Carlton, Marina
del Rey................... 32.4 5.5 10.8 23.4 3.9 7.9 3.9
The Ritz-Carlton, San
Francisco................. 50.1 9.6 14.7 34.2 6.7 10.3 6.7
Torrance................... 20.5 2.3 3.5 15.0 1.6 5.1 1.6
Denver Southeast........... 21.5 3.0 6.2 14.9 2.1 4.1 2.1
Denver Tech Center......... 26.8 5.1 8.3 20.1 3.6 6.0 3.6
Denver West................ 13.7 1.8 4.0 9.6 1.2 2.7 1.7
Marriott's Mountain Resort
at Vail................... 17.6 3.0 5.1 14.1 2.1 4.5 2.1
Hartford/Farmington........ 18.4 3.5 4.7 13.4 2.4 3.5 2.4
Hartford/Rocky Hill........ 11.6 1.5 2.7 8.5 1.1 2.0 1.1
Fort Lauderdale Marina..... 28.5 4.3 7.9 20.4 3.0 5.7 3.2
Harbor Beach Resort........ 58.1 16.5 19.3 43.2 11.6 14.0 11.6
Jacksonville............... 11.8 1.8 3.6 8.0 1.2 2.4 1.2
Miami Airport.............. 29.7 3.9 8.4 21.6 2.8 6.1 2.9
Orlando World Center....... 128.2 23.5 39.6 98.7 16.5 30.4 18.3
Palm Beach Gardens......... 11.8 1.9 3.7 8.5 1.4 3.0 1.4
Singer Island (Holiday
Inn)...................... 6.6 1.4 2.5 5.2 1.0 2.1 1.0
Tampa Airport.............. 17.1 1.6 3.5 13.1 1.1 2.7 1.1
Tampa Westshore............ 15.0 1.8 3.6 10.8 1.3 2.6 1.3
</TABLE>
F-117
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FIRST THREE QUARTERS 1998
------------------------- ----------------------------------
TOTAL
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL RENT
PROPERTY SALES RENT RENT SALES RENT RENT RECOGNIZED
- -------- -------- ------- -------- -------- ------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
The Ritz-Carlton, Naples.. $ 66.4 $ 18.1 $ 23.3 $ 53.1 $ 12.7 $ 18.0 $ 12.7
Atlanta Marriott Marquis.. 85.4 21.3 33.3 58.6 15.0 25.6 15.0
Atlanta Midtown Suites.... 10.5 1.8 3.5 7.8 1.3 2.6 1.3
Atlanta Norcross.......... 7.6 1.0 1.7 5.6 0.7 1.2 0.7
Atlanta Northwest......... 14.9 2.7 4.3 11.3 1.9 3.3 1.9
Atlanta Perimeter......... 16.6 2.5 4.5 12.6 1.7 3.5 1.7
JW Marriott Hotel at
Lenox.................... 24.8 3.7 6.8 17.7 2.6 5.0 2.6
The Ritz-Carlton,
Atlanta.................. 30.2 5.8 8.8 21.7 4.1 6.8 4.1
The Ritz-Carlton,
Buckhead................. 49.3 13.1 16.3 35.8 9.2 11.7 9.2
Chicago/Deerfield Suites.. 10.2 1.8 3.1 7.4 1.3 2.3 1.3
Chicago/Downers Grove
Suites................... 9.0 1.8 2.9 6.7 1.3 2.2 1.3
Chicago/Downtown
Courtyard................ 16.3 3.1 4.9 12.2 2.2 3.9 2.2
Chicago O'Hare............ 40.0 5.5 11.5 28.8 3.9 8.2 3.9
South Bend................ 9.9 1.1 2.1 7.0 0.8 1.5 0.8
New Orleans .............. 66.4 17.5 21.8 47.6 12.3 15.8 12.3
Bethesda.................. 23.2 3.2 5.6 17.3 2.2 4.1 2.2
Gaithersburg/Washingtonian
Center................... 13.2 2.4 3.8 9.7 1.7 2.8 1.7
Boston/Newton............. 27.4 4.8 7.8 19.1 3.4 5.5 3.4
Detroit Romulus........... 8.8 1.1 1.8 6.6 0.8 1.4 0.8
The Ritz-Carlton,
Dearborn................. 25.7 3.6 5.5 17.7 2.5 4.0 2.5
Minneapolis/Bloomington... 20.2 3.3 6.5 13.8 2.3 4.7 3.1
Minneapolis City Center... 27.5 3.7 7.5 20.4 2.4 5.2 2.4
Minneapolis Southwest..... 14.9 2.7 4.8 10.1 1.9 4.0 1.9
Kansas City Airport....... 14.3 1.7 3.7 9.9 1.2 2.5 1.2
St. Louis Pavilion........ 27.5 6.1 6.5 18.5 4.3 4.3 4.3
Nashua.................... 7.5 0.8 1.3 5.3 0.5 0.9 0.5
Hanover................... 22.5 4.7 6.6 15.1 3.3 4.3 3.9
Newark Airport............ 39.4 6.5 11.8 29.2 4.6 8.6 4.6
Park Ridge................ 16.0 2.5 4.0 11.9 1.7 4.2 1.7
Saddle Brook.............. 10.7 1.3 2.1 7.8 0.9 1.7 0.9
Albany.................... 18.5 3.5 6.1 12.4 2.5 5.2 2.7
New York Marriott
Financial Center......... 39.6 7.7 13.2 29.1 5.4 10.1 5.4
New York Marriott
Marquis.................. 210.3 40.0 60.8 155.4 29.7 47.6 29.7
Marriott World Trade
Center................... 65.4 12.2 19.4 49.1 8.6 14.9 8.6
Charlotte Executive Park.. 14.0 2.3 3.7 9.8 1.6 2.6 1.6
Raleigh Crabtree Valley... 14.9 2.4 3.9 10.9 1.7 2.8 1.7
Oklahoma City............. 15.6 2.0 3.8 10.4 1.4 2.4 1.4
Oklahoma City Waterford... 9.1 1.5 2.7 6.1 1.0 1.7 1.0
Portland.................. 26.4 4.1 7.5 17.6 2.9 4.8 2.9
Philadelphia (Convention
Center).................. 80.7 14.2 25.0 58.2 10.0 17.8 10.0
Philadelphia Airport...... 25.0 4.1 7.6 18.6 2.9 5.6 2.9
Pittsburgh City Center.... 16.4 1.9 3.0 11.1 1.3 2.2 1.3
Memphis................... 10.6 1.5 3.2 5.7 1.0 1.8 1.0
Dallas/Fort Worth......... 28.9 5.9 9.3 21.9 4.1 7.0 4.1
Dallas Quorum............. 25.7 4.2 8.2 18.3 3.0 5.8 3.7
El Paso................... 11.6 0.9 2.3 7.8 0.6 1.4 0.6
Houston Airport .......... 21.6 2.8 6.0 16.9 2.0 4.6 2.7
JW Marriott Houston....... 27.2 5.0 8.0 20.1 3.5 5.9 3.5
Plaza San Antonio......... 13.8 2.9 4.6 9.7 2.0 3.3 2.0
San Antonio Rivercenter... 68.9 17.5 24.5 49.3 12.3 17.8 12.3
San Antonio Riverwalk..... 29.3 6.1 10.3 21.7 4.3 7.6 4.4
Salt Lake City............ 28.5 5.6 9.5 21.1 3.9 7.2 4.2
Dulles Airport............ 14.6 1.8 4.0 10.9 1.2 3.0 1.7
Key Bridge................ 29.4 5.6 10.2 21.2 3.9 7.4 3.9
Norfolk Waterside......... 18.1 3.3 5.4 12.8 2.4 3.8 2.4
Pentagon City Residence
Inn...................... 11.7 3.5 5.5 8.7 2.5 4.2 2.5
The Ritz-Carlton, Tysons
Corner................... 34.4 5.9 9.8 24.9 4.1 7.3 4.1
Washington Dulles Suites.. 10.3 2.5 4.0 7.8 1.8 3.0 1.8
</TABLE>
F-118
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FIRST THREE QUARTERS 1998
-------------------------- -------------------------------------
TOTAL
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL RENT
PROPERTY SALES RENT RENT SALES RENT RENT RECOGNIZED
- -------- -------- ------- -------- -------- ------- ------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Westfields.............. $ 28.0 $ 4.7 $ 7.4 $ 20.3 $ 3.3 $ 5.4 $ 3.3
Williamsburg............ 12.6 1.8 2.8 9.3 1.3 2.1 1.3
Washington Metro
Center................. 25.2 4.5 7.3 19.2 3.2 5.3 3.2
Calgary................. 13.4 1.7 1.7 9.8 1.2 2.3 1.2
Toronto Airport......... 17.1 2.9 5.6 13.0 2.0 4.2 2.0
Toronto Eaton Centre.... 21.1 6.1 7.1 16.0 4.3 5.6 4.3
Toronto Delta
Meadowvale............. 16.1 2.6 4.9 10.6 1.9 3.1 1.9
Fairview Park........... 22.5 3.9 7.3 16.3 2.8 5.2 2.8
Dayton.................. 18.2 3.2 6.0 13.4 2.3 4.3 2.3
Research Triangle Park.. 9.1 1.4 2.9 6.8 1.0 2.3 1.0
Detroit Marriott
Southfield............. 8.8 1.2 2.1 6.9 0.9 1.7 0.9
Detroit Marriott
Livonia................ 10.0 1.4 2.6 7.4 1.0 1.9 1.0
Fullerton............... 6.8 1.2 1.8 5.0 0.8 1.3 0.8
Marriott O'Hare Suites.. 14.4 2.7 4.9 10.8 1.9 4.0 1.9
Albuquerque............. 16.4 3.6 3.6 11.1 2.5 2.6 2.5
Greensboro-High Point... 13.6 3.3 3.3 10.2 2.3 2.4 2.3
Houston Medical Center.. 16.5 4.0 4.0 12.2 2.8 2.9 2.8
Miami Biscayne Bay...... 26.8 6.5 6.6 20.5 4.5 5.1 4.5
Marriott Mountain
Shadows Resort......... 24.1 4.4 4.5 16.9 3.1 3.1 3.1
Seattle SeaTac Airport.. 23.1 6.7 6.7 17.5 4.7 5.1 4.7
Four Seasons,
Atlanta(4)............. 15.6 5.8 5.9 14.2 4.1 4.5 4.1
Four Seasons,
Philadelphia(4)........ 41.1 7.9 12.4 30.6 5.6 10.1 5.6
Grand Hyatt,
Atlanta(4)............. 25.3 10.0 10.0 22.6 7.0 8.2 7.0
Hyatt Regency,
Burlingame(4).......... 47.9 8.8 17.6 39.5 6.2 15.1 9.0
Hyatt Regency,
Cambridge(4)........... 32.4 6.7 11.9 26.8 4.7 10.4 6.1
Hyatt Regency,
Reston(4).............. 30.5 6.5 11.3 24.2 4.5 9.2 4.8
Swissotel, Atlanta(4)... 22.2 5.0 6.3 17.2 3.5 5.8 3.5
Swissotel, Boston(4).... 26.8 6.4 8.5 20.5 4.5 6.9 4.5
Swissotel, Chicago(4)... 38.1 10.9 15.1 28.9 7.7 12.0 7.7
The Drake (Swissotel),
New York(4)............ 38.8 11.6 13.6 34.2 8.2 13.4 8.2
The Ritz-Carlton, Amelia
Island(4).............. 45.7 10.3 13.4 37.4 7.2 11.1 7.2
The Ritz-Carlton,
Boston(4).............. 40.1 6.9 10.5 31.4 4.8 8.8 4.8
Non-Controlled
Subsidiary Rent........ -- (39.7) (39.7) -- (27.5) (27.5) (27.5)
-------- ------ -------- -------- ------ ------- ------
Total Full-service
Properties............. 3,600.8 676.2 1,055.9 2,671.0 477.0 810.8 491.2
Total Courtyard
Properties............. 212.0 50.6 59.2 159.2 35.0 36.8 36.8
Total Residence Inns.... 69.9 17.2 20.3 50.6 12.0 12.3 12.3
-------- ------ -------- -------- ------ ------- ------
Total................. $3,882.7 $744.0 $1,135.4 $2,880.8 $524.0 859.9 $540.3
======== ====== ======== ======== ====== ======
Less: Deferred rent
under EITF 98-9........ (319.6)
-------
Total rent
recognized........... $ 540.3
=======
</TABLE>
N. Represents the adjustment to eliminate interest income recorded for the
$92 million note receivable contributed to Crestline for the First Three
Quarters 1998.
O. Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
P. Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion. Management expects that the total
estimated non-recurring expenses to be incurred will be approximately $50
million.
Q. The "REIT 2000 Pro Forma" reflects the adjustment to eliminate the
revenues, operating expenses, interest expense and interest income which
assumes that the REIT Conversion occurs on January 1, 1999, the Blackstone
Acquisition does not occur, Host does not become REIT until January 1, 2000
and no Notes are issued.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The actual amount of the
distribution will be based in part upon the estimated amount of Host's
accumulated earnings and profits for tax purposes. To the extent that the
distributions made in connection with the Initial E&P Distribution are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional taxable distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first full taxable year as a REIT (currently expected to be December
31, 1999) in an amount intended to be sufficient to eliminate such
earnings and profits, and the Operating Partnership will make
corresponding distributions to all holders of OP Units (including Host
REIT) in an amount sufficient to permit Host REIT to make such additional
distributions.
F-119
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF CASH FLOWS
FIRST THREE QUARTERS 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
-------------------------------------------------
A B C E G
HOST HOST
MARRIOTT DISTRIBUTION MARRIOTT
CORPORATION ADJUST- HOTELS BLACKSTONE 1998 BOND
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS DISPOSITIONS REFINANCING
----------- ------------ ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $ 100 $ (2) $ 98 $ 17 $ 1 $ (31) $ (17)
Adjustments to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 184 (17) 167 42 11 -- --
Income taxes.... 50 -- 50 -- -- -- --
Gains on sales
of hotel
properties...... (50) -- (50) -- -- 50 --
Equity
(earnings)
losses of
affiliates...... -- (1) (1) -- -- -- --
Changes in
operating
accounts......... (33) (2) (35) -- -- -- --
Other assets..... 27 4 31 -- -- -- --
------ ---- ------- ---- ---- ----- -------
Cash provided by
(used in)
operations...... 278 (18) 260 59 12 19 (17)
------ ---- ------- ---- ---- ----- -------
INVESTING
ACTIVITIES
Acquisitions..... (636) 29 (607) -- 607 -- --
Cash received
from sale of
assets........... 211 -- 211 -- -- (211) --
Capital
expenditures..... (168) 9 (159) (16) (5) 2 --
Purchases of
short-term
marketable
securities....... (134) -- (134) -- -- -- --
Sales of short-
term marketable
securities....... 451 -- 451 -- -- -- --
Other............ 3 (89) (86) -- -- 21 --
------ ---- ------- ---- ---- ----- -------
Cash provided by
(used in)
investing
activities...... (273) (51) (324) (16) 602 (188) --
------ ---- ------- ---- ---- ----- -------
FINANCING
ACTIVITIES
Issuances of
debt............. 2,004 -- 2,004 -- -- -- 1,967
Scheduled
principal
repayments....... (42) 3 (39) -- -- -- --
Debt
prepayments...... (1,750) 119 (1,631) -- -- 35 (1,250)
Transfers to Host
Marriott......... -- (63) (63) -- -- -- --
Other............ (189) -- (189) -- -- -- --
------ ---- ------- ---- ---- ----- -------
Cash provided by
(used in)
financing
activities...... 23 59 82 -- -- 35 717
------ ---- ------- ---- ---- ----- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ 28 $(10) $ 18 $ 43 $614 $(134) $ 700
====== ==== ======= ==== ==== ===== =======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-----------------------------------------------------------------------
H I J K L/M O/P N
EARNINGS
NON- & PROFITS LEASE
CONTROLLED PRIVATE DISTRI- CONVER- OTHER REIT TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS BUTION(1) SION ACTIVITIES ADJUSTMENT FORMA
---------- ------- ------------ --------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $(1) $ 11 $(1) $ (5) $(208) $ 7 $(69) $ (198)
Adjustments to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... (4) 17 2 -- (18) -- -- 217
Income taxes.... -- -- -- -- 138 -- -- 188
Gains on sales
of hotel
properties...... -- -- -- -- -- -- -- --
Equity
(earnings)
losses of
affiliates...... -- -- -- -- -- -- -- (1)
Changes in
operating
accounts......... -- -- -- -- 320 -- -- 285
Other assets..... -- -- -- -- -- -- -- 31
---------- ------- ------------ --------- ------- ---------- ---------- -------
Cash provided by
(used in)
operations...... (5) 28 1 (5) 232 7 (69) 522
---------- ------- ------------ --------- ------- ---------- ---------- -------
INVESTING
ACTIVITIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... -- -- -- -- -- -- -- --
Capital
expenditures..... 1 (9) -- -- -- -- -- (186)
Purchases of
short-term
marketable
securities....... -- -- -- -- -- -- -- (134)
Sales of short-
term marketable
securities....... -- -- -- -- -- -- -- 451
Other............ -- -- -- -- -- -- -- (65)
---------- ------- ------------ --------- ------- ---------- ---------- -------
Cash provided by
(used in)
investing
activities...... 1 (9) -- -- -- -- -- 66
---------- ------- ------------ --------- ------- ---------- ---------- -------
FINANCING
ACTIVITIES
Issuances of
debt............. -- -- -- (75) -- -- -- 3,896
Scheduled
principal
repayments....... (2) -- -- -- (15) -- -- (56)
Debt
prepayments...... -- -- -- -- -- -- -- (2,846)
Transfers to Host
Marriott......... -- -- -- -- -- -- -- (63)
Other............ -- -- -- -- -- -- -- (189)
---------- ------- ------------ --------- ------- ---------- ---------- -------
Cash provided by
(used in)
financing
activities...... (2) -- -- (75) (15) -- -- 742
---------- ------- ------------ --------- ------- ---------- ---------- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $(6) $ 19 $ 1 $(80) $ 217 $ 7 $(69) $1,330
========== ======= ============ ========= ======= ========== ========== =======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-120
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
FISCAL YEAR 1997
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
---------------------------------------------------------------
A B D C E F/G
HOST HOST
MARRIOTT MARRIOTT DEBT
CORPORATION DISTRIBUTION HOTELS BLACKSTONE 1997 1998 REPAYMENT &
HISTORICAL ADJUST- MENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
----------- ------------ ---------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIV-
ITIES
Income before
extraordinary... $ 47 $ -- $ 47 $ (5) $ 16 $ 12 $ (7) $ (31)
Adjustments to
reconcile to
cash provided by
operations:
Depreciation and
amortization.... 240 (9) 231 61 17 31 (3) --
Income taxes.... (20) -- (20) -- -- -- -- --
Other........... 70 3 73 -- -- -- (2) --
Changes in
operating
accounts........ 127 (26) 101 -- -- -- -- --
------- ----- ----- ---- ---- ---- ---- ------
Cash provided by
(used in)
operations...... 464 (32) 432 56 33 43 (12) (31)
------- ----- ----- ---- ---- ---- ---- ------
INVESTING
ACTIVITIES
Acquisitions.... (596) 237 (359) -- 359 -- -- --
Cash received
from sale of
assets.......... 51 -- 51 -- -- -- -- --
Purchase of
short-term
marketable
securities...... (354) -- (354) -- -- -- -- --
Capital
expenditures.... (160) 2 (158) (20) (13) (13) 4 --
Other........... 13 -- 13 -- -- -- 1 --
------- ----- ----- ---- ---- ---- ---- ------
Cash provided by
(used in)
investing
activities...... (1,046) 239 (807) (20) 346 (13) 5 --
------- ----- ----- ---- ---- ---- ---- ------
FINANCING
ACTIVITIES
Issuances of
debt............ 857 -- 857 -- -- -- -- 1,188
Scheduled
principal
payments........ (93) 3 (90) -- -- -- --
Debt
prepayments..... (403) -- (403) -- -- -- -- (1,147)
Transfers to
Host Marriott... -- (226) (226) -- -- -- -- --
Other........... 28 (1) 27 -- -- -- -- --
------- ----- ----- ---- ---- ---- ---- ------
Cash provided by
(used in)
financing
activities...... 389 (224) 165 -- -- -- -- 41
------- ----- ----- ---- ---- ---- ---- ------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS..... $ (193) $ (17) $(210) $ 36 $379 $ 30 $ (7) $ 10
======= ===== ===== ==== ==== ==== ==== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------------------------------------
H I J K L/M N
EARNINGS
NON- PRIVATE & PROFITS LEASE
CONTROLLED PARTNER- DISTRI- OTHER REIT CONVER- TAX PRO
SUBSIDIARY MERGERS SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA
---------- ------- -------- --------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIV-
ITIES
Income before
extraordinary... $-- $10 $(1) $ (8) $-- $(21) $14 $ 26
Adjustments to
reconcile to
cash provided by
operations:
Depreciation and
amortization.... (5) 26 2 -- -- (26) -- 334
Income taxes.... -- -- -- -- -- -- -- (20)
Other........... -- -- -- -- -- -- -- 71
Changes in
operating
accounts........ -- -- -- -- -- -- -- 101
---------- ------- -------- --------- ---------- ------- ---------- -------
Cash provided by
(used in)
operations...... (5) 36 1 (8) -- (47) 14 512
---------- ------- -------- --------- ---------- ------- ---------- -------
INVESTING
ACTIVITIES
Acquisitions.... -- -- -- -- -- -- -- --
Cash received
from sale of
assets.......... (35) -- -- -- -- -- -- 16
Purchase of
short-term
marketable
securities...... -- -- -- -- -- -- -- (354)
Capital
expenditures.... 2 (11) -- -- -- -- -- (209)
Other........... 33 -- -- -- -- -- -- 47
---------- ------- -------- --------- ---------- ------- ---------- -------
Cash provided by
(used in)
investing
activities...... -- (11) -- -- -- -- -- (500)
---------- ------- -------- --------- ---------- ------- ---------- -------
FINANCING
ACTIVITIES
Issuances of
debt............ (3) -- -- (75) -- -- -- 1,967
Scheduled
principal
payments........ (6) (7) -- -- -- (30) -- (133)
Debt
prepayments..... -- -- -- -- -- -- -- (1,550)
Transfers to
Host Marriott... -- -- -- -- -- -- -- (226)
Other........... -- -- -- -- -- -- -- 27
---------- ------- -------- --------- ---------- ------- ---------- -------
Cash provided by
(used in)
financing
activities...... (9) (7) -- (75) -- (30) -- 85
---------- ------- -------- --------- ---------- ------- ---------- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS..... $(14) $18 $ 1 $(83) $-- $(77) 14 $ 97
========== ======= ======== ========= ========== ======= ========== =======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-121
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF CASH FLOWS
100% PARTICIPATION WITH NO NOTES ISSUED
A) Represents the adjustment for cash flow amounts related to Crestline.
B) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the Blackstone Acquisition.
C) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the 1998 acquisition of, or purchase of controlling
interests in, 11 full-service properties.
D) Represents the adjustment to record depreciation expense and capital
expenditures for the 1997 acquisition of, or purchase of controlling interests
in, 18 full-service properties. Cash from investing activities has also been
adjusted as if the period's historical acquisitions occurred immediately prior
to the period presented.
E) Represent the adjustment to record the decrease in depreciation expense,
capital expenditures and other investing activities for the sale of the New
York East Side Marriott and the Napa Valley Marriott, including the
elimination of the non-recurring gains on the sales totaling $50 million.
F) Represents the adjustment to reflect the decrease in interest expense
associated with the refinancing or payoff of mortgage debt for three full-
service properties (Marriott Orlando World Center, the Philadelphia Marriott,
and the San Francisco Marriott). Cash from financing activities has also been
adjusted as if the period's historical prepayments and issuances of debt
occurred immediately prior to the period presented.
G) Represents the adjustment to reflect the issuance of the $1.7 billion of
New Senior Notes net of the discount of $8 million, the retirement of the Old
Senior Notes of $1.55 billion and the initial draw on the New Credit Facility
of $372 million, including interest expense and commitment fees.
H) Represents the adjustment to record the removal of depreciation, capital
expenditures, the sale of certain assets and the scheduled principal
amortization of notes to reflect the deconsolidation of the Non-Controlled
Subsidiary.
I) Represents the adjustment to record depreciation expense and capital
expenditures related to the Mergers, including the scheduled principal
amortization of notes.
J) Represents the adjustment to record depreciation expense related to the
acquisition of the Private Partnerships.
K) Represents the adjustment to reflect the decrease in interest income, net
of tax, as a result of the estimated $225 million earnings and profits
distribution and interest expense for the $75 million draw on the New Credit
Facility.
L) Represents the adjustment to revenues to reflect lease income and remove
hotel revenues and management fees.
M) Represents the adjustment to reduce depreciation expense related to the
sale of certain furniture and equipment to the Non-Controlled Subsidiary,
including the scheduled principal amortization of notes.
N) Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
O) Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The actual amount of the
distribution will be based in part upon the estimated amount of Host's
accumulated earnings and profits for tax purposes. To the extent that the
distributions made in connection with the Initial E&P Distribution are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional taxable distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first full taxable year as a REIT (currently expected to be December
31, 1999) in an amount intended to be sufficient to eliminate such
earnings and profits, and the Operating Partnership will make
corresponding distributions to all holders of OP Units (including Host
REIT) in an amount sufficient to permit Host REIT to make such additional
distributions.
F-122
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 11, 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS, EXCEPT OP UNIT AMOUNTS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS
AND OTHER ACTIVITIES
--------------------------------------
A B
HOST HOST
MARRIOTT MARRIOTT DEBT
CORPORATION DISTRIBUTION HOTELS BLACKSTONE REPAYMENT
HISTORICAL ADJUSTMENT HISTORICAL ACQUISITION ACQUISITIONS & REFINANCING
----------- ------------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $5,937 $(649) $5,288 $1,450 $-- $--
Notes and other
receivables,
net............ 32 (3) 29 63 -- --
Due from
managers....... 88 (5) 83 5 -- --
Investments in
affiliates..... 18 -- 18 -- -- --
Other assets.... 319 2 321 -- -- --
--
--
Receivable from
Lessee for
working
capital........ -- -- -- -- -- --
Cash, cash
equivalents and
short-term
marketable
securities..... 575 (27) 548 (262) -- --
------ ----- ------ ------ ---- ----
$6,969 $(682) $6,287 $1,256 $-- $--
====== ===== ====== ====== ==== ====
LIABILITIES AND
EQUITY
Debt(I)......... $4,224 $(213) $4,011 $ 600 $-- $--
--
--
Convertible debt
obligation to
Host Marriott
Corporation.... -- 567 567 -- -- --
Accounts payable
and accrued
expenses....... 70 (8) 62 -- -- --
Deferred income
taxes.......... 526 (62) 464 -- -- --
Other
liabilities.... 447 (10) 437 -- -- --
------ ----- ------ ------ ---- ----
Total
liabilities.... 5,267 274 5,541 600 -- --
Convertible
Preferred
Securities..... 550 (550) -- -- -- --
Limited Partner
interests of
third parties
at redemption
value (on a pro
forma basis
47.1 million OP
Units
outstanding)(J).. -- -- -- 656 -- --
Equity..........
General Partner
(on a proforma
basis 204.3
million OP
Units
outstanding)
Limited
Partner
interests of
Host REIT (on
a pro forma
basis 204.3
million OP
Units
outstanding)(J).. 1,152 (406) 746 -- -- --
------ ----- ------ ------ ---- ----
$6,969 $(682) $6,287 $1,256 $-- $--
====== ===== ====== ====== ==== ====
Book value per
OP Unit........
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------------------------------------------
C D E F K G H L
EARNINGS REIT
NON- & PROFITS LEASE DEFERRED 2000
CONTROLLED PRIVATE DISTRIBU- CONTRIBUTION CONVER- TAX PRO PRO
SUBSIDIARY MERGERS PARTNERSHIPS TION(1) TO CRESTLINE SION ADJUSTMENT FORMA FORMA
---------- ------- ------------ --------- ------------ ------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $(290) $520 $ 61 $ -- $ -- $-- $ -- $7,029 $5,579
Notes and other
receivables,
net............ 214 (3) -- -- -- -- -- 303 240
Due from
managers....... (1) 12 -- -- -- (85) -- 14 14
Investments in
affiliates..... 9 -- -- -- -- -- -- 27 27
Other assets.... 5 23 (11) -- -- -- -- 338 338
Receivable from
Lessee for
working
capital........ -- -- -- -- -- 85 -- 85 80
Cash, cash
equivalents and
short-term
marketable
securities..... (8) 7 (11) (150) (15) -- -- 109 371
---------- ------- ------------ --------- ------------ ------- ---------- ------ ------
$ (71) $559 $ 39 $(150) (15) $-- $ -- $7,905 $6,649
========== ======= ============ ========= ============ ======= ========== ====== ======
LIABILITIES AND
EQUITY
Debt(I)......... $ (39) $571 $-- $ 75 $ -- $-- $ -- $5,218 $4,618
Convertible debt
obligation to
Host Marriott
Corporation.... -- -- -- -- -- -- -- 567 567
Accounts payable
and accrued
expenses....... (1) 8 -- -- -- -- -- 69 69
Deferred income
taxes.......... 6 -- -- -- -- -- (195) 275 470
Other
liabilities.... (37) (20) (6) -- 7 320 -- 701 658
---------- ------- ------------ --------- ------------ ------- ---------- ------ ------
Total
liabilities.... (71) 559 (6) 75 7 320 (195) 6,830 6,382
Convertible
Preferred
Securities..... -- -- -- -- -- -- -- -- --
Limited Partner
interests of
third parties
at redemption
value (on a pro
forma basis
47.1 million OP
Units
outstanding)(J).. -- -- 45 -- -- -- -- 701 45
Equity..........
General Partner
(on a proforma
basis 204.3
million OP
Units
outstanding)
Limited
Partner
interests of
Host REIT (on
a pro forma
basis 204.3
million OP
Units
outstanding)(J).. -- -- -- (225) (22) (320) 195 374 222
---------- ------- ------------ --------- ------------ ------- ---------- ------ ------
$ (71) $559 $ 39 $(150) $ (15) $-- $ -- $7,905 6,649
========== ======= ============ ========= ============ ======= ========== ====== ======
Book value per
OP Unit........ $ 4.27 $ 1.28
====== ======
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
F-123
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
100% PARTICIPATION WITH NOTES ISSUED
A. Represents the adjustment to record the spin-off of Crestline:
. Reduce property and equipment by $649 million
. Reduce receivables by $3 million related to certain Crestline notes held
by the Company
. Reduce due from managers by $5 million
. Increase other assets by $2 million
. Reduce cash, cash equivalents and short-term marketable securities by $27
million
. Reduce debt by $213 million
. Reduce accounts payable and accrued expenses by $8 million
. Reduce deferred income taxes by $62 million
. Reduce other liabilities by $10 million
. Reduce equity by $406 million
. Eliminate the $550 million Convertible Preferred Securities of Host
Marriott which remain an obligation of Host REIT
. Record the $567 million of Convertible Debt Obligation to Host Marriott
which is eliminated in consolidation on the historical financial
statements of Host Marriott Corporation
B. Represents the adjustment to record the Blackstone Acquisition of 12
full-service properties (5,520 rooms) and a mortgage note secured by a
thirteenth full-service property including the issuance of 43.7 million OP
Units as determined through negotiations between the Company and Blackstone:
. Record property and equipment of $1,450 million
. Record mortgage note receivable of $63 million
. Record increase in due from managers of $5 million
. Record the use of cash of $262 million
. Record the assumption of mortgage debt of $600 million
. Record the issuance of 43.7 million OP Units with an estimated fair value
of $656 million using an assumed Host Marriott stock price of $15.00
(which includes the value of Crestline since Blackstone will receive
shares of Crestline in addition to OP Units).
The purchase price of the Blackstone properties and mortgage note was
determined based on the estimated fair value of the 43.7 million OP Units to
be issued. The number of units to be issued will not increase or decrease
depending on the stock price of Host Marriott at the time of closing of the
acquisition.
C. Represents the adjustment to deconsolidate the assets and liabilities of
the Non-Controlled Subsidiaries and to reflect the sale of certain hotel
furniture and equipment to the Non-Controlled Subsidiary:
. Record decrease in property and equipment of $290 million, including $180
million of hotel furniture and equipment sold to the Non-Controlled
Subsidiary
. Record receivable from Non-Controlled Subsidiary for the furniture and
equipment loan of $180 million and other notes totaling $34 million
. Record decrease in due from managers of $1 million
. Record investment in subsidiary of $9 million
. Record increase in other assets of $5 million
. Record decrease in cash of $8 million
. Record decrease in debt of $39 million of debt transferred to the Non-
Controlled Subsidiaries.
. Record decrease in accounts payable and accrued expenses of $1 million
. Record increase in deferred taxes of $6 million
. Record decrease in other liabilities of $37 million
F-124
<PAGE>
D. Represents the adjustment to record the Mergers and issuance of Notes at
the Note Election Amount (the greater of Liquidation Value or 80% of Exchange
Value) to the Limited Partners:
. Record property and equipment of $520 million
. Record decrease in notes receivable of $3 million
. Record increase in due from managers of $12 million
. Record other assets of $23 million
. Record cash of $7 million
. Record debt of $571 million including $248 million of Notes to the
Limited Partners at the Note Election Amount
. Record accounts payable and accrued expenses of $8 million
. Record decrease in other liabilities of $20 million
The value of 6.56% Notes expected to be issued to the limited partners of
each Partnership is (in millions):
<TABLE>
<CAPTION>
PURCHASE PRICE-- INCREASE TO
VALUE OF PROPERTY AND
NOTES ISSUED EQUIPMENT
---------------- ------------
<S> <C> <C>
Atlanta Marquis................................ $ 19 $ 19
Desert Springs................................. 29 29
Hanover........................................ 4 4
MHP............................................ 64 45
MHPII.......................................... 73 67
Chicago Suites................................. 11 37
MDAH........................................... 41 157
PHLP........................................... 7 162
---- ----
$248 $520
==== ====
</TABLE>
The purchase price for minority interests (Atlanta Marquis, Desert Springs,
Hanover, MHP and MHP2) was allocated to property to the extent that the
purchase price exceeded the minority interest liability recorded. The purchase
price for the three partnerships that are presently not consolidated was
allocated in accordance with APB Opinion Number 16 with the debt of each
partnership recorded at estimated fair value, all assets and liabilities,
except for property being recorded at historical carrying values of each
partnership with the residual allocated to property. The amounts allocated to
property are in all cases less than estimated current replacement cost.
E. Represents the adjustment to record the purchase of the remaining
minority interests in four Private Partnerships:
. Record property and equipment of $61 million
. Record decrease in other assets of $11 million
. Record use of cash of $11 million
. Record decrease in minority interest liabilities of $6 million
. Record the issuance of 3.6 million OP Units totaling approximately $45
million
F. Represents the estimated $225 million cash payment of the earnings and
profits distribution to shareholders of Host Marriott including a draw on the
New Credit Facility of $75 million.(/1/)
G. Represents the adjustment to record the transfer of working capital to
Crestline related to the leasing of the Operating Partnership's hotels by
decreasing working capital and recording a receivable from the lessee of $85
million and the adjustment to record $320 million in deferred revenue in
connection with the application of EITF 98-9 to the Company's rental revenue.
F-125
<PAGE>
H. Represents the adjustment to record the effect on deferred taxes for the
change in tax status resulting from the REIT Conversion by decreasing deferred
taxes and increasing equity by $195 million.
I. The Company's pro forma aggregate debt maturities at September 11, 1998,
excluding $8 million of capital lease obligations and the $8 million debt
discount recorded in conjunction with the Senior Note Refinancing, are (in
millions):
<TABLE>
<S> <C>
1998............................................................... $ 439
1999............................................................... 131
2000............................................................... 134
2001............................................................... 99
2002............................................................... 150
Thereafter......................................................... 4,832
------
$5,785
======
</TABLE>
J. The number of OP Units includes the following (in millions):
<TABLE>
<S> <C>
General Partner interests of Host REIT.............................. 0.2
Limited Partner interests of Host REIT.............................. 204.3
Limited Partner interests of Private Partnerships................... 3.4
Limited Partner interests of Blackstone Group....................... 43.7
-----
Total OP Units.................................................... 251.6
=====
</TABLE>
K. Represents the adjustment to record the contribution of $15 million in
cash to Crestline as a reduction in equity and to record the contribution of
an investment in a mortgage note of $7 million in a joint venture which holds
a mortgage note from a consolidated subsidiary of Host.
L. The "REIT 2000 Pro Forma" assumes that the REIT Conversion occurs on
January 1, 1999, the Blackstone Acquisition does not occur, Host does not
become a REIT until January 1, 2000 and no Notes issued. The amounts reflect
the "Pro Forma" column less the amounts in column B--"Blackstone Acquisition"
and the reduction in other liabilities and increase in equity related to the
deferred revenue of $43 million related to the application of EITF 98-9 to the
Blackstone properties.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The actual amount of the
distribution will be based in part upon the estimated amount of Host's
accumulated earnings and profits for tax purposes. To the extent that the
distributions made in connection with the Initial E&P Distribution are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional taxable distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first full taxable year as a REIT (currently expected to be December
31, 1999) in an amount intended to be sufficient to eliminate such
earnings and profits, and the Operating Partnership will make
corresponding distributions to all holders of OP Units (including Host
REIT) in an amount sufficient to permit Host REIT to make such additional
distributions.
F-126
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
-------------------------------------------------
A B C E G
HOST HOST
MARRIOTT MARRIOTT
CORPORATION DISTRIBUTION HOTELS BLACKSTONE 1998 BOND
HISTORICAL ADJUSTMENT HISTORICAL ACQUISITION ACQUISITIONS DISPOSITIONS REFINANCING
----------- ------------ ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $-- $ -- $-- $-- $-- $--
Hotel revenues.. 922 -- 922 122 43 (6) --
Equity in
earnings of
affiliates..... 1 -- 1 -- -- -- --
Other revenues.. 117 (58) 59 -- -- (50) --
------ ---- ----- ---- ---- ---- ----
Total revenues.. 1,040 (58) 982 122 43 (56) --
------ ---- ----- ---- ---- ---- ----
OPERATING COSTS
AND EXPENSES
Hotels.......... 502 -- 502 52 23 (3) --
Other........... 45 (30) 15 -- -- -- --
------ ---- ----- ---- ---- ---- ----
Total operating
costs and
expenses....... 547 (30) 517 52 23 (3) --
------ ---- ----- ---- ---- ---- ----
OPERATING
PROFIT......... 493 (28) 465 70 20 (53) --
Minority
interest....... (36) -- (36) -- (1) 1 --
Corporate
expenses....... (33) 3 (30) -- -- -- --
REIT Conversion
expenses....... (14) -- (14) -- -- -- --
Interest
expense........ (245) (8) (253) (36) (1) 1 (28)
Dividends on
Convertible
Preferred
Securities..... (26) 26 -- -- -- -- --
Interest
income......... 36 2 38 (6) (16) (1) --
------ ---- ----- ---- ---- ---- ----
Income (loss)
before income
taxes.......... 175 (5) 170 28 2 (52) (28)
Benefit
(provision) for
income taxes... (75) 3 (72) (11) (1) 21 11
------ ---- ----- ---- ---- ---- ----
Income (loss)
before
extraordinary
items.......... $ 100 $ (2) $ 98 $ 17 $ 1 $(31) $(17)
====== ==== ===== ==== ==== ==== ====
Basic loss per
OP Unit........
Ratio of
earnings to
fixed charges.. 1.7x 1.8x
====== =====
Deficiency of
earnings to
fixed changes..
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------------------------------------------------
H J K L P/N I/M O Q
REIT
NON- MERGERS EARNINGS LEASE INCOME 2000
CONTROLLED & NOTES PRIVATE & PROFITS OTHER REIT CONVER- TAX PRO PRO
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES SION ADJUSTMENT FORMA FORMA
---------- -------- ------------ --------------- ---------- -------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $-- $ -- $ -- $ -- $ -- $ 540 $-- $ 540 $ 468
Hotel revenues.. (14) 56 -- -- -- (1,123) -- -- --
Equity in
earnings of
affiliates..... (3) -- -- -- -- -- (2) (2)
Other revenues.. (5) -- -- -- -- -- -- 4 4
---------- -------- ------------ --------------- ---------- -------- ---------- ------ ------
Total revenues.. (22) 56 -- -- -- (583) -- 542 470
---------- -------- ------------ --------------- ---------- -------- ---------- ------ ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (12) 35 2 -- -- (224) -- 375 335
Other........... -- -- -- -- -- -- -- 15 15
---------- -------- ------------ --------------- ---------- -------- ---------- ------ ------
Total operating
costs and
expenses....... (12) 35 2 -- -- (224) -- 390 350
---------- -------- ------------ --------------- ---------- -------- ---------- ------ ------
OPERATING
PROFIT......... (10) 21 (2) -- -- (359) -- 152 120
Minority
interest....... 3 18 1 -- -- -- -- (14) (14)
Corporate
expenses....... -- -- -- -- -- -- -- (30) (30)
REIT Conversion
expenses....... -- -- -- -- 14 -- -- -- --
Interest
expense........ 3 (33) -- (4) -- -- -- (351) (315)
Dividends on
Convertible
Preferred
Securities..... -- -- -- -- -- -- --
Interest
income......... 2 1 -- (5) (2) 13 -- 24 30
---------- -------- ------------ --------------- ---------- -------- ---------- ------ ------
Income (loss)
before income
taxes.......... (2) 7 (1) (9) 12 (346) -- (219) (209)
Benefit
(provision) for
income taxes... 1 (3) -- 4 (5) 138 (72) 11 10
---------- -------- ------------ --------------- ---------- -------- ---------- ------ ------
Income (loss)
before
extraordinary
items.......... $ (1) $ 4 $ (1) $ (5) $ 7 $ (208) $(72) $(208) (199)
========== ======== ============ =============== ========== ======== ========== ====== ======
Basic loss per
OP Unit........ $(.83) $(.96)
====== ======
Ratio of
earnings to
fixed charges.. N/A N/A
====== ======
Deficiency of
earnings to
fixed changes.. $(201) $(191)
====== ======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-127
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
----------------------------------------------------------------
A B C D E F/G
HOST HOST
MARRIOTT MARRIOTT DEBT
CORPORATION DISTRIBUTION HOTELS BLACKSTONE 1998 1997 REPAYMENT
HISTORICAL ADJUSTMENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS & REFINANCING
----------- ------------ ---------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $-- $ -- $-- $-- $-- $-- $--
Hotel revenues.. 1,093 -- 1,093 148 112 89 (23) --
Equity in
earnings of
affiliates..... 5 -- 5 -- -- -- -- --
Other revenues.. 49 (37) 12 -- -- -- -- --
------ ---- ------ ---- ---- ---- ---- ----
Total revenues.. 1,147 (37) 1,110 148 112 89 (23) --
------ ---- ------ ---- ---- ---- ---- ----
OPERATING COSTS
AND EXPENSES
Hotels.......... 649 -- 649 101 62 42 (10) --
Other........... 49 (20) 29 -- -- -- -- --
------ ---- ------ ---- ---- ---- ---- ----
Total operating
costs and
expenses....... 698 (20) 678 101 62 42 (10) --
------ ---- ------ ---- ---- ---- ---- ----
OPERATING
PROFIT.......... 449 (17) 432 47 50 47 (13) --
Minority
interest........ (32) -- (32) -- (4) 5 (1) --
Corporate
expenses........ (47) 2 (45) -- -- -- -- --
Interest
expense......... (302) (23) (325) (48) (12) (12) 3 (48)
Dividends on
Convertible
Preferred
Securities...... (37) 37 -- -- -- -- -- --
Interest income.. 52 -- 52 (7) (14) (14) -- (3)
------ ---- ------ ---- ---- ---- ---- ----
Income (loss)
before income
taxes........... 83 (1) 82 (8) 20 26 (11) (51)
Benefit
(provision) for
income taxes.... (36) 1 (35) 3 (8) (10) 4 20
------ ---- ------ ---- ---- ---- ---- ----
Income (loss)
before
extraordinary
items........... $ 47 $-- $ 47 $ (5) $ 12 $ 16 $ (7) $(31)
====== ==== ====== ==== ==== ==== ==== ====
Basic earnings
per OP Unit.....
Ratio of earnings
to fixed
charges......... 1.3x 1.3x
====== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
---------------------------------------------------------------------
H J K L I/M O Q
EARNINGS
NON- MERGERS PRIVATE & PROFITS OTHER LEASE INCOME REIT
CONTROLLED & NOTES PARTNER- DISTRI- REIT CONVER- TAX PRO 2000
SUBSIDIARY ISSUANCE SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA PRO FORMA
---------- -------- -------- --------- ---------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $-- $-- $-- $-- $-- $ 1,135 $-- $1,135 $998
Hotel revenues.. (17) 74 -- -- -- (1,476) -- -- --
Equity in
earnings of
affiliates..... (12) -- -- -- -- -- -- (7) (7)
Other revenues.. (9) -- -- -- -- -- -- 3 3
---------- -------- -------- --------- ---------- -------- ---------- ------- ---------
Total revenues.. (38) 74 -- -- -- (341) -- 1,131 994
---------- -------- -------- --------- ---------- -------- ---------- ------- ---------
OPERATING COSTS
AND EXPENSES
Hotels.......... (9) 49 2 -- -- (288) -- 598 511
Other........... (18) -- -- -- -- -- -- 11 11
---------- -------- -------- --------- ---------- -------- ---------- ------- ---------
Total operating
costs and
expenses....... (27) 49 2 -- -- (288) -- 609 522
---------- -------- -------- --------- ---------- -------- ---------- ------- ---------
OPERATING
PROFIT.......... (11) 25 (2) -- -- (53) -- 522 472
Minority
interest........ 4 17 1 -- -- -- -- (10) (10)
Corporate
expenses........ 1 -- -- -- -- -- -- (44) (44)
Interest
expense......... 5 (42) -- (6) -- -- -- (485) (437)
Dividends on
Convertible
Preferred
Securities...... -- -- -- -- -- -- -- --
Interest income.. 4 1 -- (8) -- 18 -- 29 36
---------- -------- -------- --------- ---------- -------- ---------- ------- ---------
Income (loss)
before income
taxes........... 3 1 (1) (14) -- (35) -- 12 17
Benefit
(provision) for
income taxes.... (3) -- -- 6 -- 14 8 (1) (1)
---------- -------- -------- --------- ---------- -------- ---------- ------- ---------
Income (loss)
before
extraordinary
items........... $-- $ 1 $ (1) $ (8) $-- $ (21) $ 8 $ 11 $ 16
========== ======== ======== ========= ========== ======== ========== ======= =========
Basic earnings
per OP Unit..... $ .04 $.08
======= =========
Ratio of earnings
to fixed
charges......... 1.1x 1.1x
======= =========
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-128
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
ASSUMING 100% PARTICIPATION WITH NOTES ISSUED
A. Represents the adjustment to reduce revenues, operating expenses,
corporate expenses, interest expense, interest income and income taxes for the
spin-off of Crestline.
B. Represents the adjustment to record the historical revenues, operating
expenses, interest expense, income taxes and to reduce interest income
associated with the acquisition of the equity and debt interests for the
Blackstone Acquisition.
C. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1998 acquisition of, or purchase of
controlling interests in, 11 full-service properties.
D. Represents the adjustment to record historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1997 acquisition of, or purchase of
controlling interests in, 18 full-service properties.
E. Represents the adjustment to record historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income for the 1998 sale of the New York Marriott East Side and the
Napa Valley Marriott, including the elimination of the non-recurring gains on
the sales totalling $50 million and related taxes of $20 million in 1998.
F. Represents the adjustment to reduce the interest expense, interest income
and income taxes associated with the refinancing or payoff of mortgage debt
for three full-service properties (Marriott's Orlando World Center, the
Philadelphia Marriott and the San Francisco Marriott).
G. Represents the adjustment to record interest expense and related
amortization of deferred financing fees and reduce interest income and income
taxes as a result of the Senior Note Refinancing. The adjustment excludes the
extraordinary loss of $148 million, net of taxes, related to the Senior Note
Refinancing resulting from the write-off of deferred financing fees and the
payment of bond tender and consent fees.
H. Represents the adjustment for revenues, operating expenses, minority
interest, interest expense, corporate expenses, income taxes and interest
income to deconsolidate the Non-Controlled Subsidiaries and reflect the
Company's share of income as equity in earnings of affiliate.
I. Represents the adjustment to reduce depreciation expense of $18 million
and $26 million for First Three Quarters 1998 and fiscal year 1997 related to
certain furniture and equipment sold to the Non-Controlled Subsidiary, record
interest income of $9 million and $13 million for First Three Quarters 1998
and fiscal year 1997 earned on the 7%, $180 million in notes from the Non-
Controlled Subsidiary and reduce the lease payment to the Company from the
Lessee.
J. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, interest income and income
taxes associated with the Mergers, including three partnerships not previously
consolidated by the Company. Interest expense reflects interest on various
mortgage notes and the estimated $248 million in 6.56% Notes issued in lieu of
OP Units.
K. Represents the adjustment to record additional depreciation expense and
the decrease in minority interest expense related to the purchase of the
remaining minority interests in the Private Partnerships.
L. Represents the adjustment to reduce interest income, income taxes and
record interest expense for the estimated $225 million cash payment of the
earnings and profits distribution to shareholders of Host Marriott including a
draw on the New Credit Facility of $75 million.(/1/)
F-129
<PAGE>
M. Represents the adjustment to remove hotel revenues and management fees
and other expenses of $224 million and $288 million, respectively, for First
Three Quarters 1998 and Fiscal 1997 and record rental revenues associated with
the leasing of certain hotel properties to Crestline and other lessees and
interest income of $3 million and $5 million for First Three Quarters 1998 and
fiscal year 1997 earned on the 6%, $85 million in notes from Crestline. First
Three Quarters 1998 included a $320 million reduction to rental income to
record deferred revenue for percentage rents in accordance with EITF 98-9.
Management believes the change to the lease structure described above will not
impact hotel operating results because the hotel manager and asset management
function will remain unchanged. Rental revenues under the Leases are based on
the greater of Percentage Rent or Minimum Rent. Total Rent in the pro forma
statement of operations is calculated based on the historical gross sales of
the property and the negotiated pay rates and thresholds by property as if the
leases were entered into on the first day of fiscal year 1997. There are
generally three sales categories utilized in the rent calculation: rooms, food
and beverage and other. For rooms and food and beverage, there are three tiers
of rent with two thresholds, while the other category generally has two tiers
of rent and one threshold. The percentage rent thresholds are increased
annually on the first day of each year after the initial lease year based on a
blended increase of the Consumer Price Index ("CPI") and a wage and benefit
index. For purposes of the pro formas, 1997 is the assumed initial lease year
and the blended increase applied to the thresholds at January 3, 1998 is
assumed to be 3%. Minimum rent is expressed as a fixed dollar amount that
increases annually on the first day of each year after the initial lease year
as 50% of the CPI increase. Accordingly, the 1998 rent thresholds and minimum
rent included in the pro formas were adjusted as of January 3, 1998 for the
1997 increases in the indices. Rental revenue is recognized only for leases to
be executed with Crestline at or prior to the completion of the REIT
Conversion. The execution of the leases is dependent upon distribution of the
Crestline common stock to the Company's stockholders, which is subject to
contingencies that are outside the control of the Company, including consent
of shareholders, lenders, debt holders, partners and ground lessors of Host.
The Company believes that negotiations with third parties to complete the REIT
Conversion will not result in any material change to the leases. See page F-
120 for a table detailing gross sales, minimum rent and total rent for all
full-service properties to be leased and summarized amounts for the limited-
service properties to be subleased.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FIRST THREE QUARTERS 1998
------------------- ------------------------------
TOTAL
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL RENT
PROPERTY SALES RENT RENT SALES RENT RENT RECOGNIZED
- -------- ----- ------- ----- ----- ------- ----- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Grand Hotel Resort and Golf
Club...................... $23.4 $2.8 $4.2 $18.0 $2.0 $3.7 $2.0
Scottsdale Suites.......... 11.9 3.0 5.0 8.2 2.1 3.4 2.1
The Ritz-Carlton, Phoenix.. 23.3 4.6 7.2 17.3 3.2 5.5 3.2
Coronado Island Resort..... 22.0 2.1 2.1 16.2 1.5 3.6 1.5
Costa Mesa Suites.......... 9.7 1.9 3.3 7.2 1.3 2.3 1.3
Desert Springs Resort and
Spa....................... 103.3 21.3 30.3 80.3 15.0 22.6 15.0
Manhattan Beach............ 16.3 2.4 4.8 12.2 1.7 3.6 1.7
Marina Beach .............. 21.1 4.6 7.1 16.9 3.2 6.2 3.2
Newport Beach.............. 33.5 5.5 8.7 24.0 3.9 6.8 3.9
Newport Beach Suites....... 11.0 2.6 4.1 8.0 1.8 3.0 1.8
Ontario Airport............ 12.1 1.8 3.4 8.3 1.3 2.2 1.3
San Diego Marriott Hotel
and Marina................ 103.3 38.0 39.6 78.6 26.7 31.1 26.7
San Diego Mission Valley... 16.7 3.4 5.1 12.6 2.4 5.6 2.5
San Francisco Airport...... 43.8 8.2 13.2 32.2 5.8 9.5 5.8
San Francisco Fisherman's
Wharf..................... 17.8 4.0 6.4 12.1 2.8 4.3 2.8
San Francisco Moscone
Center.................... 120.2 20.7 37.9 90.5 14.6 28.5 14.6
San Ramon.................. 19.7 4.4 5.1 14.4 3.1 4.0 3.1
Santa Clara................ 47.3 7.8 16.5 37.2 5.5 13.5 8.8
The Ritz-Carlton, Marina
del Rey................... 32.4 5.5 10.8 23.4 3.9 7.9 3.9
The Ritz-Carlton, San
Francisco................. 50.1 9.6 14.7 34.2 6.7 10.3 6.7
Torrance................... 20.5 2.3 3.5 15.0 1.6 5.1 1.6
Denver Southeast........... 21.5 3.0 6.2 14.9 2.1 4.1 2.1
Denver Tech Center......... 26.8 5.1 8.3 20.1 3.6 6.0 3.6
Denver West................ 13.7 1.8 4.0 9.6 1.2 2.7 1.7
Marriott's Mountain Resort
at Vail................... 17.6 3.0 5.1 14.1 2.1 4.5 2.1
Hartford/Farmington........ 18.4 3.5 4.7 13.4 2.4 3.5 2.4
Hartford/Rocky Hill........ 11.6 1.5 2.7 8.5 1.1 2.0 1.1
Fort Lauderdale Marina..... 28.5 4.3 7.9 20.4 3.0 5.7 3.2
Harbor Beach Resort........ 58.1 16.5 19.3 43.2 11.6 14.0 11.6
Jacksonville............... 11.8 1.8 3.6 8.0 1.2 2.4 1.2
</TABLE>
F-130
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FIRST THREE QUARTERS 1998
------------------------- ----------------------------------
TOTAL
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL RENT
PROPERTY SALES RENT RENT SALES RENT RENT RECOGNIZED
- -------- -------- ------- -------- -------- ------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Miami Airport............. $ 29.7 $ 3.9 $ 8.4 $ 21.6 $ 2.8 $ 6.1 $ 2.9
Orlando World Center...... 128.2 23.5 39.6 98.7 16.5 30.4 18.3
Palm Beach Gardens........ 11.8 1.9 3.7 8.5 1.4 3.0 1.4
Singer Island (Holiday
Inn)..................... 6.6 1.4 2.5 5.2 1.0 2.1 1.0
Tampa Airport............. 17.1 1.6 3.5 13.1 1.1 2.7 1.1
Tampa Westshore........... 15.0 1.8 3.6 10.8 1.3 2.6 1.3
The Ritz-Carlton, Naples.. 66.4 18.1 23.3 53.1 12.7 18.0 12.7
Atlanta Marriott Marquis.. 85.4 21.3 33.3 58.6 15.0 25.6 15.0
Atlanta Midtown Suites.... 10.5 1.8 3.5 7.8 1.3 2.6 1.3
Atlanta Norcross.......... 7.6 1.0 1.7 5.6 0.7 1.2 0.7
Atlanta Northwest......... 14.9 2.7 4.3 11.3 1.9 3.3 1.9
Atlanta Perimeter......... 16.6 2.5 4.5 12.6 1.7 3.5 1.7
JW Marriott Hotel at
Lenox.................... 24.8 3.7 6.8 17.7 2.6 5.0 2.6
The Ritz-Carlton,
Atlanta.................. 30.2 5.8 8.8 21.7 4.1 6.8 4.1
The Ritz-Carlton,
Buckhead................. 49.3 13.1 16.3 35.8 9.2 11.7 9.2
Chicago/Deerfield Suites.. 10.2 1.8 3.1 7.4 1.3 2.3 1.3
Chicago/Downers Grove
Suites................... 9.0 1.8 2.9 6.7 1.3 2.2 1.3
Chicago/Downtown
Courtyard................ 16.3 3.1 4.9 12.2 2.2 3.9 2.2
Chicago O'Hare............ 40.0 5.5 11.5 28.8 3.9 8.2 3.9
South Bend................ 9.9 1.1 2.1 7.0 0.8 1.5 0.8
New Orleans .............. 66.4 17.5 21.8 47.6 12.3 15.8 12.3
Bethesda.................. 23.2 3.2 5.6 17.3 2.2 4.1 2.2
Gaithersburg/Washingtonian
Center................... 13.2 2.4 3.8 9.7 1.7 2.8 1.7
Boston/Newton............. 27.4 4.8 7.8 19.1 3.4 5.5 3.4
Detroit Romulus........... 8.8 1.1 1.8 6.6 0.8 1.4 0.8
The Ritz-Carlton,
Dearborn................. 25.7 3.6 5.5 17.7 2.5 4.0 2.5
Minneapolis/Bloomington... 20.2 3.3 6.5 13.8 2.3 4.7 3.1
Minneapolis City Center... 27.5 3.7 7.5 20.4 2.4 5.2 2.4
Minneapolis Southwest..... 14.9 2.7 4.8 10.1 1.9 4.0 1.9
Kansas City Airport....... 14.3 1.7 3.7 9.9 1.2 2.5 1.2
St. Louis Pavilion........ 27.5 6.1 6.5 18.5 4.3 4.3 4.3
Nashua.................... 7.5 0.8 1.3 5.3 0.5 0.9 0.5
Hanover................... 22.5 4.7 6.6 15.1 3.3 4.3 3.9
Newark Airport............ 39.4 6.5 11.8 29.2 4.6 8.6 4.6
Park Ridge................ 16.0 2.5 4.0 11.9 1.7 4.2 1.7
Saddle Brook.............. 10.7 1.3 2.1 7.8 0.9 1.7 0.9
Albany.................... 18.5 3.5 6.1 12.4 2.5 5.2 2.7
New York Marriott
Financial Center......... 39.6 7.7 13.2 29.1 5.4 10.1 5.4
New York Marriott
Marquis.................. 210.3 40.0 60.8 155.4 29.7 47.6 29.7
Marriott World Trade
Center................... 65.4 12.2 19.4 49.1 8.6 14.9 8.6
Charlotte Executive Park.. 14.0 2.3 3.7 9.8 1.6 2.6 1.6
Raleigh Crabtree Valley... 14.9 2.4 3.9 10.9 1.7 2.8 1.7
Oklahoma City............. 15.6 2.0 3.8 10.4 1.4 2.4 1.4
Oklahoma City Waterford... 9.1 1.5 2.7 6.1 1.0 1.7 1.0
Portland.................. 26.4 4.1 7.5 17.6 2.9 4.8 2.9
Philadelphia (Convention
Center).................. 80.7 14.2 25.0 58.2 10.0 17.8 10.0
Philadelphia Airport...... 25.0 4.1 7.6 18.6 2.9 5.6 2.9
Pittsburgh City Center.... 16.4 1.9 3.0 11.1 1.3 2.2 1.3
Memphis................... 10.6 1.5 3.2 5.7 1.0 1.8 1.0
Dallas/Fort Worth......... 28.9 5.9 9.3 21.9 4.1 7.0 4.1
Dallas Quorum............. 25.7 4.2 8.2 18.3 3.0 5.8 3.7
El Paso................... 11.6 0.9 2.3 7.8 0.6 1.4 0.6
Houston Airport .......... 21.6 2.8 6.0 16.9 2.0 4.6 2.7
JW Marriott Houston....... 27.2 5.0 8.0 20.1 3.5 5.9 3.5
Plaza San Antonio......... 13.8 2.9 4.6 9.7 2.0 3.3 2.0
San Antonio Rivercenter... 68.9 17.5 24.5 49.3 12.3 17.8 12.3
San Antonio Riverwalk..... 29.3 6.1 10.3 21.7 4.3 7.6 4.4
Salt Lake City............ 28.5 5.6 9.5 21.1 3.9 7.2 4.2
</TABLE>
F-131
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
-------------------------- -------------------------
TOTAL
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL RENT
PROPERTY SALES RENT RENT SALES RENT RENT RECOGNIZED
- -------- -------- ------- -------- -------- ------- ------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Dulles Airport.......... $ 14.6 $ 1.8 $ 4.0 $ 10.9 $ 1.2 $ 3.0 $ 1.7
Key Bridge.............. 29.4 5.6 10.2 21.2 3.9 7.4 3.9
Norfolk Waterside....... 18.1 3.3 5.4 12.8 2.4 3.8 2.4
Pentagon City Residence
Inn.................... 11.7 3.5 5.5 8.7 2.5 4.2 2.5
The Ritz-Carlton, Tysons
Corner................. 34.4 5.9 9.8 24.9 4.1 7.3 4.1
Washington Dulles
Suites................. 10.3 2.5 4.0 7.8 1.8 3.0 1.8
Westfields.............. 28.0 4.7 7.4 20.3 3.3 5.4 3.3
Williamsburg............ 12.6 1.8 2.8 9.3 1.3 2.1 1.3
Washington Metro
Center................. 25.2 4.5 7.3 19.2 3.2 5.3 3.2
Calgary................. 13.4 1.7 1.7 9.8 1.2 2.3 1.2
Toronto Airport......... 17.1 2.9 5.6 13.0 2.0 4.2 2.0
Toronto Eaton Centre.... 21.1 6.1 7.1 16.0 4.3 5.6 4.3
Toronto Delta
Meadowvale............. 16.1 2.6 4.9 10.6 1.9 3.1 1.9
Fairview Park........... 22.5 3.9 7.3 16.3 2.8 5.2 2.8
Dayton.................. 18.2 3.2 6.0 13.4 2.3 4.3 2.3
Research Triangle Park.. 9.1 1.4 2.9 6.8 1.0 2.3 1.0
Detroit Marriott
Southfield............. 8.8 1.2 2.1 6.9 0.9 1.7 0.9
Detroit Marriott
Livonia................ 10.0 1.4 2.6 7.4 1.0 1.9 1.0
Fullerton............... 6.8 1.2 1.8 5.0 0.8 1.3 0.8
Marriott O'Hare Suites.. 14.4 2.7 4.9 10.8 1.9 4.0 1.9
Albuquerque............. 16.4 3.6 3.6 11.1 2.5 2.6 2.5
Greensboro-High Point... 13.6 3.3 3.3 10.2 2.3 2.4 2.3
Houston Medical Center.. 16.5 4.0 4.0 12.2 2.8 2.9 2.8
Miami Biscayne Bay...... 26.8 6.5 6.6 20.5 4.5 5.1 4.5
Marriott Mountain
Shadows Resort......... 24.1 4.4 4.5 16.9 3.1 3.1 3.1
Seattle SeaTac Airport.. 23.1 6.7 6.7 17.5 4.7 5.1 4.7
Four Seasons,
Atlanta(4)............. 15.6 5.8 5.9 14.2 4.1 4.5 4.1
Four Seasons,
Philadelphia(4)........ 41.1 7.9 12.4 30.6 5.6 10.1 5.6
Grand Hyatt,
Atlanta(4)............. 25.3 10.0 10.0 22.6 7.0 8.2 7.0
Hyatt Regency,
Burlingame(4).......... 47.9 8.8 17.6 39.5 6.2 15.1 9.0
Hyatt Regency,
Cambridge(4)........... 32.4 6.7 11.9 26.8 4.7 10.4 6.1
Hyatt Regency,
Reston(4).............. 30.5 6.5 11.3 24.2 4.5 9.2 4.8
Swissotel, Atlanta(4)... 22.2 5.0 6.3 17.2 3.5 5.8 3.5
Swissotel, Boston(4).... 26.8 6.4 8.5 20.5 4.5 6.9 4.5
Swissotel, Chicago(4)... 38.1 10.9 15.1 28.9 7.7 12.0 7.7
The Drake (Swissotel),
New York(4)............ 38.8 11.6 13.6 34.2 8.2 13.4 8.2
The Ritz-Carlton, Amelia
Island(4).............. 45.7 10.3 13.4 37.4 7.2 11.1 7.2
The Ritz-Carlton,
Boston(4).............. 40.1 6.9 10.5 31.4 4.8 8.8 4.8
Non-Controlled
Subsidiary Rent........ -- (39.7) (39.7) -- (27.5) (27.5) (27.5)
-------- ------ -------- -------- ------ ------- ------
Total Full-service
Properties............. 3,600.8 676.2 1,055.9 2,671.0 477.0 810.8 491.2
Total Courtyard
Properties............. 212.0 50.6 59.2 159.2 35.0 36.8 36.8
Total Residence Inns.... 69.9 17.2 20.3 50.6 12.0 12.3 12.3
-------- ------ -------- -------- ------ ------- ------
Total................. $3,882.7 $744.0 $1,135.4 $2,880.8 $524.0 859.9 $540.3
======== ====== ======== ======== ====== ======
Less: Deferred rent
under EITF 98-9........ (319.6)
-------
Total rent
recognized........... $ 540.3
=======
</TABLE>
N. Represents the adjustment to eliminate interest income recorded for the
$92 million note receivable contributed to Crestline for First Three Quarters
1998.
O. Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
P. Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion. Management expects that the total
estimated nonrecurring expenses to be incurred will be approximately $50
million.
Q. The "REIT 2000 Pro Forma" reflects the adjustment to eliminate the
revenues, operating expenses, interest expense and interest income which
assumes that the REIT Conversion occurs on January 1, 1999, the Blackstone
Acquisition does not occur and Host does not become a REIT until January 1,
2000.
F-132
<PAGE>
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The actual amount of the
distribution will be based in part upon the estimated amount of Host's
accumulated earnings and profits for tax purposes. To the extent that the
distributions made in connection with the Initial E&P Distribution are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional taxable distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first full taxable year as a REIT (currently expected to be December
31, 1999) in an amount intended to be sufficient to eliminate such earnings
and profits, and the Operating Partnership will make corresponding
distributions to all holders of OP Units (including Host REIT) in an amount
sufficient to permit Host REIT to make such additional distributions.
F-133
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
FIRST THREE QUARTERS 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
--------------------------------------------------
A B C E G
HOST HOST
MARRIOTT DISTRIBUTION MARRIOT
CORPORATION ADJUST- HOTELS BLACKSTONE 1998 BOND
HISTORICAL MENTS HISTORICAL ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
----------- ------------ ---------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $ 100 $ (2) $ 98 $ 17 $ 1 $ (31) $ (17)
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 184 (17) 167 42 11 -- --
Income taxes.... 50 -- 50 -- -- -- --
Gains on sales
of hotel
properties...... (50) -- (50) -- -- 50 --
Equity
(earnings)
losses of
affiliates...... -- (1) (1) -- -- -- --
Changes in
operating
accounts......... (33) (2) (35) -- -- -- --
Other assets..... 27 4 31 -- -- -- --
------- ---- ------ ---- ---- ----- ------
Cash provided by
(used in)
operations...... 278 (18) 260 59 12 19 (17)
------- ---- ------ ---- ---- ----- ------
INVESTING ACTIVI-
TIES
Acquisitions..... (636) 29 (607) -- 607 -- --
Cash received
from sale of
assets........... 211 -- 211 -- -- (211) --
Capital
expenditures..... (168) 9 (159) (16) (5) 2 --
Purchases of
short-term
marketable
securities....... (134) -- (134) -- -- -- --
Sales of short-
term marketable
securities....... 451 -- 451 -- -- -- --
Other............ 3 (89) (86) -- -- 21 --
------- ---- ------ ---- ---- ----- ------
Cash provided by
(used in)
investing
activities...... (273) (51) (324) (16) 602 (188) --
------- ---- ------ ---- ---- ----- ------
FINANCING ACTIVI-
TIES
Issuances of
debt............. 2,004 -- 2,004 -- -- -- 1,967
Scheduled
principal
repayments....... (42) 3 (39) -- -- -- --
Debt repayments.. (1,750) 119 (1,631) -- -- 35 (1,250)
Transfers to Host
Marriott......... -- (63) (63) -- -- -- --
Other............ (189) -- (189) -- -- -- --
------- ---- ------ ---- ---- ----- ------
Cash provided by
(used in)
financing
activities...... 23 59 82 -- -- 35 717
------- ---- ------ ---- ---- ----- ------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ 28 $(10) $ 18 $ 43 $614 $(134) $ 700
======= ==== ====== ==== ==== ===== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------------------
H I J K L/M O N
NON- MERGERS EARNINGS LEASE
CONTROLLED & NOTES PRIVATE & PROFITS CONVER- OTHER REIT TAX
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(1) SION ACTIVITIES ADJUSTMENT PRO FORMA
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $(1) $ 4 $(1) $ (5) $(208) $ 7 $(72) $ (208)
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... (4) 16 2 -- (18) -- -- 216
Income taxes.... -- -- -- -- 138 -- -- 188
Gains on sales
of hotel
properties...... -- -- -- -- -- -- -- --
Equity
(earnings)
losses of
affiliates...... -- -- -- -- -- -- -- (1)
Changes in
operating
accounts......... -- -- -- -- 320 -- -- 285
Other assets..... -- -- -- -- -- -- -- 31
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
Cash provided by
(used in)
operations...... (5) 20 1 (5) 232 7 (72) 511
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
INVESTING ACTIVI-
TIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... -- -- -- -- -- -- -- --
Capital
expenditures..... 1 (9) -- -- -- -- -- (186)
Purchases of
short-term
marketable
securities....... -- -- -- -- -- -- -- (134)
Sales of short-
term marketable
securities....... -- -- -- -- -- -- -- 451
Other............ -- -- -- -- -- -- -- (65)
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
Cash provided by
(used in)
investing
activities...... 1 (9) -- -- -- -- -- 66
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
FINANCING ACTIVI-
TIES
Issuances of
debt............. -- -- -- (75) -- -- -- 3,896
Scheduled
principal
repayments....... (2) -- -- -- (15) -- -- (56)
Debt repayments.. -- -- -- -- -- -- -- (2,846)
Transfers to Host
Marriott......... -- -- -- -- -- -- -- (63)
Other............ -- -- -- -- -- -- -- (189)
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
Cash provided by
(used in)
financing
activities...... (2) -- -- (75) (15) -- -- 742
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $(6) $ 11 $ 1 $(80) $ 217 $ 7 $(72) $1,319
========== ======== ============ =============== ======= ========== ========== =========
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-134
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
FISCAL YEAR 1997
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
----------------------------------------------------------------
A B D C E F/G
HOST HOST
MARRIOTT DISTRIBUTION MARRIOTT DEBT
CORPORATION ADJUST- HOTELS BLACKSTONE 1997 1998 REPAYMENTS &
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
----------- ------------ ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
ACTIVITIES
Income before ex-
traordinary
items............ $ 47 $ -- $ 47 $ (5) $ 16 $ 12 $ (7) $ (31)
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 240 (9) 231 61 17 31 (3) --
Income taxes.... (20) -- (20) -- -- -- -- --
Other........... 70 3 73 -- -- -- (2) --
Changes in
operating
accounts......... 127 (26) 101 -- -- -- -- --
------- ----- ----- ---- ---- ---- ---- ------
Cash provided by
(used in)
operations...... 464 (32) 432 56 33 43 (12) (31)
------- ----- ----- ---- ---- ---- ---- ------
INVESTING ACTIVI-
TIES
Acquisitions..... (596) 237 (359) -- 359 -- -- --
Cash received
from sale of
assets........... 51 -- 51 -- -- -- -- --
Purchase of
short-term mar-
ketable securi-
ties............. (354) -- (354) -- -- -- -- --
Capital expendi-
tures............ (160) 2 (158) (20) (13) (13) 4 --
Other............ 13 -- 13 -- -- -- 1 --
------- ----- ----- ---- ---- ---- ---- ------
Cash provided by
(used in)
investing
activities....... (1,046) 239 (807) (20) 346 (13) 5 --
------- ----- ----- ---- ---- ---- ---- ------
FINANCING ACTIVI-
TIES
Issuances of
debt............. 857 -- 857 -- -- -- -- 1,188
Scheduled
principal
repayments....... (93) 3 (90) -- -- -- -- --
Debt prepay-
ments............ (403) -- (403) -- -- -- -- (1,147)
Transfers to Host
Marriott......... -- (226) (226) -- -- -- -- --
Other............ 28 (1) 27 -- -- -- -- --
------- ----- ----- ---- ---- ---- ---- ------
Cash provided by
(used in)
financing
activities....... 389 (224) 165 -- -- -- -- 41
------- ----- ----- ---- ---- ---- ---- ------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ (193) $ (17) $(210) $ 36 $379 $ 30 $ (7) $ (10)
======= ===== ===== ==== ==== ==== ==== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
--------------------------------------------------------------------
H I J K L/M N
EARNINGS
NON- MERGERS PRIVATE & PROFITS LEASE
CONTROLLED & NOTES PARTNER- DISTRI- OTHER REIT CONVER- TAX PRO
SUBSIDIARY ISSUANCE SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA
---------- -------- -------- --------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
ACTIVITIES
Income before ex-
traordinary
items............ $-- $ 1 $(1) $ (8) $-- $(21) $ 8 $ 11
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... (5) 23 2 -- -- (26) -- 331
Income taxes.... -- -- -- -- -- -- -- (20)
Other........... -- -- -- -- -- -- -- 71
Changes in
operating
accounts......... -- 15 -- -- -- -- -- 116
---------- -------- -------- --------- ---------- ------- ---------- --------
Cash provided by
(used in)
operations...... (5) 39 1 (8) -- (47) 8 509
---------- -------- -------- --------- ---------- ------- ---------- --------
INVESTING ACTIVI-
TIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... (35) -- -- -- -- -- -- 16
Purchase of
short-term mar-
ketable securi-
ties............. -- -- -- -- -- -- -- (354)
Capital expendi-
tures............ 2 (11) -- -- -- -- -- (209)
Other............ 33 -- -- -- -- -- -- 47
---------- -------- -------- --------- ---------- ------- ---------- --------
Cash provided by
(used in)
investing
activities....... -- (11) -- -- -- -- -- (500)
---------- -------- -------- --------- ---------- ------- ---------- --------
FINANCING ACTIVI-
TIES
Issuances of
debt............. (3) -- -- (75) -- -- -- 1,967
Scheduled
principal
repayments....... (6) (7) -- -- -- (30) -- (133)
Debt prepay-
ments............ -- -- -- -- -- -- -- (1,550)
Transfers to Host
Marriott......... -- -- -- -- -- -- -- (226)
Other............ -- -- -- -- -- -- -- 27
---------- -------- -------- --------- ---------- ------- ---------- --------
Cash provided by
(used in)
financing
activities....... (9) (7) -- (75) -- (30) -- 85
---------- -------- -------- --------- ---------- ------- ---------- --------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $(14) $ 21 $ 1 $(83) $-- $(77) $ 8 $ 94
========== ======== ======== ========= ========== ======= ========== ========
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-135
<PAGE>
NOTES TO UNAUDITED CASH FLOW STATEMENTS
100% PARTICIPATION WITH NOTES ISSUED
A) Represents the adjustment for cash flow amounts related to the
distribution of Crestline.
B) Represents the adjustment to record the depreciation expense and
estimated capital expenditures for the Blackstone Acquisition.
C) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the 1998 acquisition of, or purchase of controlling
interests in, 11 full-service properties.
D) Represents the adjustment to record depreciation expense and capital
expenditures for the 1997 acquisition of, or purchase of controlling interests
in, 18 full service properties. Cash flows from investing activities has also
been adjusted as if the period's historical acquisitions occurred immediately
prior to the period presented.
E) Represent the adjustment to record the decrease in depreciation expense,
capital expenditures and other investing activities for the sale of the New
York East Side Marriott and the Napa Valley Marriott, including the
elimination of the non-recurring gains on the sales totaling $50 million.
F) Represents the adjustment to reflect the decrease in interest expense
associated with the refinancing or payoff of mortgage debt for three full-
service properties (Marriott Orlando World Center, the Philadelphia Marriott,
and the San Francisco Marriott). Cash from financing activities has also been
adjusted as if the periods historical prepayments and issuances of debt
occurred immediately prior to the period presented.
G) Represents the adjustment to reflect the issuance of the $1.7 billion of
New Senior Notes net of the discount of $8 million, the retirement of the Old
Senior Notes of $1.55 billion and the initial draw on the New Credit Facility
of $350 million, including interest expense and commitment fees.
H) Represents the adjustment to record the removal of depreciation, capital
expenditures, the sale of certain assets and the scheduled principal
amortization of notes to reflect the deconsolidation of the Non-Controlled
Subsidiaries.
I) Represents the adjustment to record depreciation expense and capital
expenditures related to the Merger, including the scheduled principal
amortization of notes.
J) Represents the adjustment to record depreciation expense related to the
acquisition of the Private Partnerships.
K) Represents the adjustment to reflect the decrease in interest income, net
of tax, as a result of the estimated $225 million earnings and profits
distribution and the interest expense for the $75 million draw on the New
Credit Facility.
L) Represent the adjustment to revenues to reflect lease income and remove
hotel revenues and management fees.(/1/)
M) Represents the adjustment to reduce depreciation expense related to the
sale of certain furniture and equipment to the Non-Controlled Subsidiary,
including the scheduled principal amortization of notes.
N) Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
O) Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.
- --------
(1) The amount of the earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The actual amount of the
distribution will be based in part upon the estimated amount of Host's
accumulated earnings and profits for tax purposes. To the extent that the
distributions made in connection with the Initial E&P Distribution are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional taxable distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first full taxable year as a REIT (currently expected to be December
31, 1999) in an amount intended to be sufficient to eliminate such
earnings and profits, and the Operating Partnership will make
corresponding distributions to all holders of OP Units (including Host
REIT) in an amount sufficient to permit Host REIT to make such additional
distributions.
F-136
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 11, 1998
NO PARTNERSHIP PARTICIPATION
(IN MILLIONS, EXCEPT OP UNITS AMOUNTS)
<TABLE>
<CAPTION>
ACQUISITIONS
---------------------------
DISPOSITIONS AND OTHER
ACTIVITIES
---------------------------
A B
HOST DISTRI- HOST BLACK- DEBT
MARRIOTT BUTION MARRIOTT STONE REPAYMENT
CORPORATION ADJUST- HOTELS ACQUI- ACQUIS- &
HISTORICAL MENTS HISTORICAL SITION ITIONS REFINANCING
----------- ------- ---------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $5,937 $(649) $5,288 $1,450 $ $--
Notes and other
receivables, net....... 32 (3) 29 63 -- --
Due from managers....... 88 (5) 83 5 -- --
Investments in
affiliates............. 18 -- 18 -- -- --
Other assets............ 319 2 321 -- -- --
Receivable from Lessee
for working capital.... -- -- -- -- -- --
Cash, cash equivalents
and short-term
marketable
securities............. 575 (27) 548 (262) -- --
------ ----- ------ ------ ----- ----
$6,969 $(682) $6,287 $1,256 $ -- $--
====== ===== ====== ====== ===== ====
LIABILITIES AND EQUITY
Debt(I)................. $4,224 $(213) $4,011 $ 600 $ -- $--
Convertible debt
obligation to Host
Marriott Corporation... -- 567 567 -- -- --
Accounts payable and
accrued expenses....... 70 (8) 62 -- -- --
Deferred income taxes... 526 (62) 464 -- -- --
Other liabilities....... 447 (10) 437 -- --
------ ----- ------ ------ ----- ----
Total liabilities....... 5,267 274 5,541 600 -- --
Convertible Preferred
Securities............. 550 (550) -- -- -- --
Limited Partner
interests of third
parties at redemption
value (on a pro forma
basis 47.1 million OP
Units
outstanding)(J)........ -- -- -- 656 -- --
Equity
General Partner (on a
pro forma basis .2
million OP Units
outstanding)(J)
Limited Partner
interests of Host REIT
(on a pro forma basis
204.3 million OP Units
outstanding)(J)........ 1,152 (406) 746 -- -- --
------ ----- ------ ------ ----- ----
$6,969 $(682) $6,287 $1,256 $ -- $--
====== ===== ====== ====== ===== ====
Book value per OP Unit
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------
C D E J F G K
EARNINGS DEFERRED REIT
NON- PRIVATE & PROFITS CONTRI- LEASE TAX 2000
CONTROLLED PARTNER- DISTRIBU- BUTION TO CONVER- ADJUST- PRO PRO
SUBSIDIARIES MERGERS SHIPS TION(1) CRESTLINE SION MENT FORMA FORMA
------------ ------- -------- --------- --------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $(501) $-- $ 61 $ -- $ -- $ -- $ -- $6,298 $4,848
Notes and other
receivables, net....... 234 -- -- -- -- -- -- 326 263
Due from managers....... (8) -- -- -- -- (67) -- 13 13
Investments in
affiliates............. 204 -- -- -- -- -- -- 222 222
Other assets............ (15) (11) -- -- -- -- 295 295
Receivable from Lessee
for working capital.... -- -- -- -- -- 67 -- 67 62
Cash, cash equivalents
and short-term
marketable
securities............. (16) -- (11) (150) (15) -- -- 94 356
------------ ------- -------- --------- --------- ------- -------- ------ ------
$(102) $-- $ 39 $(150) $ (15) $ -- $ -- $7,315 $6,059
============ ======= ======== ========= ========= ======= ======== ====== ======
LIABILITIES AND EQUITY
Debt(I)................. $(142) $-- $-- $ 75 $ -- $ -- $ -- $4,544 $3,944
Convertible debt
obligation to Host
Marriott Corporation... -- -- -- -- -- -- -- 567 567
Accounts payable and
accrued expenses....... (2) -- -- -- -- -- -- 60 60
Deferred income taxes... (16) -- -- -- -- -- (173) 275 448
Other liabilities....... 58 -- (6) -- 7 261 -- 757 714
------------ ------- -------- --------- --------- ------- -------- ------ ------
Total liabilities....... (102) -- (6) 75 7 261 (173) 6,203 5,733
Convertible Preferred
Securities............. -- -- -- -- -- -- --
Limited Partner
interests of third
parties at redemption
value (on a pro forma
basis 47.1 million OP
Units
outstanding)(J)........ -- -- 45 -- -- -- -- 701 45
Equity
General Partner (on a
pro forma basis .2
million OP Units
outstanding)(J)
Limited Partner
interests of Host REIT
(on a pro forma basis
204.3 million OP Units
outstanding)(J)........ -- -- -- (225) (22) (261) 173 411 281
------------ ------- -------- --------- --------- ------- -------- ------ ------
$(102) $-- $ 39 $(150) $ (15) $ -- $ -- $7,315 $6,059
============ ======= ======== ========= ========= ======= ======== ====== ======
Book value per OP Unit $ 4.42 $ 1.57
====== ======
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
F-137
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
NO PARTNERSHIP PARTICIPATION
A. Represents the adjustment to record the spin-off of Crestline and:
. Reduce property and equipment by $649 million
. Reduce receivables by $3 million related to certain Crestline notes held
by the Company
. Reduce due from managers by $5 million
. Increase other assets by $2 million
. Reduce cash, cash equivalents and short-term marketable securities by
$27 million
. Reduce debt by $213 million
. Reduce accounts payable and accrued expenses by $8 million
. Reduce deferred income taxes by $62 million
. Reduce other liabilities by $10 million
. Reduce equity by $406 million
. Eliminate the $550 million Convertible Preferred Securities of Host
Marriott which remain an obligation of Host REIT
. Record the $567 million of Convertible Debt Obligation to Host Marriott
which is eliminated in consolidation on the historical financial
statements of Host Marriott Corporation
B. Represents the adjustment to record the Blackstone Acquisition of 12
full-service properties (5,520 rooms) and a mortgage note secured by a
thirteenth full-service property including the issuance of 43.7 million OP
Units as determined through negotiations between the Company and Blackstone:
. Record property and equipment of $1,450 million
. Record mortgage note receivable of $63 million
. Record increase in due from managers of $5 million
. Record the use of cash of $262 million
. Record the assumption of mortgage debt of $600 million
. Record the issuance of 43.7 million OP Units with an estimated fair
value of $656 million using an assumed Host Marriott stock price of
$15.00 (which includes the value of Crestline since Blackstone will
receive shares of Crestline in addition to OP Units)
The purchase price of the Blackstone properties and mortgage note was
determined based on the estimated fair value of the 43.7 million OP Units to
be issued. The number of units to be issued will not increase or decrease
depending on the stock price of Host Marriott at the time of closing of the
acquisition.
C. Represents the adjustment to record the investment in the Non-Controlled
Subsidiaries and to reflect the sale of certain hotel furniture and equipment
to the Non-Controlled Subsidiary:
. Record decrease in property and equipment of $501 million, including
$180 million of hotel furniture and equipment sold to the Non-Controlled
Subsidiaries
. Record receivable from Non-Controlled Subsidiaries for the furniture and
equipment loan of $180 million, and transfer of other notes totaling $54
million
. Record decrease in due from managers of $8 million
. Record investment in the Non-Controlled Subsidiaries of $204 million
. Record decrease in other assets of $15 million
. Record decrease in cash of $16 million
. Record decrease in debt of $142 million of debt transferred to the Non-
Controlled Subsidiaries.
. Record decrease in accounts payable and accrued expenses of $2 million
. Record decrease in deferred taxes of $16 million
. Record increase in other liabilities of $58 million
F-138
<PAGE>
D. Represents the adjustment to record the purchase of the remaining
minority interests in four Private Partnerships:
. Record property and equipment of $61 million
. Record decrease in other assets of $11 million
. Record use of cash of $11 million
. Record decrease in minority interest liabilities of $6 million
. Record the issuance of 3.6 million OP Units totaling approximately $45
million
E. Represents the estimated $225 million cash payment of the earnings and
profits distribution to shareholders of Host Marriott including a draw on the
New Credit Facility of $75 million.(/1/)
F. Represents the adjustment to record the transfer of working capital to
Crestline related to the leasing of the Operating Partnership's hotels by
decreasing working capital and recording a receivable from the lessee of $67
million and the adjustment to record deferred revenue of $261 million in
connection with the application of EITF 98-9 to the Company's rental income.
G. Represents the adjustment to record the effect on deferred taxes for the
change in tax status resulting from the REIT Conversion by decreasing deferred
taxes and increasing equity by $173 million.
H. The Company's pro forma aggregate debt maturities at June 19, 1998,
excluding $8 million of capital lease obligations and the $8 million debt
discount recorded in conjunction with the Senior Note Refinancing, are (in
millions):
<TABLE>
<S> <C>
1998.................................................................. $ 272
1999.................................................................. 30
2000.................................................................. 133
2001.................................................................. 76
2002.................................................................. 150
Thereafter............................................................ 4,450
------
$5,111
======
</TABLE>
I. The number of OP Units includes the following (in millions):
<TABLE>
<S> <C>
Limited Partner interests of Host REIT................................. 204.3
General Partner interests of Host REIT................................. 0.2
Limited Partner interests of Private Partnerships...................... 3.4
Limited Partner interests of Blackstone Group.......................... 43.7
-----
Total OP Units....................................................... 251.6
=====
</TABLE>
J. Represents the adjustment to record the contribution of $15 million in
cash to Crestline as a reduction in equity and to record the contribution of
an investment of $7 million in a joint venture which holds a mortgage note
from a consolidated subsidiary of Host.
K. The "REIT 2000 Pro Forma" assumes that the REIT Conversion occurs on
January 1, 1999, the Blackstone Acquisition does not occur, Host does not
become a REIT until January 1, 2000 and no Notes issued. The amounts reflect
the "Pro Forma" column less the amounts in column B--"Blackstone Acquisition"
and the reduction in other liabilities and increase in equity for the deferred
revenue of $43 million related to the application of EITF 98-9 to the
Blackstone properties.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The actual amount of the
distribution will be based in part upon the estimated amount of Host's
accumulated earnings and profits for tax purposes. To the extent that the
distributions made in connection with the Initial E&P Distribution are
not sufficient to eliminate Host's estimated accumulated earnings and
profits, Host REIT will make one or more additional taxable distributions
to its shareholders (in the form of cash or securities) prior to the last
day of its first full taxable year as a REIT (currently expected to be
December 31, 1999) in an amount intended to be sufficient to eliminate
such earnings and profits, and the Operating Partnership will make
corresponding distributions to all holders of OP Units (including Host
REIT) in an amount sufficient to permit Host REIT to make such additional
distributions.
F-139
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
NO PARTNERSHIP PARTICIPATION
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------------------------------------------
A B C E G
HOST HOST
MARRIOTT MARRIOTT 1998
CORPORATION DISTRIBUTION HOTELS BLACKSTONE ACQUISI- BOND
HISTORICAL ADJUSTMENT HISTORICAL ACQUISITION TIONS DISPOSITIONS REFINANCING
----------- ------------ ---------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $-- $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 922 -- 922 122 43 (6) --
Equity in
earnings
(losses) of
affiliates..... 1 -- 1 -- -- -- --
Other revenues.. 117 (58) 59 -- -- (50) --
----- ---- ----- ----------- ----------- ----------- -----------
Total revenues.. 1,040 (58) 982 122 43 (56) --
----- ---- ----- ----------- ----------- ----------- -----------
OPERATING COSTS
AND EXPENSES
Hotels.......... 502 -- 502 52 23 (3) --
Other........... 45 (30) 15 -- -- -- --
----- ---- ----- ----------- ----------- ----------- -----------
Total operating
costs and
expenses....... 547 (30) 517 52 23 (3) --
----- ---- ----- ----------- ----------- ----------- -----------
OPERATING
PROFIT......... 493 (28) 465 70 20 (53) --
Minority
interest....... (36) -- (36) -- (1) 1 --
Corporate
expenses....... (33) 3 (30) -- -- -- --
REIT Conversion
expenses....... (14) -- (14) -- -- -- --
Interest
expense........ (245) (8) (253) (36) (1) 1 (28)
Dividends on
Convertible
Preferred
Securities..... (26) 26 -- -- -- -- --
Interest
income......... 36 2 38 (6) (18) (1) --
----- ---- ----- ----------- ----------- ----------- -----------
Income (loss)
before income
taxes.......... 175 (5) 170 28 -- (52) (28)
Benefit
(provision) for
income taxes... (75) 3 (72) (11) -- 21 11
----- ---- ----- ----------- ----------- ----------- -----------
Income (loss)
before
extraordinary
items.......... $ 100 $ (2) $ 98 $ 17 $ -- $ (31) $ (17)
===== ==== ===== =========== =========== =========== ===========
Basic loss per
OP Unit........
Ratio of
earnings to
fixed charges.. 1.7x 1.8x
===== =====
Deficiency of
earnings to
fixed charges
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-----------------------------------------------------------------------------
H J K O/M I/L N P
REIT
NON- EARNINGS OTHER LEASE INCOME 2000
CONTROLLED PRIVATE & PROFITS REIT CONVER- TAX PRO PRO
SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES SION ADJUSTMENT FORMA FORMA
---------- ------- ------------ --------------- ---------- ------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $ -- $ -- $ -- $ 410 $ -- $ 410 $ 338
Hotel revenues.. (40) -- -- -- -- (896) -- 145 145
Equity in
earnings
(losses) of
affiliates..... (17) -- -- -- -- -- -- (16) (16)
Other revenues.. (5) -- -- -- -- -- -- 4 4
---------- ------- ------------ --------------- ---------- ------- ---------- ------ ------
Total revenues.. (62) -- -- -- -- (486) -- 543 471
---------- ------- ------------ --------------- ---------- ------- ---------- ------ ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (27) 2 -- -- (221) -- 328 288
Other........... -- -- -- -- -- -- -- 15 15
---------- ------- ------------ --------------- ---------- ------- ---------- ------ ------
Total operating
costs and
expenses....... (27) -- 2 -- -- (221) -- 343 303
---------- ------- ------------ --------------- ---------- ------- ---------- ------ ------
OPERATING
PROFIT......... (35) -- (2) -- -- (265) -- 200 168
Minority
interest....... 22 -- 1 -- -- -- -- (13) (13)
Corporate
expenses....... -- -- -- -- -- -- -- (30) (30)
REIT Conversion
expenses....... -- -- -- -- 14 -- -- -- --
Interest
expense........ 6 -- -- (4) -- -- -- (315) (279)
Dividends on
Convertible
Preferred
Securities..... -- -- -- -- -- -- -- -- --
Interest
income......... 1 -- -- (5) (2) 12 -- 19 25
---------- ------- ------------ --------------- ---------- ------- ---------- ------ ------
Income (loss)
before income
taxes.......... (6) -- (1) (9) 12 (253) -- (139) (129)
Benefit
(provision) for
income taxes... 6 -- -- 4 (5) 101 (48) 7 6
---------- ------- ------------ --------------- ---------- ------- ---------- ------ ------
Income (loss)
before
extraordinary
items.......... $ 0 $ -- $ (1) $ (5) $ 7 $(152) $ (48) $(132) $(123)
========== ======= ============ =============== ========== ======= ========== ====== ======
Basic loss per
OP Unit........ $(.52) $(.59)
====== ======
Ratio of
earnings to
fixed charges.. N/A N/A
====== ======
Deficiency of
earnings to
fixed charges $(122) $(112)
====== ======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-140
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
NO PARTNERSHIP PARTICIPATION
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
--------------------------------------------------
A B C D E
HOST HOST
MARRIOTT DISTRIBUTION MARRIOTT
CORPORATION ADJUST- HOTELS BLACKSTONE 1998 1997
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS
----------- ------------ ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 1,093 -- 1,093 148 112 89 (23)
Equity in
earnings of
affiliates..... 5 -- 5 -- -- -- --
Other revenues.. 49 (37) 12 -- -- --
------ ----- ------ ----- ----- ----- -----
Total revenues.. 1,147 (37) 1,110 148 112 89 (23)
------ ----- ------ ----- ----- ----- -----
OPERATING COSTS
AND EXPENSES
Hotels.......... 649 -- 649 101 62 42 (10)
Other........... 49 (20) 29 -- -- -- --
------ ----- ------ ----- ----- ----- -----
Total operating
costs and
expenses....... 698 (20) 678 101 62 42 (10)
------ ----- ------ ----- ----- ----- -----
OPERATING
PROFIT......... 449 (17) 432 47 50 47 (13)
Minority
interest....... (32) -- (32) -- (4) 5 (1)
Corporate
expenses....... (47) 2 (45) -- -- -- --
Interest
expense........ (302) (23) (325) (48) (12) (12) 3
Dividends on
Convertible
Preferred
Securities..... (37) 37 -- -- -- -- --
Interest
income......... 52 -- 52 (7) (14) (12) --
------ ----- ------ ----- ----- ----- -----
Income (loss) before
income taxes... 83 (1) 82 (8) 20 28 (11)
Benefit
(provision) for
income taxes... (36) 1 (35) 3 (8) (10) 4
------ ----- ------ ----- ----- ----- -----
Income (loss)
before
extraordinary
items ......... $ 47 $ -- $ 47 $ (5) $ 12 $ 18 $ (7)
====== ===== ====== ===== ===== ===== =====
Basic earnings
per OP Unit.....
Ratio of
earnings to
fixed charges... 1.3x 1.3x
====== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
----------------------------------------------------------------------------------
F/G H J K I/L N P
EARNINGS REIT
DEBT NON- PRIVATE & PROFITS LEASE INCOME 2000
REPAYMENT CONTROLLED PARTNER- DISTRI- OTHER REIT CONVER- TAX PRO PRO
& REFINANCING SUBSIDIARY MERGERS SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA FORMA
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $ -- $ -- $ -- $ -- $ 882 $ -- $ 882 $745
Hotel revenues.. -- (53) -- -- -- -- (1,173) -- 193 193
Equity in
earnings of
affiliates..... -- (21) -- -- -- -- -- -- (16) (16)
Other revenues.. -- (9) -- -- -- -- -- -- 3 3
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
Total revenues.. -- (83) -- -- -- -- (291) -- 1,062 925
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... -- (26) -- 2 -- -- (247) -- 573 486
Other........... -- (18) -- -- -- -- -- -- 11 11
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
Total operating
costs and
expenses....... -- (44) -- 2 -- -- (247) -- 584 497
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
OPERATING
PROFIT......... -- (39) -- (2) -- -- (44) -- 478 428
Minority
interest....... -- 23 -- 1 -- -- -- -- (8) (8)
Corporate
expenses....... -- 1 -- -- -- -- -- -- (44) (44)
Interest
expense........ (48) 9 -- -- (6) -- -- -- (439) (391)
Dividends on
Convertible
Preferred
Securities..... -- -- -- -- -- -- -- -- -- --
Interest
income......... (3) 1 -- -- (8) -- 17 -- 26 33
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
Income (loss) before
income taxes... (51) (5) -- (1) (14) -- (27) -- 13 18
Benefit
(provision) for
income taxes... 20 5 -- -- 6 -- 11 3 (1) (1)
------------- ---------- ------- -------- --------- ---------- -------- ---------- ------- ------
Income (loss)
before
extraordinary
items ......... $ (31) $ -- $ -- $ (1) $ (8) $ -- $ (16) $ 3 $ 12 $ 17
============= ========== ======= ======== ========= ========== ======== ========== ======= ======
Basic earnings
per OP Unit..... $ .05 $.08
======= ======
Ratio of
earnings to
fixed charges... 1.1x 1.1x
======= ======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-141
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
NO PARTNERSHIP PARTICIPATION
A. Represents the adjustment to reduce revenues, operating expenses,
corporate expenses, interest expense, interest income and income taxes for the
spin-off of Crestline.
B. Represents the adjustment to record the historical revenues, operating
expenses, interest expense, income taxes and to reduce interest income
associated with the acquisition of the equity and debt interests for the
Blackstone Acquisition.
C. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1998 acquisition of, or purchase of
controlling interests in, 11 full-service properties.
D. Represents the adjustment to record historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1997 acquisition of, or purchase of
controlling interests in, 18 full-service properties.
E. Represents the adjustment to record historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income for the 1998 sale of the New York Marriott East Side and the
Napa Valley Marriott, including the elimination of the non-recurring gains on
the sales totalling $50 million and related taxes of $20 million in 1998.
F. Represents the adjustment to reduce the interest expense, interest income
and income taxes associated with the refinancing or payoff of mortgage debt
for three full-service properties (Marriott's Orlando World Center, the
Philadelphia Marriott and the San Francisco Marriott).
G. Represents the adjustment to record interest expense and related
amortization of deferred financing fees and reduce interest income and income
taxes as a result of the Senior Note Refinancing. The adjustment excludes the
extraordinary loss of $148 million, net of taxes, related to the Senior Note
Refinancing resulting from the write-off of deferred financing fees and the
payment of bond tender and consent fees.
H. Represents the adjustment for revenues, operating expenses, minority
interest, interest expense, corporate expenses, income taxes and interest
income to deconsolidate the Non-Controlled Subsidiaries and reflect the
Company's share of income as equity in earnings of affiliate.
I. Represents the adjustment to reduce depreciation expense of $18 million
and $26 million for First Three Quarters 1998 and fiscal year 1997 related to
certain furniture and equipment sold to the Non-Controlled Subsidiary, record
interest income of $9 million and $13 million for First Three Quarters 1998
and fiscal year 1997 earned on the 7%, $180 million in notes from the Non-
Controlled Subsidiary and reduce the lease payment to the Company from the
Lessee.
J. Represents the adjustment to record additional depreciation expense and
the decrease in minority interest expense related to the purchase of the
remaining minority interests in the Private Partnerships.
K. Represents the adjustment to reduce interest income, income taxes and
record interest expense for the estimated $225 million cash payment of the
earnings and profits distribution to shareholders of Host Marriott including a
draw on the New Credit Facility of $75 million.(/1/)
L. Represents the adjustment to remove hotel revenues and management fees
and other expenses of $221 million and $247 million, respectively, for First
Three Quarters 1998 and Fiscal 1997 and record rental revenues associated with
the leasing of certain hotel properties to Crestline and other lessees and
interest income of $3 million and $5 million for First Three Quarters 1998 and
fiscal year 1997 earned on the 6%, $85 million in notes from Crestline. First
Three Quarters 1998 included a $261 million reduction to rental income to
record deferred
F-142
<PAGE>
revenue for percentage rents in accordance with EITF 98-9. Management believes
the change to the lease structure described above will not impact hotel
operating results because the hotel manager and asset management function will
remain unchanged. Rental revenues under the Leases are based on the greater of
Percentage Rent or Minimum Rent. Total Rent in the pro forma statement of
operations is calculated based on the historical gross sales of the property
and the negotiated pay rates and thresholds by property as if the leases were
entered into on the first day of fiscal year 1997. There are generally three
sales categories utilized in the rent calculation: rooms, food and beverage
and other. For rooms and food and beverage, there are three tiers of rent with
two thresholds, while the other category generally has two tiers of rent and
one threshold. The percentage rent thresholds are increased annually on the
first day of each year after the initial lease year based on a blended
increase of the Consumer Price Index ("CPI") and a wage and benefit index. For
purposes of the pro formas, 1997 is the assumed initial lease year and the
blended increase applied to the thresholds at January 3, 1998 is assumed to be
3%. Minimum rent is expressed as a fixed dollar amount that increases annually
on the first day of each year after the initial lease year as 50% of the CPI
increase. Accordingly, the 1998 rent thresholds and minimum rent included in
the pro formas were adjusted as of January 3, 1998 for the 1997 increases in
the indices. Rental revenue is recognized only for leases to be executed with
Crestline at or prior to the completion of the REIT Conversion. The execution
of the leases is dependent upon the distribution of the Crestline common stock
to the Company's stockholders, which is subject to contingencies that are
outside the control of the Company, including consent of shareholders,
lenders, debt holders, partners and ground lessors of Host. The Company
believes that negotiations with third parties to complete the REIT Conversion
will not result in any material change to the leases. See page F-120 for a
table detailing gross sales, minimum rent and total rent for all full-service
properties to be leased and summarized amounts for the limited-service
properties to be subleased.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FIRST THREE QUARTERS 1998
------------------------- ----------------------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL TOTAL RENT
PROPERTY SALES RENT RENT SALES RENT RENT RECOGNIZED
- -------- -------- ------- -------- -------- ------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Grand Hotel Resort and
Golf Club.............. $ 23.4 $ 2.8 $ 4.2 $ 18.0 $ 2.0 $ 3.7 $ 2.0
Scottsdale Suites....... 11.9 3.0 5.0 8.2 2.1 3.4 2.1
The Ritz-Carlton,
Phoenix................ 23.3 4.6 7.2 17.3 3.2 5.5 3.2
Coronado Island Resort.. 22.0 2.1 2.1 16.2 1.5 3.6 1.5
Costa Mesa Suites....... 9.7 1.9 3.3 7.2 1.3 2.3 1.3
Manhattan Beach......... 16.3 2.4 4.8 12.2 1.7 3.6 1.7
Marina Beach ........... 21.1 4.6 7.1 16.9 3.2 6.2 3.2
Newport Beach........... 33.5 5.5 8.7 24.0 3.9 6.8 3.9
Newport Beach Suites.... 11.0 2.6 4.1 8.0 1.8 3.0 1.8
Ontario Airport......... 12.1 1.8 3.4 8.3 1.3 2.2 1.3
San Diego Marriott Hotel
and Marina............. 103.3 38.0 39.6 78.6 26.7 31.1 26.7
San Diego Mission
Valley................. 16.7 3.4 5.1 12.6 2.4 5.6 2.5
San Francisco Airport... 43.8 8.2 13.2 32.2 5.8 9.5 5.8
San Francisco
Fisherman's Wharf...... 17.8 4.0 6.4 12.1 2.8 4.3 2.8
San Francisco Moscone
Center................. 120.2 20.7 37.9 90.5 14.6 28.5 14.6
The Ritz-Carlton, Marina
del Rey................ 32.4 5.5 10.8 23.4 3.9 7.9 3.9
The Ritz-Carlton, San
Francisco.............. 50.1 9.6 14.7 34.2 6.7 10.3 6.7
Torrance................ 20.5 2.3 3.5 15.0 1.6 5.1 1.6
Denver Southeast........ 21.5 3.0 6.2 14.9 2.1 4.1 2.1
Denver Tech Center...... 26.8 5.1 8.3 20.1 3.6 6.0 3.6
Denver West............. 13.7 1.8 4.0 9.6 1.2 2.7 1.7
Marriott's Mountain
Resort at Vail......... 17.6 3.0 5.1 14.1 2.1 4.5 2.1
Hartford/Farmington..... 18.4 3.5 4.7 13.4 2.4 3.5 2.4
Hartford/Rocky Hill..... 11.6 1.5 2.7 8.5 1.1 2.0 1.1
Fort Lauderdale Marina.. 28.5 4.3 7.9 20.4 3.0 5.7 3.2
Jacksonville............ 11.8 1.8 3.6 8.0 1.2 2.4 1.2
Miami Airport........... 29.7 3.9 8.4 21.6 2.8 6.1 2.9
</TABLE>
F-143
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FIRST THREE QUARTERS 1998
------------------------- ----------------------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL TOTAL RENT
PROPERTY SALES RENT RENT SALES RENT RENT RECOGNIZED
- -------- -------- ------- -------- -------- ------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Palm Beach Gardens........ $ 11.8 $ 1.9 $ 3.7 $ 8.5 $ 1.4 $ 3.0 $ 1.4
Singer Island (Holiday
Inn)..................... 6.6 1.4 2.5 5.2 1.0 2.1 1.0
Tampa Airport............. 17.1 1.6 3.5 13.1 1.1 2.7 1.1
Tampa Westshore........... 15.0 1.8 3.6 10.8 1.3 2.6 1.3
The Ritz-Carlton, Naples.. 66.4 18.1 23.3 53.1 12.7 18.0 12.7
Atlanta Midtown Suites.... 10.5 1.8 3.5 7.8 1.3 2.6 1.3
Atlanta Norcross.......... 7.6 1.0 1.7 5.6 0.7 1.2 0.7
Atlanta Northwest......... 14.9 2.7 4.3 11.3 1.9 3.3 1.9
Atlanta Perimeter......... 16.6 2.5 4.5 12.6 1.7 3.5 1.7
JW Marriott Hotel at
Lenox.................... 24.8 3.7 6.8 17.7 2.6 5.0 2.6
The Ritz-Carlton,
Atlanta.................. 30.2 5.8 8.8 21.7 4.1 6.8 4.1
The Ritz-Carlton,
Buckhead................. 49.3 13.1 16.3 35.8 9.2 11.7 9.2
Chicago/Deerfield Suites.. 10.2 1.8 3.1 7.4 1.3 2.3 1.3
Chicago/Downers Grove
Suites................... 9.0 1.8 2.9 6.7 1.3 2.2 1.3
Chicago/Downtown
Courtyard................ 16.3 3.1 4.9 12.2 2.2 3.9 2.2
Chicago O'Hare............ 40.0 5.5 11.5 28.8 3.9 8.2 3.9
South Bend................ 9.9 1.1 2.1 7.0 0.8 1.5 0.8
Bethesda.................. 23.2 3.2 5.6 17.3 2.2 4.1 2.2
Gaithersburg/Washingtonian
Center................... 13.2 2.4 3.8 9.7 1.7 2.8 1.7
Boston/Newton............. 27.4 4.8 7.8 19.1 3.4 5.5 3.4
Detroit Romulus........... 8.8 1.1 1.8 6.6 0.8 1.4 0.8
The Ritz-Carlton,
Dearborn................. 25.7 3.6 5.5 17.7 2.5 4.0 2.5
Minneapolis/Bloomington... 20.2 3.3 6.5 13.8 2.3 4.7 3.1
Minneapolis City Center... 27.5 3.7 7.5 20.4 2.4 5.2 2.4
Minneapolis Southwest..... 14.9 2.7 4.8 10.1 1.9 4.0 1.9
Kansas City Airport....... 14.3 1.7 3.7 9.9 1.2 2.5 1.2
St. Louis Pavilion........ 27.5 6.1 6.5 18.5 4.3 4.3 4.3
Nashua.................... 7.5 0.8 1.3 5.3 0.5 0.9 0.5
Newark Airport............ 39.4 6.5 11.8 29.2 4.6 8.6 4.6
Park Ridge................ 16.0 2.5 4.0 11.9 1.7 4.2 1.7
Saddle Brook.............. 10.7 1.3 2.1 7.8 0.9 1.7 0.9
Albany.................... 18.5 3.5 6.1 12.4 2.5 5.2 2.7
New York Marriott
Financial Center......... 39.6 7.7 13.2 29.1 5.4 10.1 5.4
New York Marriott
Marquis.................. 210.3 40.0 60.8 155.4 29.7 47.6 29.7
Marriott World Trade
Center................... 65.4 12.2 19.4 49.1 8.6 14.9 8.6
Charlotte Executive Park.. 14.0 2.3 3.7 9.8 1.6 2.6 1.6
Raleigh Crabtree Valley... 14.9 2.4 3.9 10.9 1.7 2.8 1.7
Oklahoma City............. 15.6 2.0 3.8 10.4 1.4 2.4 1.4
Oklahoma City Waterford... 9.1 1.5 2.7 6.1 1.0 1.7 1.0
Portland.................. 26.4 4.1 7.5 17.6 2.9 4.8 2.9
Philadelphia (Convention
Center).................. 80.7 14.2 25.0 58.2 10.0 17.8 10.0
Philadelphia Airport...... 25.0 4.1 7.6 18.6 2.9 5.6 2.9
Pittsburgh City Center.... 16.4 1.9 3.0 11.1 1.3 2.2 1.3
Memphis................... 10.6 1.5 3.2 5.7 1.0 1.8 1.0
Dallas/Fort Worth......... 28.9 5.9 9.3 21.9 4.1 7.0 4.1
Dallas Quorum............. 25.7 4.2 8.2 18.3 3.0 5.8 3.7
El Paso................... 11.6 0.9 2.3 7.8 0.6 1.4 0.6
Houston Airport .......... 21.6 2.8 6.0 16.9 2.0 4.6 2.7
JW Marriott Houston....... 27.2 5.0 8.0 20.1 3.5 5.9 3.5
Plaza San Antonio......... 13.8 2.9 4.6 9.7 2.0 3.3 2.0
San Antonio Riverwalk..... 29.3 6.1 10.3 21.7 4.3 7.6 4.4
Salt Lake City............ 28.5 5.6 9.5 21.1 3.9 7.2 4.2
Dulles Airport............ 14.6 1.8 4.0 10.9 1.2 3.0 1.7
Key Bridge................ 29.4 5.6 10.2 21.2 3.9 7.4 3.9
</TABLE>
F-144
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FIRST THREE QUARTERS 1998
-------------------------- ------------------------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL TOTAL RENT
PROPERTY SALES RENT RENT SALES RENT RENT RECOGNIZED
- -------- -------- ------- -------- -------- ------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Norfolk Waterside....... $ 18.1 $ 3.3 $ 5.4 $ 12.8 $ 2.4 $ 3.8 $ 2.4
Pentagon City Residence
Inn.................... 11.7 3.5 5.5 8.7 2.5 4.2 2.5
The Ritz-Carlton, Tysons
Corner................. 34.4 5.9 9.8 24.9 4.1 7.3 4.1
Washington Dulles
Suites................. 10.3 2.5 4.0 7.8 1.8 3.0 1.8
Westfields.............. 28.0 4.7 7.4 20.3 3.3 5.4 3.3
Williamsburg............ 12.6 1.8 2.8 9.3 1.3 2.1 1.3
Washington Metro
Center................. 25.2 4.5 7.3 19.2 3.2 5.3 3.2
Calgary................. 13.4 1.7 1.7 9.8 1.2 2.3 1.2
Toronto Airport......... 17.1 2.9 5.6 13.0 2.0 4.2 2.0
Toronto Eaton Centre.... 21.1 6.1 7.1 16.0 4.3 5.6 4.3
Toronto Delta
Meadowvale............. 16.1 2.6 4.9 10.6 1.9 3.1 1.9
Four Seasons,
Atlanta(4)............. 15.6 5.8 5.9 14.2 4.1 4.5 4.1
Four Seasons,
Philadelphia(4)........ 41.1 7.9 12.4 30.6 5.6 10.1 5.6
Grand Hyatt,
Atlanta(4)............. 25.3 10.0 10.0 22.6 7.0 8.2 7.0
Hyatt Regency,
Burlingame(4).......... 47.9 8.8 17.6 39.5 6.2 15.1 9.0
Hyatt Regency,
Cambridge(4)........... 32.4 6.7 11.9 26.8 4.7 10.4 6.1
Hyatt Regency,
Reston(4).............. 30.5 6.5 11.3 24.2 4.5 9.2 4.8
Swissotel, Atlanta(4)... 22.2 5.0 6.3 17.2 3.5 5.8 3.5
Swissotel, Boston(4).... 26.8 6.4 8.5 20.5 4.5 6.9 4.5
Swissotel, Chicago(4)... 38.1 10.9 15.1 28.9 7.7 12.0 7.7
The Drake (Swissotel),
New York(4)............ 38.8 11.6 13.6 34.2 8.2 13.4 8.2
The Ritz-Carlton, Amelia
Island(4).............. 45.7 10.3 13.4 37.4 7.2 11.1 7.2
The Ritz-Carlton,
Boston(4).............. 40.1 6.9 10.5 31.4 4.8 8.8 4.8
Non-Controlled
Subsidiary Rent........ -- (39.7) (39.7) -- (27.5) (27.5) (27.5)
-------- ------ -------- -------- ------ ------ ------
Total Full-service
Properties............. 2,790.7 498.2 802.6 2,071.7 351.9 620.9 360.4
Total Courtyard
Properties............. 212.0 50.6 59.2 159.2 35.0 36.8 36.8
Total Residence Inns.... 69.9 17.2 20.3 50.6 12.0 12.3 12.3
-------- ------ -------- -------- ------ ------ ------
Total................. $3,072.6 $566.0 $882.1 $2,281.6 $398.9 670.0 $409.5
======== ====== ======== ======== ====== ======
Less: Deferred rent
under EITF 98-9........ 260.5
------
Total rent
recognized........... $409.5
======
</TABLE>
M. Represents the adjustment to eliminate interest income recorded for the
$92 million note receivable contributed to Crestline for First Three Quarters
1998.
N. Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
O. Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion. Management expects that the total
estimated nonrecurring expenses to be incurred will be approximately $50
million.
P. The "REIT 2000 Pro Forma" reflects the adjustment to eliminate the
revenues, operating expenses, interest expense and interest income which
assumes that the REIT Conversion occurs on January 1, 1999, the Blackstone
Acquisition does not occur, Host does not become a REIT until January 1, 2000
and no Notes issued.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The actual amount of the
distribution will be based in part upon the estimated amount of Host's
accumulated earnings and profits for tax purposes. To the extent that the
distributions made in connection with the Initial E&P Distribution are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional taxable distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first full taxable year as a REIT (currently expected to be December
31, 1999) in an amount intended to be sufficient to eliminate such
earnings and profits, and the Operating Partnership will make
corresponding distributions to all holders of OP Units (including Host
REIT) in an amount sufficient to permit Host REIT to make such additional
distributions.
F-145
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
FIRST THREE QUARTERS 1998
NO PARTNERSHIP PARTICIPATION
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
--------------------------------------------------
A B C E G
HOST HOST
MARRIOTT DISTRIBUTION MARRIOT
CORPORATION ADJUST- HOTELS BLACKSTONE 1998 BOND
HISTORICAL MENTS HISTORICAL ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
----------- ------------ ---------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $ 100 $ (2) $ 98 $ 17 $-- $ (31) $ (17)
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 184 (17) 167 42 11 -- --
Income taxes.... 50 -- 50 -- -- -- --
Gains on sales
of hotel
properties...... (50) -- (50) -- -- 50 --
Equity
(earnings)
losses of
affiliates...... -- (1) (1) -- -- -- --
Changes in
operating
accounts......... (33) (2) (35) -- -- -- --
Other assets..... 27 4 31 -- -- -- --
------- ---- ------ ---- ---- ----- -------
Cash provided by
(used in)
operations...... 278 (18) 260 59 11 19 (17)
------- ---- ------ ---- ---- ----- -------
INVESTING ACTIVI-
TIES
Acquisitions..... (636) 29 (607) -- 607 -- --
Cash received
from sale of
assets........... 211 -- 211 -- -- (211) --
Capital
expenditures..... (168) 9 (159) (16) (5) 2 --
Purchases of
short-term
marketable
securities....... (134) -- (134) -- -- -- --
Sales of short-
term marketable
securities....... 451 -- 451 -- -- -- --
Other............ 3 (89) (86) -- -- 21 --
------- ---- ------ ---- ---- ----- -------
Cash provided by
(used in)
investing
activities...... (273) (51) (324) (16) 602 (188) --
------- ---- ------ ---- ---- ----- -------
FINANCING ACTIVI-
TIES
Issuances of
debt............. 2,004 -- 2,004 -- -- -- 1,967
Scheduled
principal
repayments....... (42) 3 (39) -- -- -- --
Debt repayments.. (1,750) 119 (1,631) -- -- 35 (1,250)
Transfers to Host
Marriott......... -- (63) (63) -- -- -- --
Other............ (189) -- (189) -- -- -- --
------- ---- ------ ---- ---- ----- -------
Cash provided by
(used in)
financing
activities...... 23 59 82 -- -- 35 717
------- ---- ------ ---- ---- ----- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ 28 $(10) $ 18 $ 43 $613 $(134) $ 700
======= ==== ====== ==== ==== ===== =======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------------------
H I J K/L N M
NON- MERGERS EARNINGS LEASE
CONTROLLED & NOTES PRIVATE & PROFITS CONVER- OTHER REIT TAX
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(1) SION ACTIVITIES ADJUSTMENT PRO FORMA
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $-- $-- $ (1) $ (5) $(169) $ 7 $(58) $ (159)
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... (4) -- 1 -- (18) -- -- 199
Income taxes.... -- -- -- -- 112 -- -- 162
Gains on sales
of hotel
properties...... -- -- -- -- -- -- -- --
Equity
(earnings)
losses of
affiliates...... -- -- -- -- -- -- -- (1)
Changes in
operating
accounts......... -- -- -- -- 320 -- -- 285
Other assets..... -- -- -- -- -- -- -- 31
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
Cash provided by
(used in)
operations...... (4) -- -- (5) 245 7 (58) 517
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
INVESTING ACTIVI-
TIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... -- -- -- -- -- -- -- --
Capital
expenditures..... 1 -- -- -- -- -- -- (177)
Purchases of
short-term
marketable
securities....... -- -- -- -- -- -- -- (134)
Sales of short-
term marketable
securities....... -- -- -- -- -- -- -- 451
Other............ -- -- -- -- -- -- -- (65)
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
Cash provided by
(used in)
investing
activities...... 1 -- -- -- -- -- -- 75
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
FINANCING ACTIVI-
TIES
Issuances of
debt............. -- -- -- (75) -- -- -- 3,896
Scheduled
principal
repayments....... (2) -- -- -- (15) -- -- (56)
Debt repayments.. -- -- -- -- -- -- -- (2,846)
Transfers to Host
Marriott......... -- -- -- -- -- -- -- (63)
Other............ -- -- -- -- -- -- -- (189)
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
Cash provided by
(used in)
financing
activities...... (2) -- -- (75) (15) -- -- 742
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ (5) $-- $-- $(80) $ 230 $ 7 $(58) $1,334
========== ======== ============ =============== ======= ========== ========== =========
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-146
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
FISCAL YEAR 1997
NO PARTNERSHIP PARTICIPATION
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
----------------------------------------------------------------
A B D C E F/G
HOST HOST
MARRIOTT DISTRIBUTION MARRIOTT DEBT
CORPORATION ADJUST- HOTELS BLACKSTONE 1997 1998 REPAYMENTS &
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
----------- ------------ ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
ACTIVITIES
Income before ex-
traordinary
items............ $ 47 $ -- $ 47 $ (5) $ 16 $ 12 $ (7) $ (31)
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 240 (9) 231 61 17 31 (3) --
Income taxes.... (20) -- (20) -- -- -- -- --
Other........... 70 3 73 -- -- -- (2) --
Changes in oper-
ating accounts... 127 (26) 101 -- -- -- -- --
------ ----- ----- ---- ---- ---- ---- ------
Cash provided by
(used in)
operations...... 464 (32) 432 56 33 43 (12) (31)
------ ----- ----- ---- ---- ---- ---- ------
INVESTING ACTIVI-
TIES
Acquisitions..... (596) 237 (359) -- 359 -- -- --
Cash received
from sale of
assets........... 51 -- 51 -- -- -- -- --
Purchase of
short-term mar-
ketable securi-
ties............. (354) -- (354) -- -- -- -- --
Capital expendi-
tures............ (160) 2 (158) (20) (13) (13) 4 --
Other............ 13 -- 13 -- -- -- 1 --
------ ----- ----- ---- ---- ---- ---- ------
Cash provided by
(used in)
investing
activities....... (1,046) 239 (807) (20) 346 (13) 5 --
------ ----- ----- ---- ---- ---- ---- ------
FINANCING ACTIVI-
TIES
Issuances of
debt............. 857 -- 857 -- -- -- -- 1,188
Scheduled princi-
pal repayments... (93) 3 (90) -- -- -- -- --
Debt prepay-
ments............ (403) -- (403) -- -- -- -- (1,147)
Transfers to Host
Marriott......... -- (226) (226) -- -- -- -- --
Other............ 28 (1) 27 -- -- -- -- --
------ ----- ----- ---- ---- ---- ---- ------
Cash provided by
(used in)
financing
activities....... 389 (224) 165 -- -- -- -- 41
------ ----- ----- ---- ---- ---- ---- ------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ (193) $ (17) $(210) $ 36 $379 $ 30 $ (7) $ 10
====== ===== ===== ==== ==== ==== ==== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
--------------------------------------------------------------------
H I J K/L M
EARNINGS
NON- MERGERS PRIVATE & PROFITS LEASE
CONTROLLED & NOTES PARTNER- DISTRI- OTHER REIT CONVER- TAX PRO
SUBSIDIARY ISSUANCE SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA
---------- -------- -------- --------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
ACTIVITIES
Income before ex-
traordinary
items............ $-- $-- $(1) $ (8) $-- $(16) $ 3 $ 10
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... (5) -- 2 -- -- (26) -- 308
Income taxes.... -- -- -- -- -- 11 -- (9)
Other........... -- -- -- -- -- -- -- 71
Changes in oper-
ating accounts... -- -- -- -- -- -- -- 101
---------- -------- -------- --------- ---------- ------- ---------- -------
Cash provided by
(used in)
operations...... (5) -- 1 (8) -- (31) 3 481
---------- -------- -------- --------- ---------- ------- ---------- -------
INVESTING ACTIVI-
TIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... (35) -- -- -- -- -- -- 16
Purchase of
short-term mar-
ketable securi-
ties............. -- -- -- -- -- -- -- (354)
Capital expendi-
tures............ 2 -- -- -- -- -- -- (198)
Other............ 33 -- -- -- -- -- -- 47
---------- -------- -------- --------- ---------- ------- ---------- -------
Cash provided by
(used in)
investing
activities....... -- -- -- -- -- -- -- (489)
---------- -------- -------- --------- ---------- ------- ---------- -------
FINANCING ACTIVI-
TIES
Issuances of
debt............. (3) -- -- (75) -- -- -- 1,967
Scheduled princi-
pal repayments... (6) -- -- -- -- (30) -- (126)
Debt prepay-
ments............ -- -- -- -- -- -- -- (1,550)
Transfers to Host
Marriott......... -- -- -- -- -- -- -- (226)
Other............ -- -- -- -- -- -- -- 27
---------- -------- -------- --------- ---------- ------- ---------- -------
Cash provided by
(used in)
financing
activities....... (9) -- -- (75) -- (30) -- 92
---------- -------- -------- --------- ---------- ------- ---------- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $(14) $-- $ 1 $(83) $-- $(61) $ 3 $ 84
========== ======== ======== ========= ========== ======= ========== =======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-147
<PAGE>
NOTES TO UNAUDITED CASH FLOW STATEMENTS
NO PARTNERSHIP PARTICIPATION
A) Represents the adjustment for cash flow amounts related to the
distribution of Crestline.
B) Represents the adjustment to record the depreciation expense and
estimated capital expenditures for the Blackstone Acquisition.
C) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the 1998 acquisition of, or purchase of controlling
interests in, 11 full-service properties.
D) Represents the adjustment to record depreciation expense and capital
expenditures for the 1997 acquisition of, or purchase of controlling interests
in, 18 full service properties. Cash flows from investing activities has also
been adjusted as if the period's historical acquisitions occurred immediately
prior to the period presented.
E) Represent the adjustment to record the decrease in depreciation expense,
capital expenditures and other investing activities for the sale of the New
York East Side Marriott and the Napa Valley Marriott, including the
elimination of the non-recurring gains on the sales totaling $50 million.
F) Represents the adjustment to reflect the decrease in interest expense
associated with the refinancing or payoff of mortgage debt for three full-
service properties (Marriott Orlando World Center, the Philadelphia Marriott,
and the San Francisco Marriott). Cash from financing activities has also been
adjusted as if the periods historical prepayments and issuances of debt
occurred immediately prior to the period presented.
G) Represents the adjustment to reflect the issuance of the $1.7 billion of
New Senior Notes net of the discount of $8 million, the retirement of the Old
Senior Notes of $1.55 billion and the initial draw on the New Credit Facility
of $350 million, including interest expense and commitment fees.
H) Represents the adjustment to record the removal of depreciation, capital
expenditures, the sale of certain assets and the scheduled principal
amortization of notes to reflect the deconsolidation of the Non-Controlled
Subsidiaries.
I) Represents the adjustment to record depreciation expense related to the
acquisition of the Private Partnerships.
J) Represents the adjustment to reflect the decrease in interest income, net
of tax, as a result of the estimated $225 million earnings and profits
distribution and the interest expense for the $75 million draw on the New
Credit Facility.
K) Represent the adjustment to revenues to reflect lease income and remove
hotel revenues and management fees.(/1/)
L) Represents the adjustment to reduce depreciation expense related to the
sale of certain furniture and equipment to the Non-Controlled Subsidiary,
including the scheduled principal amortization of notes.
M) Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
N) Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.
- --------
(1) The amount of the earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The actual amount of the
distribution will be based in part upon the estimated amount of Host's
accumulated earnings and profits for tax purposes. To the extent that the
distributions made in connection with the Initial E&P Distribution are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional taxable distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first full taxable year as a REIT (currently expected to be December
31, 1999) in an amount intended to be sufficient to eliminate such
earnings and profits, and the Operating Partnership will make
corresponding distributions to all holders of OP Units (including Host
REIT) in an amount sufficient to permit Host REIT to make such additional
distributions.
F-148
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF HOST REIT
Given the structure of Host Marriott's Consent Solicitation, the Mergers and
the REIT Conversion may take a variety of different forms. The variations are
dependent in part on the number and identity of the Partnerships that elect to
merge and whether limited partners elect to tender their Partnership Interests
for OP Units, REIT shares, or Notes in connection with the REIT Conversion.
In light of the number of possible variations, Host REIT and the General
Partners are not able to describe all possible combinations of Hotel
Partnerships that could compose Host REIT. However, to assist Limited Partners
and current Host shareholders in analyzing the Mergers and the REIT
Conversion, Host REIT and the General Partners have prepared unaudited pro
forma financial statements of the Operating Partnership to show the impact of
the Mergers and the REIT Conversion under various scenarios (see pro forma
financial information of the company--F-108).
Additionally, Host REIT and the General Partners have prepared pro forma
financial statements of Host REIT in order to present the differences between
the Operating Partnership and Host REIT. See pro forma financial information
of the company--F-108 for the adjustments to Host's historical financial
statements necessary to arrive at Operating Partnership--Pro Forma in the
accompanying pro forma financial statements of Host REIT.
The unaudited pro forma balance sheet and statements of operations of Host
REIT reflect the following adjustments to the pro forma financial statements
of the Operating Partnership.
. The elimination in consolidation of the convertible debt obligation to
Host Marriott of the Operating Partnership and the presentation of
Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust Holding Company Substantially All of
Whose Assets are the Convertible Subordinated Debentures Due 2026
("Convertible Preferred Securities") on the balance sheet of Host REIT.
Interest expense paid by the Operating Partnership related to the
convertible debt obligation to Host Marriott (on a pro forma basis) is
eliminated and dividend expense for the Convertible Preferred Securities
is reflected on the pro forma statement of operations of Host REIT.
. The presentation of the Limited Partner interests of third parties in
the Operating Partnership as minority interest in Host REIT and the
reflection of Operating Partnership income allocable to the third party
Limited Partners as minority interest expense of Host REIT.
In addition, the Host REIT pro forma financial information has been adjusted
to the "REIT 2000" scenario. If the REIT Conversion does not occur in time for
Host REIT to elect REIT status effective January 1, 1999, Host REIT would be
subject to federal income taxes and the Blackstone Acquisition may not occur.
The adjustments between Host REIT Pro Forma and REIT 2000 Pro Forma reflect
adjustments to:
. Record the tax provision (benefit) and related deferred tax amounts
eliminated in the Company Pro Forma.
. Remove amounts related to the Blackstone Acquisition.
The unaudited pro forma financial statements are based upon available
information and upon certain assumptions as set forth in the notes to the
unaudited pro forma financial statements, that the Company believes are
reasonable under the circumstances and should be read in conjunction with the
unaudited pro forma financial statements of the Operating Partnership and the
consolidated financial statements and notes thereto for Host.
The execution of the leases is dependent upon the successful consummation of
the REIT Conversion which is subject to contingencies that are outside the
control of the Company, including consent of shareholders, lenders, debt
holders, partners and ground lessors of Host. The Company believes that
negotiations with third parties to complete the REIT Conversion will not
result in any material change to the leases.
F-149
<PAGE>
HOST REIT
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 11, 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OPERATING ADDITIONAL
PARTNERSHIP PRO FORMA HOST REIT PRO FORMA REIT 2000
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $7,069 $-- $7,069 $(1,450)(E) $5,619
Notes and other receiv-
ables, net............. 303 -- 303 (63)(E) 240
Due from managers....... 14 -- 14 14
Investments in affili-
ates................... 27 -- 27 -- 27
Other assets............ 338 -- 338 -- 338
Receivable from Lessee
for working capital.... 85 -- 85 (5)(E) 80
Cash, cash equivalents
and short-term market-
able securities........ 109 -- 109 262 (E) 371
------ ---- ------ ------- ------
Total assets.......... $7,945 $-- $7,945 $(1,256) $6,689
====== ==== ====== ======= ======
LIABILITIES AND EQUITY
Debt.................... $4,970 $-- $4,970 $ (600)(E) $4,370
Convertible debt obliga-
tion to Host Marriott
Corporation............ 567 (567)(A) -- -- --
Accounts payable and ac-
crued expenses......... 70 -- 70 -- 70
Deferred income taxes... 275 -- 275 189 (D) 464
Other liabilities....... 700 -- 700 (43)(E) 657
------ ---- ------ ------- ------
Total liabilities..... 6,582 (567) 6,015 (454) 5,561
------ ---- ------ ------- ------
Minority interest....... -- 348 (B) 348 (217)(E) 131
Convertible Preferred
Securities............. -- 550 (A) 550 -- 550
Limited Partner
interests of third
parties at redemption
value (on a pro forma
basis 70.1 million OP
units outstanding)..... 989 (989)(C) -- -- --
Equity
General Partner (on a
pro forma basis 0.2
million OP Units
outstanding)......... -- -- -- -- --
Limited Partner
interests of Host
REIT (on a pro forma
basis 204.3 million
OP Units
outstanding)......... 374 (374)(C) -- -- --
Shareholders' Equity
(on a pro forma basis
800 million shares
authorized; 204.5
million issued and
outstanding)......... -- 17 (A) 1,032 (396)(E) 447
(348)(B) (189)(D)
989 (C)
374 (C)
------ ---- ------ ------- ------
$7,945 $-- $7,945 $(1,256) $6,689
====== ==== ====== ======= ======
</TABLE>
F-150
<PAGE>
HOST REIT
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OPERATING ADDITIONAL
PARTNERSHIP PRO FORMA HOST REIT PRO FORMA REIT 2000
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE
Rental revenues....... $ 540 $-- $ 540 $(72)(F) $ 468
Other revenues........ 2 -- 2 -- 2
----- ---- ----- ---- -----
Total revenues...... 542 -- 542 (72) 470
----- ---- ----- ---- -----
OPERATING COSTS AND EX-
PENSE
Hotels................ 376 -- 376 (40)(F) 336
Other................. 15 -- 15 -- 15
----- ---- ----- ---- -----
Total operating
costs and ex-
penses............. 391 -- 391 (40) 351
----- ---- ----- ---- -----
OPERATING PROFIT........ 151 -- 151 (32) 119
Minority interest....... (14) 51 37 (41)(F) (4)
Corporate expenses...... (30) -- (30) -- (30)
Interest expense........ (339) 26 (313) 36 (F) (277)
Dividends on Convertible
Preferred Securities... -- (26) (26) -- (26)
Interest income......... 24 -- 24 6 (F) 30
----- ---- ----- ---- -----
Income (loss) before in-
come taxes............. (208) 51 (157) (31) (188)
Benefit (provision) for
income taxes........... 10 (2) 8 69 (D) 77
----- ---- ----- ---- -----
Income (loss) before ex-
traordinary items...... $(198) $ 49 $(149) $ 38 $(111)
===== ==== ===== ==== =====
Diluted loss per share.. $(.73) $(.53)
===== =====
</TABLE>
F-151
<PAGE>
HOST REIT
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OPERATING ADDITIONAL
PARTNERSHIP PRO FORMA HOST REIT PRO FORMA REIT 2000
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE
Rental revenues....... $1,135 $-- $1,135 $(137)(F) $ 998
Equity in earnings
(losses) of affili-
ates................. (7) -- (7) -- (7)
Other revenues........ 3 -- 3 -- 3
------ ---- ------ ----- -----
Total revenues...... 1,131 -- 1,131 (137) 994
------ ---- ------ ----- -----
OPERATING COSTS AND EX-
PENSE
Hotels................ 600 -- 600 (87)(F) 513
Other................. 11 -- 11 -- 11
------ ---- ------ ----- -----
Total operating
costs and ex-
penses............. 611 -- 611 (87) 524
------ ---- ------ ----- -----
OPERATING PROFIT........ 520 -- 520 (50) 470
Minority interest....... (10) (7)(B) (17) 5 (F) (12)
Corporate expenses...... (44) -- (44) -- (44)
Interest expense........ (468) 38 (A) (430) 48 (F) (382)
Dividends on Convertible
Preferred Securities... -- (37)(A) (37) -- (37)
Interest income......... 29 -- 29 7 (F) 36
------ ---- ------ ----- -----
Income (loss) before in-
come taxes............. 27 (6) 21 10 31
Benefit (provision) for
income taxes........... (1) -- (D) (1) (12)(D) (13)
------ ---- ------ ----- -----
Income (loss) before ex-
traordinary items...... $ 26 $ (6) $ 20 $ (2) $ 18
====== ==== ====== ===== =====
Diluted earnings per
share.................. $ .07 $ .08
====== =====
</TABLE>
F-152
<PAGE>
HOST REIT
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
100% PARTICIPATION WITH NO NOTES ISSUED
A. Represents the following adjustments:
. Adjustment to remove $567 million of convertible debt obligation to Host
Marriott which eliminates in consolidation.
. Record the $550 million of convertible preferred securities held by Host
REIT.
. Record $17 million adjustment to equity for the elimination in
consolidation of the convertible debt obligation to Host Marriott.
. Remove interest of $26 million and $38 million, respectively, on $567
million of convertible debt obligation to Host Marriott.
. Record dividends of $26 million and $37 million, respectively, on the
$550 million of convertible preferred securities.
B. Represents the adjustment to present the Limited Partner interests of third
parties in the Operating Partnership as minority interest in Host REIT and
the reflection of Operating Partnership income allocable to the third party
Limited Partners as minority interest expense of Host REIT as follows:
. Record $348 million minority interest liability representing Limited
Partner interests of third parties (70.1 million OP Units out of total
OP Units of 274.6 million) pro rata share of total combined Operating
Partnership equity and Limited Partner interests of third parties at
redemption value.
. Record adjustment to shareholders' equity of $348 million to record the
Limited Partner interests of third parties as minority interest.
. Record minority expense based on the Limited Partner interests of third
parties pro rata share of Operating Partnership net income (70.1 million
OP Units out of total OP Units of 274.6 million).
C. Represents the adjustment to eliminate the Partner's Capital of the
Operating Partnership and record the Common Stock, Additional Paid-in
Capital, and Retained Earnings of Host REIT.
D. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, Host REIT would be subject to federal
income taxes. This adjustment records the change to Host REIT's tax
(benefit) provision assuming the REIT Conversion did not occur in time for
Host REIT to elect REIT status to result in an estimated overall effective
tax rate for Host REIT in such circumstance of approximately 41%.
E. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the Blackstone Acquisition may not occur.
The following adjustments remove the Blackstone Acquisition from the REIT
pro forma financial information:
. Remove property and equipment of $1,450 million.
. Remove mortgage note receivable of $63 million.
. Remove receivable from Lessee for working capital of $5 million.
. Add back $262 million of cash used to make the Blackstone Acquisition.
. Remove the assumption of mortgage debt of $600 million.
. Remove the 43.7 million OP Units with an estimated fair value of $656
million using an assumed Host Marriott stock price of $15.00 (which
includes the value of Crestline since Blackstone will receive shares of
Crestline in addition to OP Units).
. Remove minority interest liability of $217 million associated with the
Blackstone limited partner interest (43.7 million OP Units) in the
Operating Partnership.
F-153
<PAGE>
. Net effect on equity of the removal of the minority interest liability,
Blackstone assets and liabilities, and recording of deferred income
taxes.
F. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the Blackstone Acquisition may not occur.
The following adjustments remove the Blackstone Acquisition from the REIT
pro forma financial information:
. Remove rental revenues and hotel operating expenses applicable to the
Blackstone Acquisition.
. Remove the minority interest associated with the 43.7 million OP units
owned by the Blackstone limited partners.
. Remove the interest expense on the $600 million of debt assumed in the
Blackstone Acquisition.
. Record interest income that was eliminated in connection with the
Blackstone Acquisition.
F-154
<PAGE>
HOST REIT
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 11, 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REIT
OPERATING ADDITIONAL 2000
PARTNERSHIP PRO FORMA HOST REIT PRO FORMA PRO FORMA
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTMENTS
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $7,029 $-- $7,029 $(1,450)(E) $5,579
Notes and other
receivables, net....... 303 -- 303 (63)(E) 240
Due from managers....... 14 -- 14 14
Investments in
affiliates............. 27 -- 27 -- 27
Other assets............ 338 -- 338 -- 338
Receivable from Lessee
for working capital.... 85 -- 85 (5)(E) 80
Cash, cash equivalents
and short-term
marketable securities.. 109 -- 109 262 (E) 371
------ ---- ------ ------- ------
Total assets........ $7,905 $-- $7,905 $(1,256) $6,649
====== ==== ====== ======= ======
LIABILITIES AND EQUITY
Debt.................... $5,218 -- 5,218 $(600)(E) $4,618
Convertible debt
obligation to Host
Marriott Corporation... 567 (567)(A) -- -- --
Accounts payable and
accrued expenses....... 69 -- 69 -- 69
Deferred income taxes... 275 -- 275 189 (D) 464
Other liabilities....... 701 -- 701 (43)(E) 658
------ ---- ------ ------- ------
Total liabilities... 6,830 (567) 6,263 (454) 5,809
------ ---- ------ ------- ------
Convertible Preferred
Securities............. -- 550 (A) 550 -- 550
Minority interest....... -- 201 (B) 201 (187)(E) 14
Limited Partner
interests of third
parties at redemption
value (on a pro forma
basis 47.1 million OP
units outstanding)..... 701 (701)(C) -- -- --
Equity
General Partner (on a
pro forma basis 0.2
million OP Units
outstanding)......... -- -- -- -- --
Limited Partner
interests of Host
REIT (on a pro forma
basis 204.3 million
OP Units
outstanding)......... 374 (374)(C) -- -- --
Shareholders' Equity
(on a pro forma basis
800 million shares
authorized; 204.5
million issued and
outstanding)......... -- 17 (A) 891 (426)(E) 276
(201)(B) (189)(D)
701 (C)
374 (C)
------ ---- ------ ------- ------
$7,905 $-- $7,905 $(1,256) $6,649
====== ==== ====== ======= ======
</TABLE>
F-155
<PAGE>
HOST REIT
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OPERATING ADDITIONAL
PARTNERSHIP PRO FORMA HOST REIT PRO FORMA REIT 2000
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE
Rental revenues....... $ 540 $-- $ 540 $(72)(F) $ 468
Other revenues........ 2 -- 2 -- 2
----- ---- ------ ---- -----
Total revenues...... 542 -- 542 (72) 470
----- ---- ------ ---- -----
OPERATING COSTS AND EX-
PENSE
Hotels................ 375 -- 375 (40)(F) 335
Other................. 15 -- 15 -- 15
----- ---- ------ ---- -----
Total operating
costs and ex-
penses............. 390 -- 390 (40) 350
----- ---- ------ ---- -----
OPERATING PROFIT........ 152 -- 152 (32) 120
Minority interest....... (14) 39 (B) 25 (37)(F) (12)
Corporate expenses...... (30) -- (30) -- (30)
Interest expense........ (351) 26 (A) (325) 36 (F) (289)
Dividends on Convertible
Preferred Securities... -- (26)(A) (26) -- (26)
Interest income......... 24 -- 24 6 (F) 30
----- ---- ------ ---- -----
Income (loss) before in-
come taxes............. (219) 39 (180) (27) (207)
Benefit (provision) for
income taxes........... 11 (2)(D) 9 76 (D) 85
----- ---- ------ ---- -----
Income (loss) before ex-
traordinary items...... $(208) $ 37 $ (171) $ 49 $(122)
===== ==== ====== ==== =====
Diluted loss per share.. $ (.84) $(.60)
====== =====
</TABLE>
F-156
<PAGE>
HOST REIT
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OPERATING ADDITIONAL
PARTNERSHIP PRO FORMA HOST REIT PRO FORMA REIT 2000
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE
Rental revenues....... $1,135 $ -- $1,135 $(137)(F) $ 998
Equity in earnings
(losses) of affili-
ates................. (7) -- (7) -- (7)
Other revenues........ 3 -- 3 -- 3
------ ----- ------ ----- -----
Total revenues...... 1,131 -- 1,131 (137) 994
------ ----- ------ ----- -----
OPERATING COSTS AND EX-
PENSE
Hotels................ 598 -- 598 (87)(F) 511
Other................. 11 -- 11 -- 11
------ ----- ------ ----- -----
Total operating
costs and ex-
penses............. 609 -- 609 (87) 522
------ ----- ------ ----- -----
OPERATING PROFIT........ 522 -- 522 (50) 472
Minority interest....... (10) (2)(B) (12) 2 (F) (10)
Corporate expenses...... (44) (44) -- (44)
Interest expense ....... (485) 38 (A) (447) 48 (F) (399)
Dividends on Convertible
Preferred Securities... -- (37)(A) (37) -- (37)
Interest income......... 29 -- 29 7 (F) 36
------ ----- ------ ----- -----
Income (loss) before in-
come taxes............. 12 (1) 11 7 18
Benefit (provision) for
income taxes........... (1) -- (D) (1) (6)(D) (7)
------ ----- ------ ----- -----
Income (loss) before ex-
traordinary items...... $ 11 $ (1) $ 10 $ 1 $ 11
====== ===== ====== ===== =====
Diluted earnings per
share.................. $ .04 $ .05
====== =====
</TABLE>
F-157
<PAGE>
HOST REIT
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
100% PARTICIPATION WITH NOTES ISSUED
A. Represents the following adjustments:
. Adjustment to remove $567 million of convertible debt obligations to
Host Marriott which eliminates in consolidation.
. Record the $550 million of convertible preferred securities held by Host
REIT.
. Record $17 million adjustment to equity for the elimination in
consolidation of the convertible debt obligation to Host Marriott.
. Remove Interest of $26 million and $38 million, respectively, on $567
million of convertible debt obligation to Host Marriott.
. Record dividends of $26 million and $37 million, respectively, on the
$550 million of convertible preferred securities.
B. Represents the adjustment to present the Limited Partner interests of third
parties in the Operating Partnership as minority interest in Host REIT and
the reflection of Operating Partnership income allocable to the third party
Limited Partners as minority interest expense of Host REIT as follows:
. Record $201 million minority interest liability representing Limited
Partner interests of third parties (47.1 million OP Units out of total
OP Units of 251.6 million) pro rata share of total combined Operating
Partnership equity and Limited Partner interests of third parties at
redemption value.
. Record adjustment to shareholders' equity of $201 million to record the
Limited Partner interests of third parties as minority interest.
. Record minority expense based on the Limited Partners interests of third
parties pro rata share of Operating Partnership net income (47.1 million
OP Units out of total OP Units of 251.6 million).
C. Represents the adjustment to eliminate the Partner's Capital of the
Operating Partnership and record the Common Stock, Additional Paid-in
Capital, and Retained Earnings of Host REIT.
D. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, Host REIT would be subject to federal
income taxes. This adjustment records the change to Host REIT's tax
(benefit) provision, assuming the REIT Conversion did not occur in time for
Host REIT to elect REIT status to result in an estimated overall effective
tax rate for Host REIT in such circumstance of approximately 41%.
E. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the Blackstone Acquisition may not occur.
The following adjustments remove the Blackstone Acquisition from the REIT
pro forma financial information:
. Remove property and equipment of $1,450 million.
. Remove mortgage note receivable of $63 million.
. Remove receivable from Lessee for working capital of $5 million.
. Add back $262 million of cash used to make the Blackstone Acquisition.
. Remove the assumption of mortgage debt of $600 million.
. Remove the 43.7 million OP Units with an estimated fair value of $656
million using an assumed Host Marriott stock price of $15.00 (which
includes the value of Crestline since Blackstone will receive shares of
Crestline in addition to OP Units).
. Remove minority interest liability of $187 million associated with the
Blackstone limited partner interest (43.7 million OP Units) in the
Operating Partnership.
. Net effect on equity on the removal of the minority interest liability,
Blackstone assets and liabilities, and recording of deferred income
taxes.
F-158
<PAGE>
F. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the Blackstone Acquisition may not occur.
The following adjustments remove the Blackstone Acquisition from the REIT
pro forma financial information:
. Remove rental revenues and hotel operation expenses applicable to the
Blackstone Acquisition.
. Remove the minority interest associated with the 43.7 million OP Units
owned by the Blackstone limited partners.
. Remove the interest expense on the $600 million of debt assumed in the
Blackstone Acquisition.
. Record interest income that was eliminated in connection with the
Blackstone Acquisition.
F-159
<PAGE>
HOST REIT
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 11, 1998
NO PARTNERSHIP PARTICIPATION
(IN MILLIONS, EXCEPT PER OP UNIT AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OPERATING ADDITIONAL
PARTNERSHIP PRO FORMA HOST REIT PRO FORMA REIT 2000
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $6,298 $ -- $6,298 $(1,450)(E) $4,848
Notes and other receiv-
ables, net............. 326 -- 326 (63)(E) 263
Due from managers....... 13 -- 13 -- 13
Investments in affili-
ates................... 222 -- 222 -- 222
Other assets............ 295 -- 295 -- 295
Receivable from Lessee
for working capital.... 67 -- 67 (5)(E) 62
Cash, cash equivalents
and short-term market-
able securities........ 94 -- 94 262 (E) 356
------ ----- ------ ------- ------
Total assets.......... $7,315 $ -- $7,315 $(1,256) $6,059
====== ===== ====== ======= ======
LIABILITIES AND EQUITY
Debt.................... $4,544 $ -- $4,544 $ (600)(E) $3,944
Convertible debt obliga-
tion to Host Marriott
Corporation............ 567 (567)(A) -- -- --
Accounts payable and ac-
crued expenses......... 60 -- 60 -- 60
Deferred income taxes... 275 -- 275 189 (D) 464
Other liabilities....... 757 -- 757 (43)(E) 714
------ ----- ------ ------- ------
Total liabilities..... 6,203 (567) 5,636 (454) 5,182
------ ----- ------ ------- ------
Minority interest....... -- 208 (B) 208 (194)(E) 14
Convertible Preferred
Securities............. -- 550 (A) 550 -- 550
Limited Partner
interests of third
parties at redemption
value (on a pro forma
basis 47.1 million OP
units outstanding)..... 701 (701)(C) -- -- --
Equity
General Partner (on a
pro forma basis 0.2
million OP Units
outstanding)......... -- -- -- -- --
Limited Partner
interests of Host
REIT (on a pro forma
basis 204.3 million
OP Units
outstanding)......... 411 (411)(C) -- -- --
Shareholders' Equity
(on a pro forma basis
800 million shares
authorized; 204.5
million issued and
outstanding)......... -- 17 (A) 921 (419)(E) 313
(208)(B) (189)(D)
701 (C)
411 (C)
------ ----- ------ ------- ------
$7,315 $ -- $7,315 $(1,256) $6,059
====== ===== ====== ======= ======
</TABLE>
F-160
<PAGE>
HOST REIT
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
NO PARTNERSHIP PARTICIPATION
(IN MILLIONS, EXCEPT PER OP UNIT AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OPERATING ADDITIONAL
PARTNERSHIP PRO FORMA HOST REIT PRO FORMA REIT 2000
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE
Rental revenues....... $ 410 $-- $ 410 $(72)(F) $ 338
Hotel revenues........ 145 -- 145 -- 145
Other revenues........ (12) -- (12) -- (12)
----- ---- ------ ---- -----
Total revenues...... 543 -- 543 (72) 471
----- ---- ------ ---- -----
OPERATING COSTS AND EX-
PENSE
Hotels................ 328 -- 328 (40)(F) 288
Other................. 15 -- 15 -- 15
----- ---- ------ ---- -----
Total operating
costs and ex-
penses............. 343 -- 343 (40) 303
----- ---- ------ ---- -----
OPERATING PROFIT........ 200 -- 200 (32) 168
Minority interest....... (13) 24(B) 11 (23)(F) (12)
Corporate expenses...... (30) -- (30) -- (30)
Interest expense........ (315) 26 (A) (289) 36 (F) (253)
Dividends on Convertible
Preferred Securities... -- (26)(A) (26) -- (26)
Interest income......... 19 -- 19 4 (F) 23
----- ---- ------ ---- -----
Income (loss) before in-
come taxes............. (139) 24 (115) (15) (130)
Benefit (provision) for
income taxes........... 7 (2)(D) 5 48(D) 53
----- ---- ------ ---- -----
Income (loss) before ex-
traordinary items...... $(132) $ 22 $ (110) $ 33 $ (77)
===== ==== ====== ==== =====
Diluted loss per share.. $(.54) $(.38)
====== =====
</TABLE>
F-161
<PAGE>
HOST REIT
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
NO PARTNERSHIP PARTICIPATION
(IN MILLIONS, EXCEPT PER OP UNIT AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OPERATING ADDITIONAL
PARTNERSHIP PRO FORMA HOST REIT PRO FORMA REIT 2000
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE
Rental revenues....... $ 882 $-- $ 882 $(137)(F) $ 745
Hotel revenues........ 193 -- 193 -- 193
Equity in earnings
(losses) of affili-
ates................. (16) -- (16) -- (16)
Other revenues........ 3 -- 3 -- 3
------ ---- ------ ----- -----
Total revenues...... 1,062 -- 1,062 (137) 925
------ ---- ------ ----- -----
OPERATING COSTS AND EX-
PENSE
Hotels................ 573 -- 573 (87)(F) 486
Other................. 11 -- 11 -- 11
------ ---- ------ ----- -----
Total operating
costs and ex-
penses............. 584 -- 584 (87) 497
------ ---- ------ ----- -----
OPERATING PROFIT 478 -- 478 (50) 428
Minority interest....... (8) (2)(B) (10) 2 (F) (8)
Corporate expenses...... (44) -- (44) -- (44)
Interest expense........ (439) 38 (A) (401) 48 (F) (353)
Dividends on Convertible
Preferred Securities... -- (37)(A) (37) -- (37)
Interest income......... 26 -- 26 7 (F) 33
------ ---- ------ ----- -----
Income (loss) before in-
come taxes............. 13 (1) 12 7 19
Benefit (provision) for
income taxes........... (1) -- (D) (1) (7)(D) (8)
------ ---- ------ ----- -----
Income (loss) before ex-
traordinary items...... $ 12 $ (1) $ 11 $ -- $ 11
====== ==== ====== ===== =====
Diluted earnings per
share.................. $ .04 $ .05
====== =====
</TABLE>
F-162
<PAGE>
HOST REIT
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NO PARTNERSHIP PARTICIPATE
A. Represents the following adjustments:
. Adjustment to remove $567 million of convertible debt obligation to Host
Marriott which eliminates in consolidation.
. Record the $550 million of convertible preferred securities held by Host
REIT.
. Record $17 million adjustment to equity for the elimination in
consolidation of the convertible debt obligation to Host Marriott.
. Remove interest of $26 million and $38 million, respectively, on $567
million of convertible debt obligation to Host Marriott.
. Record dividends of $26 million and $37 million, respectively, on the
$550 million of convertible preferred securities.
B. Represents the adjustment to present the Limited Partner interests of third
parties in the Operating Partnership as minority interest in Host REIT and
the reflection of Operating Partnership income allocable to the third party
Limited Partners as minority interest expense of Host REIT as follows:
. Record $208 million minority interest liability representing Limited
Partner interests of third parties (47.1 million OP Units out of total
OP Units of 251.6 million) pro rata share of total combined Operating
Partnership equity and Limited Partner interests of third parties at
redemption value.
. Record adjustment to shareholders' equity of $208 million to record the
Limited Partner interests of third parties as minority interest.
. Record minority expense based on the Limited Partner interests of third
parties pro rata share of Operating Partnership net income (47.1 million
OP Units out of total OP Units of 251.6 million).
C. Represents the adjustment to eliminate the Partner's Capital of the
Operating Partnership and record the Common Stock, Additional Paid-in
Capital, and Retained Earnings of Host REIT.
D. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, Host REIT would be subject to federal
income taxes. This adjustment records the change to Host REIT's tax
(benefit) provision assuming the REIT Conversion did not occur in time for
Host REIT to elect REIT status to result in an estimated overall effective
tax rate for Host REIT in such circumstance of approximately 41%.
E. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the Blackstone Acquisition may not occur.
The following adjustments remove the Blackstone Acquisition from the REIT
pro forma financial information:
. Remove property and equipment of $1,450 million.
. Remove mortgage note receivable of $63 million.
. Remove receivable from Lessee for working capital of $5 million.
. Add back $262 million of cash used to make the Blackstone Acquisition.
. Remove the assumption of mortgage debt of $600 million.
. Remove the 43.7 million OP Units with an estimated fair value of $656
million using an assumed Host Marriott stock price of $15.00 (which
includes the value of Crestline since Blackstone will receive shares of
Crestline in addition to OP Units).
. Remove minority interest liability of $194 million associated with the
Blackstone limited partner interest (43.7 million OP Units) in the
Operating Partnership.
F. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the Blackstone Acquisition may not occur.
The following adjustments remove the Blackstone Acquisition from the REIT
pro forma financial information:
. Remove rental revenues and hotel operation expenses applicable to the
Blackstone Acquisition.
. Remove the minority interest associated with the 43.7 million OP Units
owned by the Blackstone limited partners.
. Remove the interest expense on the $600 million of debt assumed in the
Blackstone Acquisition.
. Record interest income that was eliminated in connection with the
Blackstone Acquisition.
F-163
<PAGE>
PRO FORMA FINANCIAL STATEMENTS OF CRESTLINE
The REIT Conversion involves a complex series of transactions not all of
which necessarily have to occur in order for the REIT Conversion to be
consummated. For example, there is no requirement that any of the Partnerships
participate in the REIT Conversion in order for the REIT Conversion to be
consummated (but if a Partnership does not participate in the REIT Conversion,
its hotel properties would not be leased to the Company), nor is there a
requirement that the Blackstone Acquisition occur in order for the REIT
Conversion to be consummate. In addition, the consent of a number of lenders
and several outside partners in certain key Partnerships are required in order
for certain hotel properties owned by Host to be leased to the Company, and
there can be no assurance that all such consents will be obtained.
Accordingly, the number of hotel properties that will be leased by Crestline
may vary, perhaps substantially.
In light of the number of possible variations, the Company is not able to
describe all possible combinations of Partnerships that could be leased.
However, to assist in analyzing the REIT Conversion, the Company has prepared
two separate sets of unaudited pro forma financial statements to show the
impact of the REIT Conversion assuming that all Partnerships participate in
the REIT Conversion, the Blackstone Acquisition is consummated, and that all
required lender and outside partner consents are obtained ("All Partnerships
Participate") and a second scenario showing no Partnerships participate in the
REIT Conversion (but that the Blackstone Acquisition is consummated, and that
all required lender and outside partner consents (other than for the
Partnerships) are obtained) ("No Partnership Participation").
The unaudited pro forma condensed consolidated statements of operations of
Crestline reflect the following transactions for the First Three Quarters 1998
and for the fiscal year ended January 2, 1998, as if such transactions had
been completed at the beginning of each of the periods:
. 1997 acquisition of Forum Group, Inc. (the "Forum Acquisition") and one
additional senior living community
. 1998 retirement of $26 million of debt through a capital contribution
from Host Marriott
. 1998 repayment and forgiveness of $92 million of unsecured debt and $14.8
million intercompany note treated as a capital contribution by Host
. 1998 acquisition of one senior living community
. 1998 acquisition of minority interests in certain consolidated
subsidiaries of Crestline through contributions from Host Marriott
. 1998 spin off of Crestline by Host Marriott and the concurrent lease or
sublease of hotels from Host REIT
. 1998 adoption of EITF 97-2 to reflect the change in presentation to
present property-level sales and operating expenses
. Contribution to Crestline from Host of a 5% interest in a joint venture
which holds an approximate $130 million mortgage note from a consolidated
subsidiary of Host in connection with the REIT Conversion.
. Adjustment to corporate expenses as if Crestline were operated on a
stand-alone basis, partially offset by the asset management fee to be
charged to Host REIT.
The adjustments to the unaudited pro forma balance sheet of Crestline
reflect the lease and sublease of substantially all of Host Marriott's owned
or leased hotels and certain other transactions as described herein in
conjunction with the REIT Conversion.
In 1998, Crestline acquired one senior living community for $21 million.
Also, during 1998, Host Marriott prepaid approximately $26 million of
Crestline's mortgage debt and repaid $92 million of unsecured debt to Marriott
International. The prepayment was recorded as a capital contribution to
Crestline and the $92 million was repaid in exchange for a $92 million note
due to Host Marriott with similar terms. The $92 million note and an
additional $14.8 million intercompany note were forgiven by Host and treated
as a capital contribution in the First Three Quarters 1998.
F-164
<PAGE>
In 1997, Host Marriott Corporation acquired 29 senior living communities
from Marriott International and concurrently contributed all of the assets and
liabilities obtained in the Forum Acquisition to Crestline. In addition,
during 1997, Crestline acquired 49% of the remaining 50% interest in Leisure
Park Venture Limited Partnership which owns a 418-unit retirement community in
New Jersey for approximately $23 million, including the assumption of
approximately $15 million in debt. Crestline currently owns 99% of the
partnership.
If all components of Host's conversion to a REIT are not completed by
January 1, 1999, Host REIT may be precluded from electing REIT status until
January 1, 2000 and the Blackstone Acquisition may not be consummated.
Accordingly a separate column ("Pro Forma without Blackstone") has been
included in the pro forma financials that assumes that the Blackstone
Acquisition does not occur.
The unaudited pro forma financial statements present the financial position
and the results of operations of Crestline as if the transactions described
above were completed. These presentations do not purport to represent what
Crestline's results of operations would actually have been if the transactions
described above had in fact occurred on such date or at the beginning of such
period or to project Crestline's results of operations for any future date or
period.
The unaudited pro forma financial statements are based upon certain
assumptions, as set forth in the notes to the unaudited pro forma financial
statements, that Crestline believes are reasonable under the circumstances and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto for HMC Senior Communities, Inc included elsewhere herein.
F-165
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 11, 1998
ALL PARTNERSHIPS PARTICIPATE
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WITHOUT
HISTORICAL ADJUSTMENTS PRO FORMA BLACKSTONE (I)
---------- ----------- --------- --------------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment,
net........................ $649,528 $ -- $649,528 $649,528
Amounts due from Marriott
International.............. 4,097 -- 4,097 4,097
Other assets................ 14,290 85,000(A) 105,772 100,772
6,482(B)
Cash and cash equivalents... 26,504 15,000(B) 41,504 41,504
-------- -------- -------- --------
Total assets.............. $694,419 $106,482 $800,901 $795,901
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Debt........................ $213,034 $ -- $213,034 $213,034
Deferred income taxes....... 61,376 -- 61,376 61,376
Due to Host Marriott Corpo-
ration, net................ 12,989 85,000(A) 97,989 87,989
Accounts payable and other
accrued liabilities........ 13,639 -- 13,639 13,639
Deferred revenue............ 1,310 -- 1,310 1,310
-------- -------- -------- --------
Total liabilities......... 302,348 85,000 387,348 382,348
-------- -------- -------- --------
Stockholder's equity
Common stock, 100 shares
authorized, issued and
outstanding (on a pro forma
basis 75 million shares of
common stock authorized;
24.8 million issued and
outstanding)(/1/) ......... -- -- -- --
Additional paid-in capital.. 386,627 15,000(B) 408,109 408,109
6,482(B)
Retained earnings........... 5,444 -- 5,444 5,444
-------- -------- -------- --------
Total stockholder's equi-
ty....................... 392,071 21,482 413,553 413,553
-------- -------- -------- --------
Total liabilities and
stockholder's equity..... $694,419 $106,482 $800,901 $795,901
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-166
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
ALL PARTNERSHIPS PARTICIPATE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
D E F G H I
DEBT PRO FORMA
REFINANCING/ COMMUNITY CORPORATE HOTEL ADOPTION OF WITHOUT
HISTORICAL REPAYMENTS ACQUISITIONS EXPENSES LEASES EITF 97-2 PRO FORMA BLACKSTONE
---------- ------------ ------------ --------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Rooms................ $ -- $ -- $ -- $ -- $ -- $1,847,650 $1,847,650 $1,636,922
Food and beverage.... -- -- -- -- -- 863,953 863,953 765,417
Other................ -- -- -- -- -- 163,268 163,268 144,647
House profit......... -- -- -- -- 1,123,100 (1,123,100) -- --
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total hotels......... -- -- -- -- 1,123,100 1,751,771 2,874,871 2,546,986
-------- ------- ----- ------- --------- ---------- ---------- ----------
Senior living
communities
Routine.............. 54,872 -- 84 -- -- 94,792 149,748 149,748
Ancillary............ 2,928 -- 1 -- -- 13,483 16,412 16,412
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total senior living
communities......... 57,800 -- 85 -- -- 108,275 166,160 166,160
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total revenues....... 57,800 -- 85 -- 1,123,100 1,860,046 3,041,031 2,713,146
-------- ------- ----- ------- --------- ---------- ---------- ----------
OPERATING COSTS AND
EXPENSES
Hotels
Property-level costs
and expenses
Rooms................ -- -- -- -- -- 729,475 729,475 647,105
Food and beverage.... -- -- -- -- -- 766,688 766,688 680,116
Other department
costs and
deductions.......... -- -- -- -- -- 255,608 255,608 226,746
Management fees and
other............... -- -- -- -- 205,169 -- 205,169 193,888
Lease expense........ -- -- -- -- 887,400 -- 887,400 771,900
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total hotels........ -- -- -- -- 1,092,569 1,751,771 2,844,340 2,519,755
-------- ------- ----- ------- --------- ---------- ---------- ----------
Senior living
communities
Property-level costs
and expenses
Routine.............. -- -- -- -- -- 94,792 94,792 94,792
Ancillary............ -- -- -- -- -- 13,483 13,483 13,483
Other operating costs
and expenses........ 29,803 -- 49 -- -- -- 29,852 29,852
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total senior living
communities........ 29,803 -- 49 -- -- 108,275 138,127 138,127
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total operating
costs and
expenses........... 29,803 -- 49 -- 1,092,569 1,860,046 2,982,467 2,657,882
-------- ------- ----- ------- --------- ---------- ---------- ----------
Operating profit ..... 27,997 -- 36 -- 30,531 -- 58,564 55,264
Corporate expenses.... (2,937) -- -- (7,948) -- -- (10,885) (10,885)
Interest expense...... (17,560) 4,789 -- -- (3,531) -- (16,302) (16,094)
Interest and dividend
income............... 1,120 -- 6 -- 392 -- 1,518 1,518
-------- ------- ----- ------- --------- ---------- ---------- ----------
Income (loss) before
income taxes......... 8,620 4,789 42 (7,948) 27,392 -- 32,895 29,803
Benefit (provision)
for income taxes..... (3,534) (1,963) (18) 3,259 (11,231) -- (13,487) (12,219)
-------- ------- ----- ------- --------- ---------- ---------- ----------
Income (loss) before
extraordinary item... $ 5,086 $ 2,826 $ 24 $(4,689) $ 16,161 $ -- $ 19,408 $ 17,584
======== ======= ===== ======= ========= ========== ========== ==========
Pro forma earnings per
share................ $ .21(2) $ .78(2) $ .86(3)
======== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-167
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1998
ALL PARTNERSHIPS PARTICIPATE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
C D E F G H
DEBT
FORUM REFINANCING/ COMMUNITY CORPORATE HOTEL ADOPTION OF PRO
HISTORICAL ACQUISITION REPAYMENT ACQUISITIONS EXPENSES LEASES EITF 97-2 FORMA
---------- ----------- ------------ ------------ --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Room............. $ -- $ -- $ -- $ -- $ -- $ -- $ 2,460,816 $2,460,816
Food and bever-
age............. -- -- -- -- -- -- 1,156,017 1,156,017
Other............ -- -- -- -- -- -- 248,471 248,471
House profit..... -- -- -- -- -- 1,475,300 (1,475,300) --
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total hotels.... -- -- -- -- -- 1,475,300 2,390,004 3,865,304
-------- ------- ------- ------- ------- ---------- ----------- ----------
Senior living
communities......
Routine.......... 35,473 30,859 -- 7,031 -- -- 127,135 200,498
Ancillary........ 1,427 1,983 -- 188 -- -- 18,693 22,291
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total senior
living
communities.... 36,900 32,842 -- 7,219 -- -- 145,828 222,789
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total revenues.. 36,900 32,842 -- 7,219 -- 1,475,300 2,535,832 4,088,093
-------- ------- ------- ------- ------- ---------- ----------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ -- -- -- -- -- -- 993,374 993,374
Food and bever-
age............. -- -- -- -- -- -- 1,047,903 1,047,903
Other department
costs and
deductions...... -- -- -- -- -- -- 348,727 348,727
Management fees
and other....... -- -- -- -- -- 260,500 -- 260,500
Lease expense.... -- -- -- -- -- 1,175,100 -- 1,175,100
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total hotels.... -- -- -- -- -- 1,435,600 2,390,004 3,825,604
-------- ------- ------- ------- ------- ---------- ----------- ----------
Senior living com-
munities
Property-level costs and expenses
Routine.......... -- -- -- -- -- -- 127,135 127,135
Ancillary........ -- -- -- -- -- -- 18,693 18,693
Other operating
costs
and expenses.... 20,929 17,977 -- 4,733 -- -- -- 43,639
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total senior
living
communities.... 20,929 17,977 -- 4,733 -- -- 145,828 189,467
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total operating
costs and
expenses....... 20,929 17,977 -- 4,733 -- 1,435,600 2,535,832 4,015,071
-------- ------- ------- ------- ------- ---------- ----------- ----------
Operating profit
................. 15,971 14,865 -- 2,486 -- 39,700 -- 73,022
Corporate
expenses......... (2,304) (5,115) -- 745 (6,826) -- -- (13,500)
Interest expense.. (13,396) (9,630) 7,312 (2,118) -- (5,100) -- (22,932)
Interest and
dividend income.. 336 598 -- -- -- 567 -- 1,501
-------- ------- ------- ------- ------- ---------- ----------- ----------
Income (loss)
before income
taxes............ 607 718 7,312 1,113 (6,826) 35,167 -- 38,091
Benefit
(provision) for
income taxes..... (249) (294) (2,998) (456) 2,799 (14,419) -- (15,617)
-------- ------- ------- ------- ------- ---------- ----------- ----------
Income (loss)
before
extraordinary
item............. $ 358 $ 424 $ 4,314 $ 657 $(4,027) $ 20,748 $ -- $ 22,474
======== ======= ======= ======= ======= ========== =========== ==========
Pro forma earnings
per share........ $ .01(2) $ .91(2)
======== ==========
<CAPTION>
I
PRO
FORMA
WITHOUT
BLACKSTONE
-------------
<S> <C> <C> <C>
REVENUES
Hotels
Room............. $2,203,294
Food and bever-
age............. 1,035,041
Other............ 222,469
House profit..... --
-------------
Total hotels.... 3,460,804
-------------
Senior living
communities......
Routine.......... 200,498
Ancillary........ 22,291
-------------
Total senior
living
communities.... 222,789
-------------
Total revenues.. 3,683,593
-------------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ 886,763
Food and bever-
age............. 935,440
Other department
costs and
deductions...... 311,301
Management fees
and other....... 246,500
Lease expense.... 1,038,600
-------------
Total hotels.... 3,418,604
-------------
Senior living com-
munities
Property-level costs and expenses
Routine.......... 127,135
Ancillary........ 18,693
Other operating
costs
and expenses.... 43,639
-------------
Total senior
living
communities.... 189,467
-------------
Total operating
costs and
expenses....... 3,608,071
-------------
Operating profit
................. 75,522
Corporate
expenses......... (13,500)
Interest expense.. (22,633)
Interest and
dividend income.. 1,501
-------------
Income (loss)
before income
taxes............ 40,890
Benefit
(provision) for
income taxes..... (16,765)
-------------
Income (loss)
before
extraordinary
item............. $ 24,125
=============
Pro forma earnings
per share........ $ 1.18(3)
=============
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-168
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
ALL PARTNERSHIPS PARTICIPATE
A. Represents the adjustment to increase working capital and record a loan
payable to Host of $85 million to record the transfer of hotel working capital
to the Company related to the leasing of Host's hotels.
B. Represents the following transactions in connection with the
Distribution:
. Host's contribution of $15 million in cash to the Company.
. Host's contribution of a 5% limited partner interest in a joint
venture with Host that owns an approximate $130 million note
receivable from a consolidated subsidiary of Host.
C. Represents the adjustment to reflect the historical revenues, operating
expenses, corporate expenses, interest expense and interest income for the
Forum Acquisition as if such acquisition occurred at the beginning of 1997
(actual acquisition date was June 21, 1997).
D. Represents the adjustment to eliminate interest expense on $133 million
of debt repaid during 1998 by Host on behalf of the Company and treated as a
capital contribution by Host.
E. Represents the adjustment to record the historical revenues, operating
expenses, corporate expenses and interest income related to the acquisition of
one senior living community in 1998 and the acquisition of one senior living
community in 1997. The adjustment also includes the elimination of $745,000 of
minority interest expense included in corporate expenses related to the
purchase of minority interests in certain consolidated subsidiaries of the
Company in 1997.
F. Represents the adjustment to record additional corporate expenses
anticipated to be incurred when the Company is operated on a stand-alone basis
subsequent to the Distribution, net of the asset management contract of $4.5
million per annum. The adjustment includes the following (in thousands):
<TABLE>
<CAPTION>
FIRST THREE FISCAL YEAR
QUARTERS 1998 1997
------------- -----------
<S> <C> <C>
Payroll costs......................................... $ 6,748 $ 6,894
Rent and insurance.................................... 1,218 1,267
Other general and administrative costs................ 3,097 3,165
------- -------
11,063 11,326
Less: asset management fee............................ (3,115) (4,500)
------- -------
Net corporate expense adjustment.................... $ 7,948 $ 6,826
======= =======
</TABLE>
G. Represents the adjustment to record the historical hotel revenues and
hotel expenses and pro forma lease expense associated with the leasing of
certain hotel properties from Host, interest expense on the $85 million
working capital loan at 6%, and dividend income from the 5% investment in the
joint venture with Host that owns a $130 million note receivable from a
consolidated subsidiary of Host.
Rental revenues under the leases are based on the greater of Percentage Rent
or Minimum Rent. Total rent in the pro forma statement of operations is
calculated based on the historical gross sales of the property and the
negotiated rental rates and thresholds by property as if the leases were
entered into on the first day of fiscal year 1997. There are generally three
sales categories utilized in the rent calculation: rooms, food and beverage
and other. For rooms and food and beverage, there are three tiers of rent with
two thresholds, while the other category generally has two tiers of rent and
one threshold. The percentage rent thresholds are increased annually on the
first day of each year after the initial lease year based on a blended
increase of the Consumer Price Index ("CPI") and a wage and benefit index. For
purposes of the pro formas, 1997 is the assumed initial lease year
F-169
<PAGE>
and the blended increase applied to the thresholds at January 3, 1998 is
assumed to be 3%. Minimum rent is expressed as a fixed dollar amount that
increases annually on the first day of each year after the initial lease year
at 50% of the CPI increase. Accordingly, the 1998 rent thresholds and minimum
rent included in the pro formas were adjusted as of January 3, 1998 for the
1997 increases in the indices. Rental revenues are recognized only for leases
to be executed with Host REIT at or prior to completion of the Distribution.
The execution of the leases is dependent upon the consummation of the
Distribution, which is subject to contingencies that are outside the control
of the Company, including consent of shareholders, lenders, debt holders,
partners and ground lessors of Host. The Company believes that negotiations
with third parties to complete the Distribution will not result in any
material change to the leases. The table below details gross sales, minimum
rent and total rent for all full-service properties to be leased and
summarized amounts for the limited-service properties to be subleased:
<TABLE>
<CAPTION>
FIRST THREE
FISCAL YEAR 1997 QUARTERS 1998
------------------- -------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- ----- ------- ----- ----- ------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Grand Hotel Resort and Golf Club....... $23.4 $2.8 $4.2 $18.0 $2.0 $3.7
Scottsdale Suites...................... 11.9 3.0 5.0 8.2 2.1 3.4
The Ritz-Carlton, Phoenix.............. 23.3 4.6 7.2 17.3 3.2 5.5
Coronado Island Resort................. 22.0 2.1 2.1 16.2 1.5 3.6
Costa Mesa Suites...................... 9.7 1.9 3.3 7.2 1.3 2.3
Desert Springs Resort and Spa.......... 103.3 21.3 30.3 80.3 15.0 22.6
Manhattan Beach........................ 16.3 2.4 4.8 12.2 1.7 3.6
Marina Beach .......................... 21.1 4.6 7.1 16.9 3.2 6.2
Newport Beach.......................... 33.5 5.5 8.7 24.0 3.9 6.8
Newport Beach Suites................... 11.0 2.6 4.1 8.0 1.8 3.0
Ontario Airport........................ 12.1 1.8 3.4 8.3 1.3 2.2
San Diego Marriott Hotel and Marina.... 103.3 38.0 39.6 78.6 26.7 31.1
San Diego Mission Valley............... 16.7 3.4 5.1 12.6 2.4 5.6
San Francisco Airport.................. 43.8 8.2 13.2 32.2 5.8 9.5
San Francisco Fisherman's Wharf........ 17.8 4.0 6.4 12.1 2.8 4.3
San Francisco Moscone Center........... 120.2 20.7 37.9 90.5 14.6 28.5
San Ramon.............................. 19.7 4.4 5.1 14.4 3.1 4.0
Santa Clara............................ 47.3 7.8 16.5 37.2 5.5 13.5
The Ritz-Carlton, Marina del Rey....... 32.4 5.5 10.8 23.4 3.9 7.9
The Ritz-Carlton, San Francisco........ 50.1 9.6 14.7 34.2 6.7 10.3
Torrance............................... 20.5 2.3 3.5 15.0 1.6 5.1
Denver Southeast....................... 21.5 3.0 6.2 14.9 2.1 4.1
Denver Tech Center..................... 26.8 5.1 8.3 20.1 3.6 6.0
Denver West............................ 13.7 1.8 4.0 9.6 1.2 2.7
Marriott's Mountain Resort at Vail..... 17.6 3.0 5.1 14.1 2.1 4.5
Hartford/Farmington.................... 18.4 3.5 4.7 13.4 2.4 3.5
Hartford/Rocky Hill.................... 11.6 1.5 2.7 8.5 1.1 2.0
Fort Lauderdale Marina................. 28.5 4.3 7.9 20.4 3.0 5.7
Harbor Beach Resort.................... 58.1 16.5 19.3 43.2 11.6 14.0
Jacksonville........................... 11.8 1.8 3.6 8.0 1.2 2.4
Miami Airport.......................... 29.7 3.9 8.4 21.6 2.8 6.1
Orlando World Center................... 128.2 23.5 39.6 98.7 16.5 30.4
Palm Beach Gardens..................... 11.8 1.9 3.7 8.5 1.4 3.0
Singer Island (Holiday Inn)............ 6.6 1.4 2.5 5.2 1.0 2.1
Tampa Airport.......................... 17.1 1.6 3.5 13.1 1.1 2.7
Tampa Westshore........................ 15.0 1.8 3.6 10.8 1.3 2.6
The Ritz-Carlton, Naples............... 66.4 18.1 23.3 53.1 12.7 18.0
Atlanta Marriott Marquis............... 85.4 21.3 33.3 58.6 15.0 25.6
Atlanta Midtown Suites................. 10.5 1.8 3.5 7.8 1.3 2.6
Atlanta Norcross....................... 7.6 1.0 1.7 5.6 0.7 1.2
Atlanta Northwest...................... 14.9 2.7 4.3 11.3 1.9 3.3
Atlanta Perimeter...................... 16.6 2.5 4.5 12.6 1.7 3.5
JW Marriott Hotel at Lenox............. 24.8 3.7 6.8 17.7 2.6 5.0
The Ritz-Carlton, Atlanta.............. 30.2 5.8 8.8 21.7 4.1 6.8
</TABLE>
F-170
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
The Ritz-Carlton, Buckhead.. $ 49.3 $ 13.1 $ 16.3 $ 35.8 $ 9.2 $ 11.7
Chicago/Deerfield Suites.... 10.2 1.8 3.1 7.4 1.3 2.3
Chicago/Downers Grove
Suites..................... 9.0 1.8 2.9 6.7 1.3 2.2
Chicago/Downtown Courtyard.. 16.3 3.1 4.9 12.2 2.2 3.9
Chicago O'Hare.............. 40.0 5.5 11.5 28.8 3.9 8.2
South Bend.................. 9.9 1.1 2.1 7.0 0.8 1.5
New Orleans ................ 66.4 17.5 21.8 47.6 12.3 15.8
Bethesda.................... 23.2 3.2 5.6 17.3 2.2 4.1
Gaithersburg/Washingtonian
Center..................... 13.2 2.4 3.8 9.7 1.7 2.8
Boston/Newton............... 27.4 4.8 7.8 19.1 3.4 5.5
Detroit Romulus............. 8.8 1.1 1.8 6.6 0.8 1.4
The Ritz-Carlton, Dearborn.. 25.7 3.6 5.5 17.7 2.5 4.0
Minneapolis/Bloomington..... 20.2 3.3 6.5 13.8 2.3 4.7
Minneapolis City Center..... 27.5 3.7 7.5 20.4 2.4 5.2
Minneapolis Southwest....... 14.9 2.7 4.8 10.1 1.9 4.0
Kansas City Airport......... 14.3 1.7 3.7 9.9 1.2 2.5
St. Louis Pavilion.......... 27.5 6.1 6.5 18.5 4.3 4.3
Nashua...................... 7.5 0.8 1.3 5.3 0.5 0.9
Hanover..................... 22.5 4.7 6.6 15.1 3.3 4.3
Newark Airport.............. 39.4 6.5 11.8 29.2 4.6 8.6
Park Ridge.................. 16.0 2.5 4.0 11.9 1.7 4.2
Saddle Brook................ 10.7 1.3 2.1 7.8 0.9 1.7
Albany...................... 18.5 3.5 6.1 12.4 2.5 5.2
New York Marriott Financial
Center..................... 39.6 7.7 13.2 29.1 5.4 10.1
New York Marriott Marquis... 210.3 40.0 60.8 155.4 29.7 47.6
Marriott World Trade
Center..................... 65.4 12.2 19.4 49.1 8.6 14.9
Charlotte Executive Park.... 14.0 2.3 3.7 9.8 1.6 2.6
Raleigh Crabtree Valley..... 14.9 2.4 3.9 10.9 1.7 2.8
Oklahoma City............... 15.6 2.0 3.8 10.4 1.4 2.4
Oklahoma City Waterford..... 9.1 1.5 2.7 6.1 1.0 1.7
Portland.................... 26.4 4.1 7.5 17.6 2.9 4.8
Philadelphia (Convention
Center).................... 80.7 14.2 25.0 58.2 10.0 17.8
Philadelphia Airport........ 25.0 4.1 7.6 18.6 2.9 5.6
Pittsburgh City Center...... 16.4 1.9 3.0 11.1 1.3 2.2
Memphis..................... 10.6 1.5 3.2 5.7 1.0 1.8
Dallas/Fort Worth........... 28.9 5.9 9.3 21.9 4.1 7.0
Dallas Quorum............... 25.7 4.2 8.2 18.3 3.0 5.8
El Paso..................... 11.6 0.9 2.3 7.8 0.6 1.4
Houston Airport ............ 21.6 2.8 6.0 16.9 2.0 4.6
JW Marriott Houston......... 27.2 5.0 8.0 20.1 3.5 5.9
Plaza San Antonio........... 13.8 2.9 4.6 9.7 2.0 3.3
San Antonio Rivercenter..... 68.9 17.5 24.5 49.3 12.3 17.8
San Antonio Riverwalk....... 29.3 6.1 10.3 21.7 4.3 7.6
Salt Lake City.............. 28.5 5.6 9.5 21.1 3.9 7.2
Dulles Airport.............. 14.6 1.8 4.0 10.9 1.2 3.0
Key Bridge.................. 29.4 5.6 10.2 21.2 3.9 7.4
Norfolk Waterside........... 18.1 3.3 5.4 12.8 2.4 3.8
Pentagon City Residence
Inn........................ 11.7 3.5 5.5 8.7 2.5 4.2
The Ritz-Carlton, Tysons
Corner..................... 34.4 5.9 9.8 24.9 4.1 7.3
Washington Dulles Suites.... 10.3 2.5 4.0 7.8 1.8 3.0
Westfields.................. 28.0 4.7 7.4 20.3 3.3 5.4
Williamsburg................ 12.6 1.8 2.8 9.3 1.3 2.1
Washington Metro Center..... 25.2 4.5 7.3 19.2 3.2 5.3
Calgary..................... 13.4 1.7 1.7 9.8 1.2 2.3
Toronto Airport............. 17.1 2.9 5.6 13.0 2.0 4.2
Toronto Eaton Centre........ 21.1 6.1 7.1 16.0 4.3 5.6
Toronto Delta Meadowvale.... 16.1 2.6 4.9 10.6 1.9 3.1
Fairview Park............... 22.5 3.9 7.3 16.3 2.8 5.2
</TABLE>
F-171
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Dayton....................... $ 18.2 $ 3.2 $ 6.0 $ 13.4 $ 2.3 $ 4.3
Research Triangle Park....... 9.1 1.4 2.9 6.8 1.0 2.3
Detroit Marriott Southfield.. 8.8 1.2 2.1 6.9 0.9 1.7
Detroit Marriott Livonia..... 10.0 1.4 2.6 7.4 1.0 1.9
Fullerton.................... 6.8 1.2 1.8 5.0 0.8 1.3
Marriott O'Hare Suites....... 14.4 2.7 4.9 10.8 1.9 4.0
Albuquerque.................. 16.4 3.6 3.6 11.1 2.5 2.6
Greensboro-High Point........ 13.6 3.3 3.3 10.2 2.3 2.4
Houston Medical Center....... 16.5 4.0 4.0 12.2 2.8 2.9
Miami Biscayne Bay........... 26.8 6.5 6.6 20.5 4.5 5.1
Marriott Mountain Shadows
Resort...................... 24.1 4.4 4.5 16.9 3.1 3.1
Seattle SeaTac Airport....... 23.1 6.7 6.7 17.5 4.7 5.1
Four Seasons, Atlanta(4)..... 15.6 5.8 5.9 14.2 4.1 4.5
Four Seasons,
Philadelphia(4)............. 41.1 7.9 12.4 30.6 5.6 10.1
Grand Hyatt, Atlanta(4)...... 25.3 10.0 10.0 22.6 7.0 8.2
Hyatt Regency,
Burlingame(4)............... 47.9 8.8 17.6 39.5 6.2 15.1
Hyatt Regency, Cambridge(4).. 32.4 6.7 11.9 26.8 4.7 10.4
Hyatt Regency, Reston(4)..... 30.5 6.5 11.3 24.2 4.5 9.2
Swissotel, Atlanta(4)........ 22.2 5.0 6.3 17.2 3.5 5.8
Swissotel, Boston(4)......... 26.8 6.4 8.5 20.5 4.5 6.9
Swissotel, Chicago(4)........ 38.1 10.9 15.1 28.9 7.7 12.0
The Drake (Swissotel), New
York(4)..................... 38.8 11.6 13.6 34.2 8.2 13.4
The Ritz-Carlton, Amelia
Island(4)................... 45.7 10.3 13.4 37.4 7.2 11.1
The Ritz-Carlton, Boston(4).. 40.1 6.9 10.5 31.4 4.8 8.8
-------- ------ -------- -------- ------ ------
Total Full-service
Properties.................. 3,600.8 715.9 1,095.6 2,671.0 504.5 838.3
Total Courtyard Properties... 212.0 50.6 59.2 159.2 35.0 36.8
Total Residence Inns......... 69.9 17.2 20.3 50.6 12.0 12.3
-------- ------ -------- -------- ------ ------
Total...................... $3,882.7 $783.7 $1,175.1 $2,880.8 $551.5 $887.4
======== ====== ======== ======== ====== ======
</TABLE>
H. Represents the adjustment to reflect the Company's anticipated adoption
of EITF 97-2 in the fourth quarter of 1998 by recording property-level sales
and operating expenses. The adjustment has no impact on operating profit or
net income.
I. The "Pro Forma without Blackstone" column reflects the adjustment to
eliminate the revenues, operating expenses and working capital relating to the
Blackstone hotel properties assuming that the Blackstone Acquisition does not
occur.
- --------
(1) On a pro forma basis as of September 11, 1998, the Company had 75
million shares of common stock, $.01 par value authorized with 24.8 million
shares issued and outstanding. In addition, on a pro forma basis, 10 million
shares of preferred stock, $.01 par value are authorized with none issued or
outstanding.
(2) Reflects the pro forma earnings per share based on 24.8 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and the issuance of shares to
the Blackstone Entities.
(3) Reflects the pro forma earnings per share based on 20.4 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and assumes that the Blackstone
acquisition does not occur.
(4) Represent the Blackstone hotel properties.
F-172
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 11, 1998
NO PARTNERSHIP PARTICIPATION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WITHOUT
HISTORICAL ADJUSTMENTS PRO FORMA BLACKSTONE
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment, net...... $649,528 $ -- $649,528 $649,528
Amounts due from Marriott Inter-
national........................ 4,097 -- 4,097 4,097
Other assets..................... 14,290 67,000(A) 87,772 82,772
6,482(B)
Cash and cash equivalents........ 26,504 15,000(B) 41,504 41,504
-------- ------- -------- --------
Total assets................... $694,419 $88,482 $782,901 $777,901
======== ======= ======== ========
LIABILITIES AND STOCKHOLDER'S EQ-
UITY
Debt.............................
$213,034 $ $213,034 $213,034
Deferred income taxes............ 61,376 -- 61,376 61,376
Due to Host Marriott Corporation,
net............................. 12,989 67,000(A) 79,989 74,989
Accounts payable and other ac-
crued liabilities............... 13,639 -- 13,639 13,639
Deferred revenue................. 1,310 -- 1,310 1,310
-------- ------- -------- --------
Total liabilities.............. 302,348 67,000 369,348 364,348
-------- ------- -------- --------
Stockholder's equity
Common stock, 100 shares autho-
rized, issued and outstanding
(on a pro forma basis 75 million
shares of common stock autho-
rized; 24.8 million issued and
outstanding)(/1/) .............. -- -- -- --
Additional paid-in capital....... 386,627 15,000(B) 408,109 408,109
6,482(B)
Retained earnings................ 5,444 -- 5,444 5,444
-------- ------- -------- --------
Total stockholder's equity..... 392,071 21,482 413,553 413,553
-------- ------- -------- --------
Total liabilities and stock-
holder's equity............... $694,419 $88,482 $782,901 $777,901
======== ======= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-173
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
NO PARTNERSHIP PARTICIPATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
D E F G H I
DEBT PRO FORMA
REFINANCING/ COMMUNITY CORPORATE HOTEL ADOPTION OF WITHOUT
HISTORICAL REPAYMENTS ACQUISITIONS EXPENSES LEASES EITF 97-2 PRO FORMA BLACKSTONE
---------- ------------ ------------ --------- ------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Rooms................. $ -- $ -- $ -- $ -- $ -- 1,507,687 1,507,687 1,292,185
Food and beverage..... -- -- -- -- -- 675,831 675,831 579,231
Other................. -- -- -- -- -- 110,423 110,423 94,640
House profit.......... -- -- -- -- 896,321 (896,321) -- --
-------- ------- ----- ------- ------- --------- --------- ---------
Total hotels.......... -- -- -- -- 896,321 1,397,620 2,293,941 1,966,056
-------- ------- ----- ------- ------- --------- --------- ---------
Senior living
communities
Routine............... 54,872 -- 84 -- -- 94,792 149,748 149,748
Ancillary............. 2,928 -- 1 -- -- 13,483 16,412 16,412
-------- ------- ----- ------- ------- --------- --------- ---------
Total senior living
communities.......... 57,800 -- 85 -- -- 108,275 166,160 166,160
-------- ------- ----- ------- ------- --------- --------- ---------
Total revenues........ 57,800 -- 85 -- 896,321 1,505,895 2,460,101 2,132,216
-------- ------- ----- ------- ------- --------- --------- ---------
OPERATING COSTS AND
EXPENSES
Hotels
Property-level costs
and expenses
Rooms................. -- -- -- -- -- 651,662 651,662 569,292
Food and beverage..... -- -- -- -- -- 632,750 632,750 546,178
Other department costs
and deductions....... -- -- -- -- -- 113,208 113,208 105,846
Management fees and
other................ -- -- -- -- 177,521 -- 177,521 166,240
Lease expense......... -- -- -- -- 697,500 -- 697,500 554,500
-------- ------- ----- ------- ------- --------- --------- ---------
Total hotels......... -- -- -- -- 875,021 1,397,620 2,272,641 1,942,056
-------- ------- ----- ------- ------- --------- --------- ---------
Senior living
communities
Property-level costs
and expenses
Routine............... -- -- -- -- -- 94,792 94,792 94,792
Ancillary............. -- -- -- -- -- 13,483 13,483 13,483
Other operating costs
and expenses......... 29,803 -- 49 -- -- -- 29,852 29,852
-------- ------- ----- ------- ------- --------- --------- ---------
Total senior living
communities......... 29,803 -- 49 -- -- 108,275 138,127 138,127
-------- ------- ----- ------- ------- --------- --------- ---------
Total operating costs
and expenses........ 29,803 -- 49 -- 875,021 1,505,895 2,410,768 2,080,183
-------- ------- ----- ------- ------- --------- --------- ---------
Operating profit ...... 27,997 -- 36 -- 21,300 49,333 52,033
Corporate expenses..... (2,937) -- -- (7,948) -- -- (10,885) (10,885)
Interest expense....... (17,560) 4,789 -- -- (2,949) -- (15,720) (15,515)
Interest and dividend
income................ 1,120 -- 6 -- 392 -- 1,518 1,518
-------- ------- ----- ------- ------- --------- --------- ---------
Income (loss) before
income taxes.......... 8,620 4,789 42 (7,948) 18,743 -- 24,246 27,153
Benefit (provision) for
income taxes.......... (3,534) (1,963) (18) 3,259 (7,684) -- (9,941) (11,133)
-------- ------- ----- ------- ------- --------- --------- ---------
Income (loss) before
extraordinary item.... $ 5,086 $ 2,826 $ 24 $(4,689) 11,059 -- 14,305 16,020
======== ======= ===== ======= ======= ========= ========= =========
Pro forma earnings per
share................. $ .21(2) $ .58(2) $ .78(3)
======== ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-174
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1998
NO PARTNERSHIP PARTICIPATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
C D E F G H
DEBT
FORUM REFINANCING/ COMMUNITY CORPORATE HOTEL ADOPTION OF PRO
HISTORICAL ACQUISITION REPAYMENT ACQUISITIONS EXPENSES LEASES EITF 97-2 FORMA
---------- ----------- ------------ ------------ --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Room............. $ -- $ -- $ -- $ -- $ -- $ -- $1,984,659 $1,984,659
Food and bever-
age............. -- -- -- -- -- -- 874,761 874,761
Other............ -- -- -- -- -- -- 167,322 167,322
House profit..... -- -- -- -- -- 1,163,628 (1,163,628) --
-------- ------- ------- ------- ------- --------- ---------- ----------
Total hotels.... -- -- -- -- -- 1,163,628 1,863,114 3,026,742
-------- ------- ------- ------- ------- --------- ---------- ----------
Senior living
communities......
Routine.......... 35,473 30,859 -- 7,031 -- -- 127,135 200,498
Ancillary........ 1,427 1,983 -- 188 -- -- 18,693 22,291
-------- ------- ------- ------- ------- --------- ---------- ----------
Total senior
living
communities.... 36,900 32,842 -- 7,219 -- -- 145,828 222,789
-------- ------- ------- ------- ------- --------- ---------- ----------
Total revenues.. 36,900 32,842 -- 7,219 -- 1,163,628 2,008,942 3,249,531
-------- ------- ------- ------- ------- --------- ---------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ -- -- -- -- -- -- 889,525 889,525
Food and bever-
age............. -- -- -- -- -- -- 852,701 852,701
Other department
costs and
deductions...... -- -- -- -- -- -- 120,888 120,888
Management fees
and other....... -- -- -- -- -- 214,128 -- 214,128
Lease expense.... -- -- -- -- -- 921,800 -- 921,800
-------- ------- ------- ------- ------- --------- ---------- ----------
Total hotels.... -- -- -- -- -- 1,135,928 1,863,114 2,999,042
-------- ------- ------- ------- ------- --------- ---------- ----------
Senior living com-
munities
Property-level costs and expenses --
Routine.......... -- -- -- -- -- -- 127,135 127,135
Ancillary........ -- -- -- -- -- -- 18,693 18,693
Other operating
costs and
expenses......... 20,929 17,977 -- 4,733 -- -- -- 43,639
-------- ------- ------- ------- ------- --------- ---------- ----------
Total senior
living
communities.... 20,929 17,977 -- 4,733 -- -- 145,828 189,467
-------- ------- ------- ------- ------- --------- ---------- ----------
Total operating
costs and
expenses....... 20,929 17,977 -- 4,733 -- 1,135,928 2,008,942 3,188,509
-------- ------- ------- ------- ------- --------- ---------- ----------
Operating profit
................. 15,971 14,865 -- 2,486 -- 27,700 -- 61,022
Corporate
expenses......... (2,304) (5,115) -- 745 (6,826) -- -- (13,500)
Interest expense.. (13,396) (9,630) 7,312 (2,118) -- (4,261) -- (22,093)
Interest and
dividend income.. 336 598 -- -- -- 567 -- 1,501
-------- ------- ------- ------- ------- --------- ---------- ----------
Income (loss)
before income
taxes............ 607 718 7,312 1,113 (6,826) 24,006 -- 26,930
Benefit
(provision) for
income taxes..... (249) (294) (2,998) (456) 2,799 (9,843) -- (11,041)
-------- ------- ------- ------- ------- --------- ---------- ----------
Income (loss)
before
extraordinary
item............. $ 358 $ 424 $ 4,314 $ 657 $(4,027) $ 14,163 $ -- $ 15,889
======== ======= ======= ======= ======= ========= ========== ==========
Pro forma earnings
per share........ $ .01(2) $ .64(2)
======== ==========
<CAPTION>
I
PRO
FORMA
WITHOUT
BLACKSTONE
-------------
<S> <C>
REVENUES
Hotels
Room............. $1,719,425
Food and bever-
age............. 757,856
Other............ 144,961
House profit..... --
-------------
Total hotels.... 2,622,242
-------------
Senior living
communities......
Routine.......... 200,498
Ancillary........ 22,291
-------------
Total senior
living
communities.... 222,789
-------------
Total revenues.. 2,845,031
-------------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ 782,914
Food and bever-
age............. 740,238
Other department
costs and
deductions...... 83,462
Management fees
and other....... 200,128
Lease expense.... 785,300
-------------
Total hotels.... 2,592,042
-------------
Senior living com-
munities
Property-level costs and e-- xpenses
Routine.......... 127,135
Ancillary........ 18,693
Other operating
costs and
expenses......... 43,639
-------------
Total senior
living
communities.... 189,467
-------------
Total operating
costs and
expenses....... 2,781,509
-------------
Operating profit
................. 63,522
Corporate
expenses......... (13,500)
Interest expense.. (21,793)
Interest and
dividend income.. 1,501
-------------
Income (loss)
before income
taxes............ 29,730
Benefit
(provision) for
income taxes..... (12,189)
-------------
Income (loss)
before
extraordinary
item............. $ 17,541
=============
Pro forma earnings
per share........ $ .86(3)
=============
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-175
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NO PARTNERSHIP PARTICIPATION
A. Represents the adjustment to increase working capital and record a loan
payable to Host of $67 million to record the transfer of hotel working capital
to the Company related to the leasing of Host's hotels.
B. Represents the following transactions in connection with the
Distribution:
. Host's contribution of $15 million in cash to the Company.
. Host's contribution of a 5% limited partner interest in a joint
venture with Host that owns an approximate $130 million note
receivable from a consolidated subsidiary of Host.
C. Represents the adjustment to reflect the historical revenues, operating
expenses, corporate expenses, interest expense and interest income for the
Forum Acquisition as if such acquisition occurred at the beginning of 1997
(actual acquisition date was June 21, 1997).
D. Represents the adjustment to eliminate interest expense on $133 million
of debt repaid during 1998 by Host on behalf of the Company and treated as a
capital contribution by Host.
E. Represents the adjustment to record the historical revenues, operating
expenses, corporate expenses and interest income related to the acquisition of
one senior living community in 1998 and the acquisition of one senior living
community in 1997. The adjustment also includes the elimination of $745,000 of
minority interest expense included in corporate expenses related to the
purchase of minority interests in certain consolidated subsidiaries of the
Company in 1997.
F. Represents the adjustment to record additional corporate expenses
anticipated to be incurred when the Company is operated on a stand-alone basis
subsequent to the Distribution, net of the asset management contract of $4.5
million per annum. The adjustment includes the following (in thousands):
<TABLE>
<CAPTION>
FIRST THREE FISCAL YEAR
QUARTERS 1998 1997
------------- -----------
<S> <C> <C>
Payroll costs......................................... $6,748 $6,894
Rent and insurance.................................... 1,217 1,267
Other general and administrative costs................ 3,097 3,165
------ ------
11,062 11,326
Less: asset management fee............................ (3,115) (4,500)
------ ------
Net corporate expense adjustment.................... $7,947 $6,826
====== ======
</TABLE>
G. Represents the adjustment to record the historical hotel revenues and
hotel expenses and pro forma lease expense associated with the leasing of
certain hotel properties from Host, interest expense on the $67 million
working capital loan at 6%, and dividend income from the 5% investment in the
joint venture with Host that owns a $130 million note receivable from a
consolidated subsidiary of Host.
Rental revenues under the leases are based on the greater of Percentage Rent
or Minimum Rent. Total rent in the pro forma statement of operations is
calculated based on the historical gross sales of the property and the
negotiated rental rates and thresholds by property as if the leases were
entered into on the first day of fiscal year 1997. There are generally three
sales categories utilized in the rent calculation: rooms, food and beverage
and other. For rooms and food and beverage, there are three tiers of rent with
two thresholds, while the other category generally has two tiers of rent and
one threshold. The percentage rent thresholds are increased annually on the
first day of each year after the initial lease year based on a blended
increase of the CPI and a wage and benefit index. For purposes of the pro
formas, 1997 is the assumed initial lease year and the blended increase
applied to the thresholds at January 3, 1998 is assumed to be 3%. Minimum rent
is expressed as a fixed dollar amount that increases annually on the first day
of each year after the initial lease year at 50% of the CPI increase.
Accordingly, the 1998 rent thresholds and minimum rent included in the pro
formas were adjusted as of
F-176
<PAGE>
January 3, 1998 for the 1997 increases in the indices. Rental revenues are
recognized only for leases to be executed with Host REIT at or prior to
completion of the Distribution. The execution of the leases is dependent upon
the consummation of the Distribution, which is subject to contingencies that
are outside the control of the Company, including consent of shareholders,
lenders, debt holders, partners and ground lessors of Host. The Company
believes that negotiations with third parties to complete the Distribution
will not result in any material change to the leases. The table below details
gross sales, minimum rent and total rent for all full-service properties to be
leased and summarized amounts for the limited-service properties to be
subleased:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Grand Hotel Resort and Golf
Club....................... $ 23.4 $ 2.8 $ 4.2 $ 18.0 $ 2.0 $ 3.7
Scottsdale Suites........... 11.9 3.0 5.0 8.2 2.1 3.4
The Ritz-Carlton, Phoenix... 23.3 4.6 7.2 17.3 3.2 5.5
Coronado Island Resort...... 22.0 2.1 2.1 16.2 1.5 3.6
Costa Mesa Suites........... 9.7 1.9 3.3 7.2 1.3 2.3
Manhattan Beach............. 16.3 2.4 4.8 12.2 1.7 3.6
Marina Beach ............... 21.1 4.6 7.1 16.9 3.2 6.2
Newport Beach............... 33.5 5.5 8.7 24.0 3.9 6.8
Newport Beach Suites........ 11.0 2.6 4.1 8.0 1.8 3.0
Ontario Airport............. 12.1 1.8 3.4 8.3 1.3 2.2
San Diego Marriott Hotel and
Marina..................... 103.3 38.0 39.6 78.6 26.7 31.1
San Diego Mission Valley.... 16.7 3.4 5.1 12.6 2.4 5.6
San Francisco Airport....... 43.8 8.2 13.2 32.2 5.8 9.5
San Francisco Fisherman's
Wharf...................... 17.8 4.0 6.4 12.1 2.8 4.3
San Francisco Moscone
Center..................... 120.2 20.7 37.9 90.5 14.6 28.5
The Ritz-Carlton, Marina del
Rey........................ 32.4 5.5 10.8 23.4 3.9 7.9
The Ritz-Carlton, San
Francisco.................. 50.1 9.6 14.7 34.2 6.7 10.3
Torrance.................... 20.5 2.3 3.5 15.0 1.6 5.1
Denver Southeast............ 21.5 3.0 6.2 14.9 2.1 4.1
Denver Tech Center.......... 26.8 5.1 8.3 20.1 3.6 6.0
Denver West................. 13.7 1.8 4.0 9.6 1.2 2.7
Marriott's Mountain Resort
at Vail.................... 17.6 3.0 5.1 14.1 2.1 4.5
Hartford/Farmington......... 18.4 3.5 4.7 13.4 2.4 3.5
Hartford/Rocky Hill......... 11.6 1.5 2.7 8.5 1.1 2.0
Fort Lauderdale Marina...... 28.5 4.3 7.9 20.4 3.0 5.7
Jacksonville................ 11.8 1.8 3.6 8.0 1.2 2.4
Miami Airport............... 29.7 3.9 8.4 21.6 2.8 6.1
Palm Beach Gardens.......... 11.8 1.9 3.7 8.5 1.4 3.0
Singer Island (Holiday
Inn)....................... 6.6 1.4 2.5 5.2 1.0 2.1
Tampa Airport............... 17.1 1.6 3.5 13.1 1.1 2.7
Tampa Westshore............. 15.0 1.8 3.6 10.8 1.3 2.6
The Ritz-Carlton, Naples.... 66.4 18.1 23.3 53.1 12.7 18.0
Atlanta Midtown Suites...... 10.5 1.8 3.5 7.8 1.3 2.6
Atlanta Norcross............ 7.6 1.0 1.7 5.6 0.7 1.2
Atlanta Northwest........... 14.9 2.7 4.3 11.3 1.9 3.3
Atlanta Perimeter........... 16.6 2.5 4.5 12.6 1.7 3.5
JW Marriott Hotel at Lenox.. 24.8 3.7 6.8 17.7 2.6 5.0
The Ritz-Carlton, Atlanta... 30.2 5.8 8.8 21.7 4.1 6.8
The Ritz-Carlton, Buckhead.. 49.3 13.1 16.3 35.8 9.2 11.7
Chicago/Deerfield Suites.... 10.2 1.8 3.1 7.4 1.3 2.3
Chicago/Downers Grove
Suites..................... 9.0 1.8 2.9 6.7 1.3 2.2
Chicago/Downtown Courtyard.. 16.3 3.1 4.9 12.2 2.2 3.9
Chicago O'Hare.............. 40.0 5.5 11.5 28.8 3.9 8.2
South Bend.................. 9.9 1.1 2.1 7.0 0.8 1.5
Bethesda.................... 23.2 3.2 5.6 17.3 2.2 4.1
</TABLE>
F-177
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- ----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- ------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Gaithersburg/Washingtonian
Center...................... $ 13.2 $ 2.4 $ 3.8 $ 9.7 $ 1.7 $ 2.8
Boston/Newton................ 27.4 4.8 7.8 19.1 3.4 5.5
Detroit Romulus.............. 8.8 1.1 1.8 6.6 0.8 1.4
The Ritz-Carlton, Dearborn... 25.7 3.6 5.5 17.7 2.5 4.0
Minneapolis/Bloomington...... 20.2 3.3 6.5 13.8 2.3 4.7
Minneapolis City Center...... 27.5 3.7 7.5 20.4 2.4 5.2
Minneapolis Southwest........ 14.9 2.7 4.8 10.1 1.9 4.0
Kansas City Airport.......... 14.3 1.7 3.7 9.9 1.2 2.5
St. Louis Pavilion........... 27.5 6.1 6.5 18.5 4.3 4.3
Nashua....................... 7.5 0.8 1.3 5.3 0.5 0.9
Newark Airport............... 39.4 6.5 11.8 29.2 4.6 8.6
Park Ridge................... 16.0 2.5 4.0 11.9 1.7 4.2
Saddle Brook................. 10.7 1.3 2.1 7.8 0.9 1.7
Albany....................... 18.5 3.5 6.1 12.4 2.5 5.2
New York Marriott Financial
Center...................... 39.6 7.7 13.2 29.1 5.4 10.1
New York Marriott Marquis.... 210.3 40.0 60.8 155.4 29.7 47.6
Marriott World Trade Center.. 65.4 12.2 19.4 49.1 8.6 14.9
Charlotte Executive Park..... 14.0 2.3 3.7 9.8 1.6 2.6
Raleigh Crabtree Valley...... 14.9 2.4 3.9 10.9 1.7 2.8
Oklahoma City................ 15.6 2.0 3.8 10.4 1.4 2.4
Oklahoma City Waterford...... 9.1 1.5 2.7 6.1 1.0 1.7
Portland..................... 26.4 4.1 7.5 17.6 2.9 4.8
Philadelphia (Convention
Center)..................... 80.7 14.2 25.0 58.2 10.0 17.8
Philadelphia Airport......... 25.0 4.1 7.6 18.6 2.9 5.6
Pittsburgh City Center....... 16.4 1.9 3.0 11.1 1.3 2.2
Memphis...................... 10.6 1.5 3.2 5.7 1.0 1.8
Dallas/Fort Worth............ 28.9 5.9 9.3 21.9 4.1 7.0
Dallas Quorum................ 25.7 4.2 8.2 18.3 3.0 5.8
El Paso...................... 11.6 0.9 2.3 7.8 0.6 1.4
Houston Airport ............. 21.6 2.8 6.0 16.9 2.0 4.6
JW Marriott Houston.......... 27.2 5.0 8.0 20.1 3.5 5.9
Plaza San Antonio............ 13.8 2.9 4.6 9.7 2.0 3.3
San Antonio Riverwalk........ 29.3 6.1 10.3 21.7 4.3 7.6
Salt Lake City............... 28.5 5.6 9.5 21.1 3.9 7.2
Dulles Airport............... 14.6 1.8 4.0 10.9 1.2 3.0
Key Bridge................... 29.4 5.6 10.2 21.2 3.9 7.4
Norfolk Waterside............ 18.1 3.3 5.4 12.8 2.4 3.8
Pentagon City Residence Inn.. 11.7 3.5 5.5 8.7 2.5 4.2
The Ritz-Carlton, Tysons
Corner...................... 34.4 5.9 9.8 24.9 4.1 7.3
Washington Dulles Suites..... 10.3 2.5 4.0 7.8 1.8 3.0
Westfields................... 28.0 4.7 7.4 20.3 3.3 5.4
Williamsburg................. 12.6 1.8 2.8 9.3 1.3 2.1
Washington Metro Center...... 25.2 4.5 7.3 19.2 3.2 5.3
Calgary...................... 13.4 1.7 1.7 9.8 1.2 2.3
Toronto Airport.............. 17.1 2.9 5.6 13.0 2.0 4.2
Toronto Eaton Centre......... 21.1 6.1 7.1 16.0 4.3 5.6
Toronto Delta Meadowvale..... 16.1 2.6 4.9 10.6 1.9 3.1
Four Seasons, Atlanta(4)..... 15.6 5.8 5.9 14.2 4.1 4.5
Four Seasons,
Philadelphia(4)............. 41.1 7.9 12.4 30.6 5.6 10.1
Grand Hyatt, Atlanta(4)...... 25.3 10.0 10.0 22.6 7.0 8.2
Hyatt Regency,
Burlingame(4)............... 47.9 8.8 17.6 39.5 6.2 15.1
Hyatt Regency, Cambridge(4).. 32.4 6.7 11.9 26.8 4.7 10.4
Hyatt Regency, Reston(4)..... 30.5 6.5 11.3 24.2 4.5 9.2
Swissotel, Atlanta(4)........ 22.2 5.0 6.3 17.2 3.5 5.8
Swissotel, Boston(4)......... 26.8 6.4 8.5 20.5 4.5 6.9
Swissotel, Chicago(4)........ 38.1 10.9 15.1 28.9 7.7 12.0
The Drake (Swissotel), New
York(4)..................... 38.8 11.6 13.6 34.2 8.2 13.4
The Ritz-Carlton, Amelia
Island(4)................... 45.7 10.3 13.4 37.4 7.2 11.1
</TABLE>
F-178
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
----------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- ------ -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
The Ritz-Carlton, Boston(4).... $ 40.1 $ 6.9 $ 10.5 $ 31.4 $ 4.8 $ 8.8
-------- ------ ------ -------- ------ ------
Total Full-service Properties.. 2,790.7 537.9 842.3 2,071.7 379.4 648.4
Total Courtyard Properties..... 212.0 50.6 59.2 159.2 35.0 36.8
Total Residence Inns........... 69.9 17.2 20.3 50.6 12.0 12.3
-------- ------ ------ -------- ------ ------
Total........................ $3,072.6 $605.7 $921.8 $2,281.6 $426.4 $697.5
======== ====== ====== ======== ====== ======
</TABLE>
H. Represents the adjustment to reflect the Company's anticipated adoption
of EITF 97-2 in the fourth quarter of 1998 by recording property-level sales
and operating expenses. The adjustment has no impact on operating profit or
net income.
I. The "Pro Forma without Blackstone" column reflects the adjustment to
eliminate the revenues and operating expenses and working capital relating to
the Blackstone hotel properties assuming that the Blackstone Acquisition does
not occur.
- --------
(1) On a pro forma basis as of September 11, 1998, the Company had 75
million shares of common stock, $.01 par value authorized with 24.8 million
shares issued and outstanding. In addition, on a pro forma basis, 10 million
shares of preferred stock, $.01 par value authorized with none issued or
outstanding.
(2) Reflects the pro forma earnings per share based on 24.8 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and the issuance of shares to
the Blackstone Entities.
(3) Reflects the pro forma earnings per share based on 20.4 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and assumes that the Blackstone
acquisition does not occur.
(4) Represent the Blackstone hotel properties.
F-179
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of November ,
1998, among Host Marriott Corporation, a Delaware corporation ("Host"), HMC
Merger Corporation, a Maryland corporation ("Host REIT") and Host Marriott,
L.P., a Delaware limited partnership (the "Operating Partnership").
RECITALS
WHEREAS, Host has adopted an overall plan (the "REIT Conversion") to
restructure its business operations so that it will qualify as a real estate
investment trust for federal income tax purposes; and
WHEREAS, the transactions comprising the REIT Conversion include, among
others, (a) the contribution by Host of its wholly-owned full-service hotels,
its interests in certain hotel partnerships and certain other assets to the
Operating Partnership, which was organized and is currently wholly-owned by
Host and of which Host will be the sole general partner, in accordance with
the terms of a contribution agreement to be entered into in connection
therewith (the "OP Contribution") and (b) the reincorporation (the
"Reincorporation") of Host from the State of Delaware to the State of Maryland
by means of a merger of Host with and into Host REIT, which was formed as a
direct wholly-owned subsidiary of Host for the sole purpose of effecting the
Reincorporation; and
WHEREAS, the Board of Directors of Host and the Board of Directors of Host
REIT each have determined that the OP Contribution and the Reincorporation by
means of the merger is advisable for their respective companies and
stockholders, and accordingly have agreed to effect the OP Contribution and
the Reincorporation by means of the merger provided for herein upon the terms
and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby adopt the plan of restructuring encompassed by this
Agreement and agree as follows:
I. THE OP CONTRIBUTION
Subject to the applicable terms and conditions of this Agreement and the
terms and conditions of a contribution agreement to be entered into prior to
the Merger by Host and the Operating Partnership, Host will effectuate the OP
Contribution consisting of the contribution of (a) the wholly-owned full-
service hotel assets held by Host, (b) certain interests in various
partnerships that own full-service hotels in which Host is the general partner
(the "Partnerships"), (c) certain other partnerships or limited liability
companies (the "Private Partnerships") that own one or more full-service
hotels and that are partially but not wholly-owned by Host (other than its
interests in the general partners of the Partnerships, each of which is Host
or a wholly-owned, direct or indirect subsidiary of Host, and certain other
subsidiaries of Host which will remain in existence as subsidiaries of Host
REIT following the REIT Conversion) and (d) certain of its other assets
(excluding Host's senior living assets and the cash or other consideration to
be distributed to stockholders of Host or Host REIT in connection with the
REIT Conversion and certain other de minimis assets that cannot be contributed
to the Operating Partnership) to the Operating Partnership in exchange for (i)
a number of units of limited partnership interest in the Operating Partnership
equal to the number of outstanding shares of Host Common Stock (as defined
below) at the completion of the REIT Conversion (and preferred partnership
interests in the Operating Partnership corresponding to any shares of
preferred stock of Host, if any, outstanding at the time of the REIT
Conversion), including a 0.1% general partnership interest and (ii) the
assumption by the Operating Partnership of liabilities of Host, including past
and future contingent liabilities, other than liabilities of Crestline Capital
Corporation, a Maryland corporation ("Crestline"), which currently is a
wholly-owned subsidiary of Host but will become a separate public company as
part of the REIT Conversion, all as set forth in the contribution agreement.
Following the above-described OP Contribution, as well as certain other
contributions
A-1
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to the Operating Partnership by various subsidiaries of Host in connection
with the REIT Conversion, the Operating Partnership and its subsidiaries will
directly or indirectly own all of Host's and its subsidiaries' wholly-owned
hotels, substantially all of Host's direct and indirect interests in both the
Partnerships and the Private Partnerships and all of Host's other assets
(excluding its senior living assets and the cash or other consideration to be
distributed to the stockholders of Host or Host REIT in connection with the
REIT Conversion and certain other de minimis assets that cannot be contributed
to the Operating Partnership).
II. THE MERGER
ARTICLE 1
THE MERGER; CLOSING; EFFECTIVE TIME
1.1. THE MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), Host shall be merged with and
into Host REIT in accordance with this Agreement and the separate corporate
existence of Host shall thereupon cease (the "Merger"). The parties intend
that the Merger qualify as a reorganization within the meaning of Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended. Host REIT shall
be the surviving entity in the Merger (sometimes hereinafter referred to as
the "Surviving Corporation") and shall continue to be governed by the laws of
the State of Maryland, and the separate existence of Host REIT with all its
rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger. The Merger shall have the effects specified in the
Delaware General Corporation Law ("DGCL") and the Maryland General Corporation
Law ("MGCL").
1.2. THE CLOSING. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place (a) at the offices of
Hogan & Hartson L.L.P., 555 Thirteenth Street, N.W., Washington, D.C., 20004,
at 9:00 a.m., local time, on or (b) at such other time, date or place as
Host and Host REIT may agree. The date on which the Closing occurs is
hereinafter referred to as the "Closing Date."
1.3. EFFECTIVE TIME. If all the conditions to the Merger set forth in
Article 5 shall have been satisfied or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 6, following
the Closing, the parties hereto shall, at such time as they deem advisable,
cause (i) a Certificate of Merger (the "Certificate of Merger") to be
executed, acknowledged and filed with the Secretary of State of Delaware, as
provided in Section 252 of the DGCL and (ii) Articles of Merger substantially
in the form attached hereto as Exhibit A (the "Articles of Merger") to be
filed with the State Department of Assessments and Taxation of Maryland (the
"SDAT"), as provided in Section 3-105 of the MGCL. The Merger shall become
effective upon the later of the filing of the Certificate of Merger with the
Secretary of State of Delaware and the acceptance for record of the Articles
of Merger by the SDAT, or such other time as specified in the Articles of
Merger and the Certificate of Merger (the "Effective Time").
ARTICLE 2
NAME, ARTICLES OF INCORPORATION
AND BYLAWS
OF THE SURVIVING CORPORATION
2.1. NAME OF SURVIVING CORPORATION. The name of the Surviving Corporation
shall be changed at the Effective Time to "Host Marriott Corporation", as
provided in the Restated Articles (as defined in Section 2.2 hereof).
2.2. ARTICLES OF INCORPORATION. The Articles of Amendment and Restatement of
Articles of Incorporation of Host REIT, substantially in the form attached
hereto as Exhibit B (the "Restated Articles"), shall be filed with the SDAT as
part of the Merger and shall be the Articles of Incorporation of the Surviving
Corporation until duly amended in accordance with the terms thereof and the
MGCL.
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2.3. BYLAWS. The Bylaws of Host REIT in effect immediately prior to the
Effective Time (a copy of which is attached hereto as Exhibit C) shall be the
Bylaws of the Surviving Corporation until duly amended in accordance with the
terms thereof and the MGCL.
ARTICLE 3
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1. DIRECTORS. As set forth in the Restated Articles, the directors of Host
immediately prior to the Effective Time shall be the directors of the
Surviving Corporation as of and following the Effective Time until their
successors have been duly elected and qualified or until their earlier death,
resignation or removal in accordance with the Articles of Incorporation and
Bylaws of the Surviving Corporation.
3.2. OFFICERS. The officers of Host immediately prior to the Effective Time
shall be the officers of the Surviving Corporation as of and following the
Effective Time until their successors have been duly appointed and qualified
or until their earlier death, resignation or removal in accordance with the
Articles of Incorporation and Bylaws of the Surviving Corporation.
ARTICLE 4
EFFECT ON CAPITAL STOCK;
EXCHANGE OF CERTIFICATES
4.1 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the Merger
and without any further action on the part of any holder of any capital stock
of Host:
(a) Each share of common stock, par value $1.00 per share, of Host ("Host
Common Stock") issued and outstanding immediately prior to the Effective
Time, together with the associated right ("Host Right") issued under the
Rights Agreement dated as of February 3, 1989, as amended, between Marriott
Corporation (the former name of Host) and the Bank of New York (the "Host
Rights Agreement"), shall be converted into one validly issued, fully paid
and nonassessable share of common stock, par value $0.01 per share, of Host
REIT ("Host REIT Common Stock"), together with the associated right issued
under a stockholder rights plan to be adopted by Host REIT prior to the
Merger (the "Host REIT Stockholder Rights Plan"). Any shares of preferred
stock of Host outstanding immediately prior to the Effective Time would be
converted into an equal number of shares of preferred stock of Host REIT
having substantially the same rights and preferences.
(b) All shares of Host Common Stock shall no longer be outstanding and
shall be canceled and retired and shall cease to exist. At the Effective
Time, each certificate representing shares of Host Common Stock will be
deemed for all purposes to evidence the same number of shares of Host REIT
Common Stock until such certificate is exchanged for a certificate
representing shares of Host REIT Common Stock in accordance with Article 4
hereof.
(c) Each share of Host Common Stock held in Host's treasury at the
Effective Time shall, by virtue of the Merger and without any action on the
part of the holder thereof, cease to be outstanding, shall be canceled and
retired without payment of any consideration therefor and shall cease to
exist.
(d) Each share of Host REIT Common Stock issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of Host REIT or the holder of such shares,
be canceled and retired without payment of any consideration therefor.
(e) Any dividends or other distributions to the stockholders of Host that
have been declared by Host but not paid prior to consummation of the Merger
will be assumed by Host REIT.
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4.2 BENEFIT PLANS. The rights and obligations of Host under the Host
Marriott Corporation 1997 Comprehensive Stock Incentive Plan (formerly called
the Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan), the
Host Marriott Corporation Employee Stock Purchase Plan, the Host Marriott
Corporation (HMC) Retirement and Savings Plan, the Host Marriott Corporation
Executive Deferred Compensation Plan and the Host Marriott Corporation
Medical/Dental/Vision Care Plan (collectively, the "Plans") and related and
other option agreements will be transferred to the Operating Partnership, and
all rights of the parties thereto and the participants therein to acquire
shares of Host Common Stock on the terms and conditions of the Plans and such
option agreements will be converted into rights to acquire shares of Host REIT
Common Stock, in each case, to the extent set forth in, and in accordance
with, the terms of such Plans and related and other agreements and the
Employee Benefits and Other Employment Matters Allocation Agreement to be
entered into by Host in connection with the REIT Conversion. The rights and
obligations of Host under the Host Marriott Corporation Non-Employee
Director's Deferred Stock Compensation Plan will be continued by Host REIT.
4.3 EXCHANGE OF CERTIFICATES.
(a) As of the Effective Time, Host REIT shall deposit, or shall cause to be
deposited, with First Chicago Trust Company of New York, the transfer agent
and registrar for the shares of Host REIT Common Stock and the exchange agent
for purposes of the Merger (the "Transfer and Exchange Agent"), for exchange
in accordance with this Article 4, certificates evidencing shares of Host REIT
Common Stock (the "Exchange Fund") to be issued pursuant to Section 4.1 and
delivered pursuant to this Section 4.3 in exchange for outstanding securities
of Host.
(b) As soon as practicable after the Effective Time, Host REIT shall cause
the Transfer and Exchange Agent to mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Host Common Stock ("Certificates"), (i) a
letter of transmittal which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of
the Certificates to the Transfer and Exchange Agent and shall be in such form
and have such other provisions as Host REIT may reasonably specify and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for certificates evidencing shares of Host REIT Common Stock. Upon
surrender of a Certificate for cancellation to the Transfer and Exchange Agent
together with such letter of transmittal, duly executed and completed in
accordance with the instructions thereto, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate evidencing the
number of shares of Host REIT Common Stock which such holder has the right to
receive in respect of the Certificate surrendered pursuant to the provisions
of this Article 4, and the Certificate so surrendered shall forthwith be
canceled. In the event of a surrender of a Certificate representing shares of
Host Common Stock in exchange for a certificate evidencing shares of Host REIT
Common Stock in the name of a person other than the person in whose name the
share of Host Common Stock are registered, a certificate evidencing the proper
number of shares of Host REIT Common Stock that may be issued to such a
transferee if the Certificate evidencing such securities is presented to the
Transfer and Exchange Agent, accompanied by all documents required by the
Transfer and Exchange Agent or Host REIT to evidence and effect such transfer
and to evidence that any applicable transfer taxes have been paid.
(c) All shares of Host REIT Common Stock issued upon the surrender for
exchange of shares of Host Common Stock in accordance with the terms hereof
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares Host Common Stock, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have
been declared or made by Host on such Host Common Stock and which remain
unpaid at the Effective Time. Any such dividends or distributions that would
have entitled stockholders of Host to receive shares of Host Common Stock
shall be deemed, after the Effective Time, to entitle stockholders of Host
REIT to receive the same number of shares of Host REIT Common Stock.
(d) At and after the Effective Time, there shall be no transfers on the
stock transfer books of Host of shares of Host Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
canceled and exchanged for certificates representing shares of Host REIT
Common Stock in accordance with the procedures set forth in this Article 4.
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(e) No fractional shares of Host REIT Common Stock shall be issued pursuant
hereto.
(f) Any portion of the Exchange Fund that remains unclaimed by the former
stockholders of Host one year after the Effective Time shall be delivered to
the Surviving Corporation. Any former stockholders of Host who have not
theretofore complied with this Article 4 shall thereafter look only to the
Surviving Corporation for payment of their shares of Host REIT Common Stock
deliverable in respect of each share of Host Common Stock such stockholder
holds as determined pursuant to this Agreement, without any interest thereon.
None of Host, Host REIT, the Transfer and Exchange Agent or any other person
shall be liable to any former holder of shares or securities of Host for any
amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Surviving
Corporation, the posting by such person of a bond in such reasonable amount as
the Surviving Corporation may direct as indemnity against any claim that may
be made against it with respect to such Certificate, the Transfer and Exchange
Agent or the Surviving Corporation will issue in exchange for such lost,
stolen or destroyed Certificate the shares of Host REIT Common Stock
deliverable in respect thereof pursuant to this Agreement.
ARTICLE 5
CONDITIONS
5.1 CONDITIONS AS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of Host and Host REIT to consummate the Merger are
subject to the satisfaction or, with respect to Sections 5.1(c) and (d) only,
waiver, of the following conditions:
(a) The Merger shall have been duly approved by Host, as the sole
stockholder of Host REIT, and this Agreement shall have been duly approved
by the holders of Host Common Stock representing not less than two-thirds
(66 2/3%) of the outstanding shares of Host Common Stock.
(b) Host's Board of Directors shall have determined (i) that the
transactions constituting the REIT Conversion which impact Host REIT's
status as a REIT for federal income tax purposes have occurred or are
reasonably likely to occur, and (ii) based upon the advice of counsel, that
Host REIT can elect to be treated as a REIT for federal income tax purposes
effective no later than the first full taxable year commencing after the
REIT Conversion is completed.
(c) Host REIT shall have adopted the Host REIT Stockholder Rights Plan,
which Plan shall have been approved by the Board of Directors of Host prior
to the Effective Time.
(d) Host shall amend the Host Rights Agreement to provide that each Host
Right issuable pursuant to the Host Rights Agreement will be converted, as
of the Effective Time, into a right issuable under the Host REIT
Stockholder Rights Plan.
(e) Host shall have received all governmental and third party consents to
the Merger, including consents of lenders and Marriott International, Inc.,
except for consents as would not reasonably be expected to have a material
adverse effect on the business, financial condition or results of
operations of Host REIT, the Operating Partnership and their subsidiaries
taken as a whole.
(f) Host shall have determined, in its sole discretion, that The United
States Congress shall not have enacted legislation, or proposed legislation
with a reasonable possibility of being enacted, that would have the effect
of (i) substantially impairing the ability of Host REIT to qualify as a
REIT or the Operating Partnership to qualify as a partnership, (ii)
substantially increasing the federal tax liabilities of Host REIT resulting
from the REIT Conversion or (iii) substantially reducing the expected
benefits to Host REIT resulting from the REIT Conversion.
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ARTICLE 6
TERMINATION
6.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the stockholders of Host, by either
(i) the mutual written consent of the Board of Directors of Host and the Board
of Directors of Host REIT or (ii) the Board of Directors of Host in its sole
discretion.
6.2 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article 6, no
party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other party to this Agreement.
ARTICLE 7
GENERAL PROVISIONS
7.1 ENTIRE AGREEMENT. This Agreement, the Exhibits and any documents
delivered by the parties in connection herewith constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
7.2 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken by their respective Board of Directors at any time before or
after approval of the Agreement by the stockholders of Host, but after such
stockholder approval, no amendment shall be made which by law requires the
further approval of such stockholders without obtaining such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
7.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the States of Delaware and Maryland.
7.4 COUNTERPARTS. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof,
each signed by less than all, but together signed by all of the parties
hereto.
7.5 HEADINGS. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
7.6 INCORPORATION. All Exhibits attached hereto and referred to herein are
hereby incorporated herein and made a part hereof for all purposes as if fully
set forth herein.
7.7 SEVERABILITY. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
7.8 WAIVER OF CONDITIONS. The conditions to each of the parties' obligations
to consummate the Merger are for the sole benefit of such party and may be
waived by such party in whole or in part to the extent permitted by applicable
law.
7.9 NO THIRD-PARTY BENEFICIARIES. This Agreement is not intended to confer
upon any person other than the parties hereto any rights or remedies
hereunder.
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
ATTEST:
HOST MARRIOTT CORPORATION
By: By:
---------------------------------- ----------------------------(SEAL)
[Title] [Title]
ATTEST:
HMC MERGER CORPORATION
By: By:
---------------------------------- ----------------------------(SEAL)
[Title] [Title]
ATTEST:
HOST MARRIOTT, L.P.
(for purposes of Section I only)
By: By:
---------------------------------- ----------------------------(SEAL)
[Title] [Title]
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<PAGE>
EXHIBIT A TO APPENDIX A
ARTICLES OF MERGER
BETWEEN
HMC MERGER CORPORATION
(a Maryland Corporation)
AND
HOST MARRIOTT CORPORATION
(a Delaware Corporation)
HMC Merger Corporation, a corporation duly organized and existing under the
laws of the State of Maryland ("Host-MD"), and Host Marriott Corporation, a
corporation duly organized and existing under the laws of the State of
Delaware ("Host-DE"), do hereby certify that:
FIRST: Host-MD and Host-DE agree to merge.
SECOND: The name and place of incorporation of each party to these Articles
are HMC Merger Corporation, a Maryland corporation, and Host Marriott
Corporation, a Delaware corporation. Host-MD shall be the successor
corporation in the merger. Upon consummation of the merger, the current name
of Host-MD shall be changed to "Host Marriott Corporation" and Host-MD shall
continue as a corporation of the State of Maryland.
THIRD: Host-DE was incorporated on July 10, 1929, under the Delaware General
Corporation Law under the name Marriott Corporation, which name was changed to
Host Marriott Corporation on October 8, 1993 pursuant to an amendment to the
Certificate of Incorporation of Host-DE. Host-DE has been registered and
qualified to do business in Maryland since May 7, 1937 and owns interests in
land in County, Maryland.
FOURTH: Both Host-MD and Host-DE have their principal offices in Bethesda,
Maryland, Montgomery County.
FIFTH: The terms and conditions of the transaction set forth in these
Articles were advised, authorized, and approved by each corporation party to
these Articles in the manner and by the vote required by its Articles or
Certificate of Incorporation, as the case may be, and the laws of its state of
incorporation. The manner of approval was as follows:
(a) The directors of Host-DE determined the proposed agreement and plan
of merger to be advisable for Host-DE and its stockholders, approved the
agreement and plan of merger at a special meeting of the board of directors
on November , 1998 and directed that the agreement and plan of merger be
submitted for consideration by the stockholders of Host-DE at a special
meeting for the purpose of acting on the agreement and plan of merger. At a
special meeting of Host-DE stockholders held on December , 1998, the
stockholders of Host-DE adopted a resolution approving the agreement and
plan of merger by the affirmative vote of at least two-thirds (66 2/3%) of
the shares of capital stock of Host-DE outstanding on the record date for
such special meeting and entitled to vote thereon.
(b) The Board of Directors of Host-MD adopted a resolution at a special
meeting of the board of directors on November , 1998 which declared that
the proposed merger was advisable on substantially the terms and conditions
set forth or referred to in the resolution and directed that such
resolution be submitted for consideration by the sole stockholder of Host-
MD. In accordance with Sections 2-504(d) and 2-505 of the Maryland General
Corporation Law, the sole stockholder of Host-MD adopted a resolution by
unanimous written consent dated as of December , 1998, approving the
proposed merger.
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SIXTH: The Articles of Incorporation of Host-MD, the successor corporation,
shall be amended and restated as part of the merger to read as set forth in
Exhibit A to these Articles.
SEVENTH: (a) The total number of shares of stock of all classes which Host-
DE has authority to issue is 601,000,000 shares, of which 600,000,000 shares
are classified as common stock, par value $1.00 per share ("Host-DE Common
Stock"), and 1,000,000 shares are classified as preferred stock, without par
value.
(b) The aggregate par value of all the shares of stock of all classes of
Host-DE is $600,000,000.
EIGHTH: (a) As of immediately before the merger, the total number of shares
of stock of all classes which Host-MD has authority to issue is 1,000 shares
of common stock, par value $0.01 per share.
(b) As changed by the merger, the total number of shares of stock of all
classes which Host-MD has authority to issue is 800,000,000 shares, of which
750,000,000 shares are classified as common stock, par value $0.01 per share
("Host-MD Common Stock"), and 50,000,000 shares are classified as preferred
stock, par value $0.01 per share.
(c) The aggregate par value of all the shares of stock of all classes of
Host-MD is $10 before the merger and $8,000,000 as changed by the merger.
NINTH: The merger shall become effective at p.m. (Eastern Time) on
December , 1998 (the "Effective Time").
TENTH: The manner and basis of converting or exchanging issued stock of the
merging corporations into different stock of a corporation, or other
consideration, and the treatment of any issued stock of the merging
corporations not to be converted or exchanged, are as follows:
(a) Each share of Host-DE Common Stock issued and outstanding immediately
prior to the Effective Time, together with the associated right ("Host
Right") issued under the Rights Agreement dated as of February 3, 1989, as
amended, between Marriott Corporation (the former name of Host) and the
Bank of New York (the "Host Rights Agreement"), shall, upon effectiveness
of the merger, be converted into one validly issued, fully paid and
nonassessable share of Host-MD Common Stock, together with the associated
right issued under a stockholder rights plan to be adopted by Host-MD prior
to the Merger (the "Host-MD Stockholder Rights Plan").
(b) After the Effective Time, all shares of Host-DE Common Stock shall no
longer be outstanding and shall be canceled and retired and shall cease to
exist. At the Effective Time, each certificate representing shares of Host-
DE Common Stock will be deemed for all purposes to evidence the same number
of shares of Host-MD Common Stock until exchanged for a certificate
representing shares of Host-MD Common Stock in accordance with the terms of
the Agreement and Plan of Merger.
(c) Each share of Host-DE Common Stock held in Host-DE's treasury at the
Effective Time shall, by virtue of the merger and without any action on the
part of the holder thereof, cease to be outstanding, shall be canceled and
retired without payment of any consideration therefor and shall cease to
exist.
(d) Each share of Host-MD Common Stock issued and outstanding immediately
prior to the Effective Time shall, by virtue of the merger and without any
action on the part of Host-MD or the holder of such shares, be canceled and
retired without payment of any consideration therefor.
(e) Any dividends or other distributions to the stockholders of Host-DE
that have been declared by Host-DE but not paid prior to consummation of
the Merger will be assumed by Host-MD.
(f) As soon as practicable after the Effective Time, Host-MD shall cause
First Chicago Trust Company of New York, the transfer agent and registrar
for the Host-MD Common Stock and the exchange agent for purposes of the
merger (the "Transfer and Exchange Agent"), to mail to each holder of
record of a
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certificate which immediately prior to the Effective Time represented
outstanding shares of Host-DE Common Stock ("Certificates"), (i) a letter
of transmittal and (ii) instructions for use in effecting the surrender of
such Certificates in exchange for certificates evidencing Host-MD Common
Stock. Upon surrender of a Certificate for cancellation to the Transfer and
Exchange Agent together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
evidencing the number of shares of Host-MD Common Stock which such holder
has the right to receive in respect of the Certificate surrendered pursuant
to the terms of the Agreement and Plan of Merger and the Certificate so
surrendered shall forthwith be canceled.
IN WITNESS WHEREOF, HMC Merger Corporation and Host Marriott Corporation
have caused these presents to be signed in their respective names and on their
respective behalves by their respective presidents and witnessed by their
respective secretaries on December , 1998.
WITNESS:
HMC MERGER CORPORATION
- ------------------------------------- -------------------------------------
[Christopher G. Townsend] Terence C. Golden
Secretary President
WITNESS:
HOST MARRIOTT CORPORATION
- ------------------------------------- -------------------------------------
Christopher G. Townsend Terence C. Golden
Secretary President and Chief Executive
Officer
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THE UNDERSIGNED, President of HMC Merger Corporation, who executed on behalf
of said corporation the foregoing Articles of Merger of which this certificate
is made a part, hereby acknowledges in the name and on behalf of said
corporation the foregoing Articles of Merger to be the corporate act of said
corporation and hereby certifies that to the best of his knowledge,
information and belief the matters and facts set forth therein with respect to
the authorization and approval thereof are true in all material respects under
the penalties of perjury.
- -------------------------------------
Terence C. Golden
President
THE UNDERSIGNED, President and Chief Executive Officer of Host Marriott
Corporation, who executed on behalf of said corporation the foregoing Articles
of Merger of which this certificate is made a part, hereby acknowledges in the
name and on behalf of said corporation the foregoing Articles of Merger to be
the corporate act of said corporation and hereby certifies that to the best of
his knowledge, information and belief the matters and facts set forth therein
with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
- -------------------------------------
Terence C. Golden
President and Chief Executive Officer
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EXHIBIT B TO APPENDIX A
FORM OF ARTICLES OF AMENDMENT AND RESTATEMENT
OF
ARTICLES OF INCORPORATION
OF
HMC MERGER CORPORATION
HMC Merger Corporation, a Maryland corporation having its principal office
in Maryland in Bethesda, Maryland, and having CSC-Lawyers Incorporating
Service Company as its resident agent, located at 11 East Chase Street,
Baltimore, Maryland 21202, hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Articles of Incorporation of the Corporation, filed with the
State Department of Assessments and Taxation of Maryland on September 28,
1998, are hereby amended and restated in full as follows:
ARTICLE I
NAME
The name of the corporation (which is hereinafter called the "Corporation")
is Host Marriott Corporation.
ARTICLE II
PURPOSES
The purposes for which the Corporation is formed are to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Maryland (the "MGCL").
ARTICLE III
PRINCIPAL OFFICE
The present address of the principal office of the Corporation in the State
of Maryland is 10400 Fernwood Road, Bethesda, Maryland 20817.
ARTICLE IV
REGISTERED AGENT
The name and address of the resident agent of the Corporation in the State
of Maryland is CSC-Lawyers Incorporating Service Company, 11 East Chase
Street, Baltimore, Maryland 21202. Said resident agent is a Maryland
corporation.
ARTICLE V
DURATION
The duration of the Corporation shall be perpetual.
ARTICLE VI
CAPITALIZATION
Section 6(a) Shares and Par Value. The total number of shares of stock of
all classes ("Capital Stock") which the Corporation has authority to issue is
800,000,000 shares, 750,000,000 of which initially are classified
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as common stock, par value of $.01 per share ("Common Stock"), and 50,000,000
of which initially are classified as preferred stock, par value $.01 per share
("Preferred Stock"). The aggregate par value of all classes of stock that the
Corporation shall have authority to issue is $8,000,000. The Board of
Directors may, by adopting a resolution and filing articles supplementary with
the State Department of Assessments and Taxation of Maryland, classify and
reclassify any unissued shares of Capital Stock by setting or changing in any
one or more respects the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such shares of stock. The power of the Board of
Directors under this Section 6(a) to classify and reclassify any of the shares
of Capital Stock shall include, without limitation, authority to classify or
reclassify any unissued shares of such stock (including shares initially
designated as Common Stock or Preferred Stock above) into Common Stock,
Preferred Stock, a class or classes of preferred stock, preference stock,
special stock or other stock (including non-voting common stock), and to
divide and classify shares of any class into one or more series of such class.
Unless otherwise specifically provided for in the terms of any class or series
of stock now or hereafter created, the amount that would be needed, if the
Corporation were to be dissolved at the time of a distribution, to satisfy the
preferential rights on dissolution of stockholders whose preferential rights
are superior to those receiving the distribution, shall not limit the ability
of the Corporation to make any distribution or the amount thereof.
Section 6(b) Common Stock. The following is a description of the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption of the Common Stock of the Corporation:
(1) Voting Rights. Each share of Common Stock shall have one vote on all
actions to be taken by the stockholders of the Corporation, and, except as
otherwise provided in respect of any class of stock at any time classified
or reclassified, the exclusive voting power for all purposes shall be
vested in the holders of the Common Stock.
(2) Dividends. Subject to the provisions of law and any preferences of
any class of Capital Stock, including any shares of Preferred Stock,
hereafter classified or reclassified, dividends, including dividends
payable in shares of another class of the Corporation's stock, may be paid
on the Common Stock of the Corporation at such time and in such amounts as
the Board of Directors may deem advisable and the holders of the Common
Stock shall share ratably in any such dividends, in proportion to the
number of shares of Common Stock held by them respectively, on a share for
share basis.
(3) Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of the Common Stock shall be entitled, after payment or provision
for payment of the debts and other liabilities of the Corporation and the
amount to which the holders of any class of Capital Stock at any time
classified or reclassified having a preference on distributions in the
liquidation, dissolution or winding up of the Corporation are entitled,
including any shares of Preferred Stock, together with the holders of any
other class of Capital Stock hereafter classified or reclassified not
having a preference on distributions in the liquidation, dissolution or
winding up of the Corporation, to share ratably in the remaining net assets
of the Corporation.
Section 6(c) Preferred Stock. The Board of Directors shall have the
authority to classify and reclassify any unissued shares of Preferred Stock
from time to time by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such shares of the Preferred Stock. Subject to the foregoing,
the power of the Board of Directors to classify and reclassify any of the
shares of Preferred Stock shall include, without limitation, subject to the
provisions of the charter, authority to classify or reclassify any of the
shares of such stock into Common Stock, a class or classes of preferred stock,
preference stock, special stock or other stock, and to divide and classify
shares of any class into one or more series of such class, by determining,
fixing, or altering one or more of the following:
(1) The distinctive designation of such class or series and the number of
shares to constitute such class or series; provided that, unless otherwise
prohibited by the terms of such or any other class or series, the
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number of shares of any class or series may be decreased by the Board of
Directors in connection with any classification or reclassification of
unissued shares and the number of shares of such class or series may be
increased by the Board of Directors in connection with any such
classification or reclassification, and any shares of any class or series
which have been redeemed, purchased, otherwise acquired or converted into
shares of Common Stock or any other class or series shall become part of
the authorized class of stock so redeemed, purchased, otherwise acquired or
converted into shares of Common Stock and be subject to classification and
reclassification as provided in this Article VI.
(2) Whether or not and, if so, the rates, amounts and times at which, and
the conditions under which, dividends shall be payable on shares of such
class or series, whether any such dividends shall rank senior or junior to
or on a parity with the dividends payable on any other class or series of
stock, and the status of any such dividends as cumulative, cumulative to a
limited extent or non-cumulative and as participating or non-participating.
(3) Whether or not shares of such class or series shall have voting
rights, in addition to any voting rights provided by law and, if so, the
terms of such voting rights.
(4) Whether or not shares of such class or series shall have conversion
or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment of the conversion or exchange rate in
such events or at such times as the Board of Directors shall determine.
(5) Whether or not shares of such class or series shall be subject to
redemption and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable
and the amount per share payable in case of redemption, which amount may
vary under different conditions and at different redemption dates; and
whether or not there shall be any sinking fund or purchase account in
respect thereof, and if so, the terms thereof.
(6) The rights of the holders of shares of such class or series upon the
liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary
depending upon whether such liquidation, dissolution or winding up is
voluntary or involuntary and, if voluntary, may vary at different dates,
and whether such rights shall rank senior or junior to or on a parity with
such rights of any other class or series of stock.
(7) Whether or not there shall be any limitations applicable, while
shares of such class or series are outstanding, upon the payment of
dividends or making of distributions on, or the acquisition of, or the use
of moneys for purchase or redemption of, any stock of the Corporation, or
upon any other action of the Corporation, including action under this
Section 6(c), and, if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including restrictions
on transferability, and qualifications of shares of such class or series,
not inconsistent with law and the charter of the Corporation.
Section 6(d) Ranking of Classes or Series of Capital Stock. For the purposes
hereof and of any articles supplementary to the charter providing for the
classification or reclassification of any shares of Capital Stock or of any
other charter document of the Corporation (unless otherwise provided in any
such articles or document), any class or series of stock of the Corporation
shall be deemed to rank:
(1) prior to another class or series either as to dividends or upon
liquidation, if the holders of such class or series shall be entitled to
the receipt of dividends or of amounts distributable on liquidation,
dissolution or winding up, as the case may be, in preference or priority to
holders of such other class or series;
(2) on a parity with another class or series either as to dividends or
upon liquidation, whether or not the dividend rates, dividend payment dates
or redemption or liquidation price per share thereof be different from
those of such others, if the holders of such class or series of stock shall
be entitled to receipt of dividends or amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion
to their respective dividend rates or redemption or liquidation prices,
without preference or priority over the holders of such other class or
series; and
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(3) junior to another class or series either as to dividends or upon
liquidation, if the rights of the holders of such class or series shall be
subject or subordinate to the rights of the holders of such other class or
series in respect of the receipt of dividends or the amounts distributable
upon liquidation, dissolution or winding up, as the case may be.
ARTICLE VII
BOARD OF DIRECTORS
Section 7(a) Number of Directors; Classification. Effective upon the filing
of these Articles of Amendment and Restatement with the State Department of
Assessments and Taxation of Maryland, the number of directors shall be
increased from two (2) to eight (8). Except as otherwise fixed by or pursuant
to the provisions of Article VI hereof relating to the rights of the holders
of any class or series of stock having a preference over the Common Stock as
to dividends or upon liquidation to elect additional directors under specified
circumstances, the number of directors may thereafter be increased or
decreased pursuant to the Bylaws of the Corporation; provided such number
established in accordance with the Bylaws is not decreased to less than three
(3) nor increased to more than thirteen (13). The directors, other than those
who may be elected by the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, shall be
divided into three classes as nearly equal in number as possible, with the
term of office of one class expiring each year. One class of directors,
consisting initially of three members, shall hold office initially for a term
expiring at the annual meeting of stockholders in 1999 (Class I); another
class, consisting initially of three members, shall hold office initially for
a term expiring at the annual meeting of stockholders in 2000 (Class II); and
the third class, consisting initially of two members, shall hold office
initially for a term expiring at the annual meeting of shareholders in 2001
(Class III). In the event of any increase or decrease in the number of
directors, other than resulting from the rights of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect additional directors pursuant to the provisions of
Article VI hereof, the newly created or eliminated directorships resulting
from such increase or decrease shall be apportioned by the Board of Directors
among the three classes of directors so as to maintain such classes as nearly
equal in number as possible. The names and classes of the directors upon the
filing of these Articles of Amendment and Restatement with the State
Department of Assessments and Taxation of Maryland who will serve until their
successors are elected and qualify are:
<TABLE>
<CAPTION>
CLASS OF DIRECTOR NAME
----------------- ----
<S> <C>
Class I: J.W. Marriott, Jr.
Harry L. Vincent, Jr.
John G. Schreiber
Class II: Robert M. Baylis
Ann Dore McLaughlin
Terence C. Golden
Class III: R. Theodore Ammon
Richard E. Marriott
</TABLE>
Section 7(b) Removal of Directors. Subject to the rights of holders of one
or more classes or series of Capital Stock other than Common Stock to elect
one or more directors, any director may be removed only for cause and only by
the affirmative vote of stockholders holding at least two thirds of all the
votes entitled to be cast for the election of directors.
Section 7(c) Vacancies. Except in the case of a vacancy on the Board of
Directors among the directors elected by a class or series of Capital Stock
other than Common Stock, any vacancy on the Board of Directors may be filled
by the affirmative vote of the remaining directors (except that a vacancy
which results from an increase in the number of directors may be filled by a
majority of the entire Board of Directors) and, in the case of a vacancy
resulting from the removal of a director, by the stockholders by the
affirmative vote of two-thirds
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of the votes entitled to be cast for the election of directors. Any vacancy on
the Board of Directors among the directors elected by a class or series of
Capital Stock other than Common Stock may be filled by a majority of the
remaining directors elected by that class or series or by the sole remaining
director elected by that class or series, or by the stockholders of that class
or series unless otherwise provided in the articles supplementary for that
class or series.
Section 7(d) Amendments. Notwithstanding any other provisions of the charter
or Bylaws of the Corporation, the affirmative vote of stockholders holding at
least two-thirds of all of the votes entitled to be cast thereon shall be
required to amend, alter, change, repeal, or adopt any provisions inconsistent
with, the provisions of this ARTICLE VII.
ARTICLE VIII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES OF CAPITAL STOCK
Section 8.1 Definitions. For the purpose of this Article VIII, the following
terms shall have the following meanings:
Beneficial Ownership. The term "Beneficial Ownership" shall mean
ownership of shares of Capital Stock by a Person, whether the interest in
the shares of Capital Stock is held directly or indirectly (including by a
nominee), and shall include (in addition to direct ownership and indirect
ownership through a nominee or similar arrangement) interests that would be
treated as owned through the application of Section 544 of the Code, as
modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner,"
"Beneficially Owns" and "Beneficially Owned" shall have the correlative
meanings.
Benefit Plan Investor. The term "Benefit Plan Investor" shall have the
meaning provided in 29 C.F.R. (S) 2510.3-101(f)(2), or any successor
regulation thereto.
Business Day. The term "Business Day" shall mean any day, other than a
Saturday or Sunday, that is neither a legal holiday nor a day on which
banking institutions in the state of Maryland or in the state of New York
are authorized or required by law, regulation or executive order to close.
Charitable Beneficiary. The term "Charitable Beneficiary" shall mean one
or more beneficiaries of the Charitable Trust as determined pursuant to
Section 8.3.7, provided that each such organization must be described in
Sections 501(c)(3), 170(b)(1)(A) (other than clause (vii) or (viii)
thereof) and 170(c)(2) of the Code and contributions to each such
organization must be eligible for deduction under each of Sections
170(b)(1)(A), 2055 and 2522 of the Code.
Charitable Trust. The term "Charitable Trust" shall mean any trust
provided for in Section 8.2.1(b)(i) and Section 8.3.1.
Charitable Trustee. The term "Charitable Trustee" shall mean the Person,
unaffiliated with the Corporation and a Prohibited Owner, that is appointed
by the Corporation from time to time to serve as trustee of the Charitable
Trust. In the absence of such designation, the Charitable Trustee shall be
.
Closing Price. The "Closing Price" on any date shall mean the last sale
price for such shares of Capital Stock, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked
prices, regular way, for such shares of Capital Stock, in either case as
reported on the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the NYSE or, if such
shares of Capital Stock are not listed or admitted to trading on the NYSE,
as reported on the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange
on which such shares of Capital Stock are listed or admitted to trading or,
if such shares of Capital Stock are not listed or admitted to trading on
any national securities exchange, the last quoted price, or, if not so
quoted, the average of the high bid and low asked prices, in the over-the-
counter market, as reported by the NASDAQ Stock Market or, if such system
is no longer in use, the principal other automated quotation system that
may then be in use or, if such shares of Capital Stock are not quoted by
any such organization, the average of the closing bid and asked prices as
furnished by a
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professional market maker making a market in such shares of Capital Stock
selected by the Board of Directors or, in the event that no trading price
is available for such shares of Capital Stock, the fair market value of
such shares, as determined in good faith by the Board of Directors.
Code. The term "Code" means the Internal Revenue Code of 1986, as
amended.
Constructive Ownership. The term "Constructive Ownership" shall mean
ownership of shares of Capital Stock by a Person, whether the interest in
shares of Capital Stock is held directly or indirectly (including by a
nominee), and shall include any interests that would be treated as owned
through the application of Section 318(a) of the Code, as modified by
Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have the correlative
meanings.
Effective Date. The term "Effective Date" shall mean the date on which
the Effective Time occurs.
Effective Time. The term "Effective Time" shall mean the later of (i) the
time the State Department of Assessments and Taxation of Maryland accepts
the articles of merger for the Merger for record or (ii) the time
established under the articles of merger for the Merger.
ERISA Investor. The term "ERISA Investor" shall mean any holder of shares
of Capital Stock that is (i) an employee benefit plan subject to Title I of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
(ii) a plan as defined in Section 4975(e) of the Code (any such employee
benefit plan or "plan" described in clause (i) or this clause (ii) being
referred to herein as a "Plan"), (iii) a trust which was established
pursuant to a Plan, or a nominee for such trust or Plan, or (iv) an entity
whose underlying assets include assets of a Plan by reason of such Plan's
investment in such entity.
Excepted Holder. The term "Excepted Holder" shall mean a stockholder of
the Corporation for whom an Excepted Holder Limit is created by the Board
of Directors pursuant to Section 8.2.7.
Excepted Holder Limit. The term "Excepted Holder Limit" shall mean,
provided that (and only so long as) the affected Excepted Holder complies
with all of the requirements established by the Board of Directors pursuant
to Section 8.2.7, and subject to adjustment pursuant to Section 8.2.8, the
percentage limit established by the Board of Directors pursuant to Section
8.2.7.
Excluded Holder. The term "Excluded Holder" shall mean any Person who
acquires Constructive Ownership or Beneficial Ownership of shares of Common
Stock solely by reason of the Transfer of Common Stock in the Merger and
who, immediately following the Merger, either Beneficially Owns or
Constructively Owns shares of Common Stock in excess of the Ownership Limit
solely by reason of such Transfer of Common Stock in the Merger.
Excluded Holder Limit. The term "Excluded Holder Limit" shall mean, with
respect to any Excluded Holder, the lesser of (i) shares of Capital Stock
representing 9.9% (in value) of the outstanding shares of Capital Stock of
the Corporation or (ii) the shares of Capital Stock that such Excluded
Holder was considered to Constructively Own immediately following the
Merger solely by reason of the Merger (taking into account only such shares
of Capital Stock and no other shares as to which such Person may thereafter
become, for any reason, the Constructive Owner or the Beneficial Owner),
provided, however, that if at any time the Excluded Holder Limit for any
Excluded Holder would be less than the Ownership Limit, such Excluded
Holder shall cease to be an Excluded Holder and the Ownership Limit shall
thereafter apply to such Person.
Market Price. The term "Market Price" on any date shall mean, with
respect to any class or series of outstanding shares of Capital Stock, the
Closing Price for such shares of Capital Stock on such date.
Merger. The term "Merger" shall mean the merger of Host Marriott
Corporation, a Delaware corporation, with and into the Corporation, with
the Corporation being the surviving entity and with the outstanding shares
of capital stock of Host Marriott Corporation being converted into shares
of Capital Stock as set forth in the articles of merger for the Merger.
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NYSE. The term "NYSE" shall mean the New York Stock Exchange, Inc.
Ownership Limit. The term "Ownership Limit" shall mean (i) with respect
to shares of Common Stock, 9.8% (in value or number of shares, whichever is
more restrictive) of the outstanding Common Stock of the Corporation; and
(ii) with respect to any class or series of shares of Preferred Stock or
other stock, 9.8% (in value or number of shares, whichever is more
restrictive) of the outstanding shares of such class or series of Preferred
Stock or other stock of the Corporation.
Person. The term "Person" shall mean an individual, corporation,
partnership, estate, trust (including a trust qualified under Sections
401(a) or 501(c)(17) of the Code), portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section 642(c)
of the Code, association, private foundation within the meaning of Section
509(a) of the Code, joint stock company, limited liability company, or
other entity and also includes a group as that term is used for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended;
provided, however, that the term "Person" shall not include any group as
that term is used for purposes of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, if such "group" would be an Excluded
Holder (but any Person that is a member of such "group" shall still be
considered to be a "Person" for purposes hereof).
Prohibited Owner. The term "Prohibited Owner" shall mean any Person who,
but for the provisions of Section 8.2.1, would Beneficially Own or
Constructively Own shares of Capital Stock, and if appropriate in the
context, shall also mean any Person who would have been the record owner of
shares of Capital Stock that the Prohibited Owner would have so owned.
Publicly Offered Securities. The term "Publicly Offered Securities" shall
have the meaning provided in 29 C.F.R Section 2510.3-101(b)(2), or any
successor regulation thereto.
REIT. The term "REIT" shall mean a real estate investment trust within
the meaning of Section 856 of the Code.
Restriction Date. The term "Restriction Date" shall mean the first day
after the Effective Date.
Restriction Termination Date. The term "Restriction Termination Date"
shall mean the first day after the Effective Date on which the Board of
Directors determines that it is no longer in the best interests of the
Corporation to attempt to, or continue to, qualify as a REIT or that
compliance with the restrictions and limitations on Beneficial Ownership,
Constructive Ownership and Transfers of shares of Capital Stock set forth
herein is no longer required in order for the Corporation to qualify as a
REIT.
Transfer. The term "Transfer" shall mean any issuance, sale, transfer,
gift, assignment, devise or other disposition, as well as any other event
(or any agreement to take any such actions or cause any such events) that
causes any Person to acquire Beneficial Ownership or Constructive Ownership
of shares of Capital Stock or the right to vote or receive dividends on
shares of Capital Stock, including without limitation, (a) the issuance and
transfer to holders of shares of Host Marriott Corporation of shares of
Capital Stock in the Merger, (b) a change in the capital structure of the
Corporation, (c) a change in the relationship between two or more Persons
which causes a change in ownership of shares of Capital Stock by
application of either Section 544 of the Code, as modified by Section
856(h) or Section 318(a) of the Code, as modified by Section 856(d)(5), (d)
the grant or exercise of any option or warrant (or any disposition of any
option or warrant, or any event that causes any option or warrant not
theretofore exercisable to become exercisable), pledge, security interest
or similar right to acquire shares of Capital Stock, (e) any disposition of
any securities or rights convertible into or exchangeable for shares of
Capital Stock or any interest in shares of Capital Stock or any exercise of
any such conversion or exchange right, (f) Transfers of interests in other
entities that result in changes in Beneficial Ownership or Constructive
Ownership of shares of Capital Stock, and (g) solely for purposes of
applying the Excluded Holder Limit, any change in the value of one class or
series of shares of Capital Stock relative to the value of any other class
or series of shares of Capital Stock, in each case, whether voluntary or
involuntary, whether owned of record, Constructively Owned or Beneficially
Owned, and whether by operation of law or otherwise. (For purposes of this
Article VIII, the right of a limited partner in Host Marriott, L.P., a
Delaware limited partnership (or any successor thereto), to require the
partnership to redeem such limited partner's units of
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limited partnership interest pursuant to Section 8.6 of the Amended and
Restated Agreement of Limited Partnership of Host Marriott, L.P shall not
be considered to be an option or similar right to acquire shares of Capital
Stock of the Corporation so long as such Section 8.6 is not amended in a
manner that would grant to a limited partner a legal right to require that
either Host Marriott, L.P. (or any successor thereto) or the Corporation
issue to such limited partner shares of Capital Stock and so long as the
restrictions in Section 8.6.C of such Agreement apply to the exercise of
the rights set forth in such Section 8.6.) The terms "Transferring" and
"Transferred" shall have the correlative meanings.
Section 8.2 Restrictions on Ownership and Transfer of Shares.
Section 8.2.1 Ownership Limitations. During the period commencing at the
Effective Time and ending at the close of business on the Restriction
Termination Date:
(a) Basic Restrictions.
(i) (1) No Person, other than an Excepted Holder or an Excluded
Holder, shall Beneficially Own or Constructively Own shares of
Capital Stock in excess of the Ownership Limit, (2) no Excepted
Holder shall Beneficially Own or Constructively Own shares of
Capital Stock in excess of the Excepted Holder Limit for such
Excepted Holder, and (3) commencing at 12:01 a.m. (Eastern Standard
Time) on the Restriction Date, no Excluded Holder shall Beneficially
Own or Constructively Own shares of Capital Stock in excess of the
Excluded Holder Limit for such Excluded Holder.
(ii) No Person shall Beneficially Own or Constructively Own shares
of Capital Stock to the extent that (1) such Beneficial Ownership of
shares of Capital Stock would result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code
(without regard to whether the ownership interest is held during the
last half of a taxable year), (2) such Constructive Ownership would
cause either the Corporation to be considered to Constructively Own
an interest in a tenant that is described in Section 856(d)(2)(B) of
the Code for purposes of applying Section 856(c) of the Code or Host
Marriott, L.P. (or any successor thereto) to be considered to
Constructively Own an interest in a tenant that is described in
Section 856(d)(2)(B) of the Code for purposes of applying Section
7704(d) of the Code, or (3) such Beneficial Ownership or
Constructive Ownership of shares of Capital Stock would result in
the Corporation otherwise failing to qualify as a REIT or Host
Marriott, L.P. (or any successor thereto) to fail to qualify as a
partnership for federal income tax purposes.
(iii) No Person shall Transfer any shares of Capital Stock if, as
a result of the Transfer, the outstanding shares of all classes and
series of Capital Stock would be Beneficially Owned by less than 100
Persons (determined without reference to the rules of attribution
under Section 544 of the Code). Subject to Section 8.5 and
notwithstanding any other provisions contained herein, any Transfer
of shares of Capital Stock (whether or not such Transfer is the
result of a transaction entered into through the facilities of the
NYSE or any other national securities exchange or automated inter-
dealer quotation system) that, if effective, would result in
outstanding shares of all classes and series of Capital Stock being
Beneficially Owned by less than 100 Persons (determined under the
principles of Section 856(a)(5) of the Code) shall be void ab
initio, and the intended transferee shall acquire no rights in such
shares of Capital Stock.
(b) Transfer in Trust. If, as a result of the Merger and the Transfer
of shares of Capital Stock to holders of shares of Host Marriott
Corporation, a Delaware corporation, any Person Beneficially Owns or
Constructively Owns shares of Capital Stock in violation of Section
8.2.1(a)(i) or 8.2.1(a)(ii) or 8.2.1(a)(iii) as of 12:01 a.m. (Eastern
Standard Time) on the Restriction Date, then that number of shares of
Capital Stock the Beneficial Ownership or Constructive Ownership of
which otherwise would cause such Person to violate Section 8.2.1(a)(i)
or 8.2.1(a)(ii) or 8.2.1(a)(iii) (whichever is applicable) (rounded
upward to the nearest whole share) shall be automatically transferred
to a Charitable Trust for the benefit of a Charitable Beneficiary, as
described in Section 8.3, effective as of 12:01 a.m.
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(Eastern Standard Time) on the Restriction Date, and such Person shall
have no rights in such shares of Capital Stock (except as otherwise
provided in Section 8.3.5(b)). If any Transfer of shares of Capital
Stock other than as a result of the Merger and Transfer of shares of
Capital Stock to holders of shares of Host Marriott Corporation
(whether or not such Transfer is the result of a transaction entered
into through the facilities of the NYSE or any other national
securities exchange or automated inter-dealer quotation system) occurs
which, if effective, would result in any Person Beneficially Owning or
Constructively Owning shares of Capital Stock in violation of Section
8.2.1(a)(i) or 8.2.1(a)(ii) or 8.2.1(a)(iii), as applicable,
(i) then that number of shares of Capital Stock the Beneficial
Ownership or Constructive Ownership of which otherwise would cause
such Person to violate Section 8.2.1(a)(i) or 8.2.1(a)(ii) or
8.2.1(a)(iii) (rounded upward to the nearest whole share) shall be
automatically transferred to a Charitable Trust for the benefit of a
Charitable Beneficiary, as described in Section 8.3, effective as of
the close of business on the Business Day prior to the date of such
Transfer (or as of the close of business on the Effective Date as to
any such Transfer that occurs on the Effective Date), and such
Person shall acquire no rights in such shares of Capital Stock; or
(ii) if the transfer to the Charitable Trust described in clause
(i) of this sentence would not be effective for any reason to
prevent the violation of Section 8.2.1(a)(i) or 8.2.1(a)(ii) or
8.2.1(a)(iii), as applicable, then the Transfer of that number of
shares of Capital Stock that otherwise would cause any Person to
violate Section 8.2.1(a)(i) or 8.2.1(a)(ii) or 8.2.1(a)(iii), as
applicable, shall be void ab initio, and the intended transferee
shall acquire no rights in such shares of Capital Stock.
Section 8.2.2 Remedies for Breach. If the Board of Directors or any duly
authorized committee thereof shall at any time determine in good faith that
a Transfer or other event has taken place that results in a violation of
Section 8.2.1 or that a Person intends to acquire or has attempted to
acquire Beneficial Ownership or Constructive Ownership of any shares of
Capital Stock in violation of Section 8.2.1 (whether or not such violation
is intended), the Board of Directors or a committee thereof shall take such
action as it deems advisable to refuse to give effect to or to prevent such
Transfer or other event, including, without limitation, causing the
Corporation to redeem shares of Capital Stock, refusing to give effect to
such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer or other event; provided, however, that any Transfer
or attempted Transfer or other event in violation of Section 8.2.1 shall
automatically result in the transfer to the Charitable Trust described
above, and, where applicable under Section 8.2.1(b)(ii), such Transfer (or
other event) shall be void ab initio as provided above irrespective of any
action (or non-action) by the Board of Directors or a committee thereof.
Section 8.2.3 Notice of Restricted Transfer. Any Person who acquires or
attempts or intends to acquire Beneficial Ownership or Constructive
Ownership of shares of Capital Stock that will or may violate Section
8.2.1(a), or any Person who would have owned shares of Capital Stock that
resulted in a transfer to the Charitable Trust pursuant to the provisions
of Section 8.2.1(b), shall immediately give written notice to the
Corporation of such event, or in the case of such a proposed or attempted
transaction, give at least 15 days prior written notice, and shall provide
to the Corporation such other information as the Corporation may request in
order to determine the effect, if any, of such acquisition or ownership on
the Corporation's status as a REIT.
Section 8.2.4 Owners Required To Provide Information. During the period
commencing at the Effective Time and ending at the close of business on the
Restriction Termination Date:
(a) Every stockholder of record of more than five percent (or such
lower percentage as required by the Code or the Treasury Regulations
promulgated thereunder) of the outstanding shares of Capital Stock,
within 30 days after the end of each taxable year, shall give written
notice to the Corporation stating the name and address of such owner,
the number of shares Beneficially Owned, and a
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description of the manner in which such shares of Capital Stock are
held; provided that a stockholder of record who holds outstanding
shares of Capital Stock as nominee for another Person, which other
Person is required to include in gross income the dividends received on
such shares (an "Actual Owner"), shall give written notice to the
Corporation stating the name and address of such Actual Owner and the
number of shares of Capital Stock of such Actual Owner with respect to
which the stockholder of record is nominee. Each such stockholder of
record and each Actual Owner shall provide to the Corporation such
additional information as the Corporation may request in order to
determine the effect, if any, of such Beneficial Ownership on the
Corporation's status as a REIT and to ensure compliance with the
Ownership Limit.
(b) Each Person who is a Beneficial Owner or Constructive Owner of
shares of Capital Stock and each Person (including the stockholder of
record) who is holding shares of Capital Stock for a Beneficial Owner
or Constructive Owner shall provide to the Corporation such information
as the Corporation may request, in good faith, in order to determine
the Corporation's status as a REIT and to comply with requirements of
any taxing authority or governmental authority or to determine such
compliance.
Section 8.2.5 Remedies Not Limited. Subject to Section 8.5, nothing
contained in this Section 8.2 shall limit the authority of the Board of
Directors to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders in preserving
the Corporation's status as a REIT.
Section 8.2.6 Ambiguity. In the case of an ambiguity in the application of
any of the provisions of this Section 8.2, Section 8.3 or any definition
contained in Section 8.1, the Board of Directors shall have the power to
determine the application of the provisions of this Section 8.2 or Section 8.3
with respect to any situation based upon the facts known to it. If Section 8.2
or 8.3 requires an action by the Board of Directors and the charter of the
Corporation fails to provide specific guidance with respect to such action,
the Board of Directors shall have the power to determine the action to be
taken so long as such action is not contrary to the provisions of Sections
8.1, 8.2 or 8.3.
Section 8.2.7 Exceptions.
(a) The Board of Directors, in its sole and absolute discretion, may
grant to any Person who makes a request therefor an exception to the
Ownership Limit (or one or more elements thereof) with respect to the
ownership of any series or class of Capital Stock of the Corporation,
subject to the following conditions and limitations: (A) the Board of
Directors shall have determined that (x) assuming such Person would
Beneficially Own or Constructively Own the maximum amount of shares of
Common Stock and stock of the Corporation (other than Common Stock)
permitted as a result of the exception to be granted and (y) assuming that
all other Persons who would be treated as "individuals" for purposes of
Section 542(a)(2) of the Code (determined taking into account Section
856(h)(3)(A) of the Code) would Beneficially Own or Constructively Own the
maximum amount of shares of Common Stock and stock of the Corporation
(other than Common Stock) permitted under this Article VIII (taking into
account any exception, waiver or exemption granted under this Section 8.2.7
to (or with respect to) such Persons), the Corporation would not be
"closely held" within the meaning of Section 856(h) of the Code (assuming
that the ownership of shares of Capital Stock is determined during the
second half of a taxable year) and would not otherwise fail to qualify as a
REIT; and (B) such Person provides to the Board of Directors such
representations and undertakings, if any, as the Board of Directors may, in
its sole and absolute discretion, determine to be necessary in order for it
to make the determination that the conditions set forth in clause (A) above
of this Section 8.2.7(a) have been and/or will continue to be satisfied
(including, without limitation, an agreement as to a reduced Ownership
Limit or Excepted Holder Limit for such Person with respect to the
Beneficial Ownership or Constructive Ownership of one or more other classes
or series of shares of Capital Stock not subject to the exception), and
such Person agrees that any violation of such representations and
undertakings or any attempted violation thereof will result in the
application of the remedies set forth in Section 8.2 with respect to shares
of Capital Stock held in excess of the Ownership Limit or the Excepted
Holder Limit (as
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may be applicable) with respect to such Person (determined without regard
to the exception granted such Person under this subparagraph (a)). If a
member of the Board of Directors requests that the Board of Directors grant
an exception pursuant to this subparagraph (a) with respect to such member,
or with respect to any other Person if such Board member would be
considered to be the Beneficial Owner or Constructive Owner of shares of
Capital Stock owned by such other Person, such member of the Board of
Directors shall not participate in the decision of the Board of Directors
as to whether to grant any such exception.
(b) In addition to exceptions permitted under subparagraph (a) above, the
Board of Directors, in its sole and absolute discretion, may grant to any
Person who makes a request therefor (a "Requesting Person") an exception
from the Ownership Limit (or one or more elements thereof) if: (i) such
Person submits to the Board of Directors information satisfactory to the
Board of Directors, in its reasonable discretion, demonstrating that such
Requesting Person is not an individual for purposes of Section 542(a)(2) of
the Code (determined taking into account Section 856(h)(3)(A) of the Code);
(ii) such Requesting Person submits to the Board of Directors information
satisfactory to the Board of Directors, in its reasonable discretion,
demonstrating that no Person who is an individual for purposes of Section
542(a)(2) of the Code (determined taking into account Section 856(h)(3)(A)
of the Code) would be considered to Beneficially Own shares of Capital
Stock in excess of the Ownership Limit by reason of the Requesting Person's
ownership of shares of Capital Stock in excess of the Ownership Limit
pursuant to the exception granted under this subparagraph (b); (iii) such
Requesting Person submits to the Board of Directors information
satisfactory to the Board of Directors, in its reasonable discretion,
demonstrating that neither clause (2) nor clause (3) of subparagraph
(a)(ii) of Section 8.2.1 will be violated by reason of the Requesting
Person's ownership of shares of Capital Stock in excess of the Ownership
Limit pursuant to the exception granted under this subparagraph (b); and
(iv) such Requesting Person provides to the Board of Directors such
representations and undertakings, if any, as the Board of Directors may, in
its sole and absolute discretion, require to ensure that the conditions in
clauses (i), (ii) and (iii) hereof are satisfied and will continue to be
satisfied throughout the period during which such Requesting Person owns
shares of Capital Stock in excess of the Ownership Limit pursuant to any
exception thereto granted under this subparagraph (b), and such Requesting
Person agrees that any violation of such representations and undertakings
or any attempted violation thereof will result in the application of the
remedies set forth in Section 8.2 with respect to shares of Capital Stock
held in excess of the Ownership Limit with respect to such Requesting
Person (determined without regard to the exception granted such Requesting
Person under this subparagraph (b)).
(c) Prior to granting any exception or exemption pursuant to subparagraph
(a) or (b), the Board of Directors may require a ruling from the IRS or an
opinion of counsel, in either case in form and substance satisfactory to
the Board of Directors, in its sole and absolute discretion as it may deem
necessary or advisable in order to determine or ensure the Corporation's
status as a REIT; provided, however, that the Board of Directors shall not
be obligated to require obtaining a favorable ruling or opinion in order to
grant an exception hereunder.
(d) Subject to Section 8.2.1(a)(ii), an underwriter that participates in
a public offering or a private placement of shares of Capital Stock (or
securities convertible into or exchangeable for shares of Capital Stock)
may Beneficially Own or Constructively Own shares of Capital Stock (or
securities convertible into or exchangeable for shares of Capital Stock) in
excess of the Ownership Limit, but only to the extent necessary to
facilitate such public offering or private placement; and provided, that
the ownership of shares of Capital Stock by such underwriter would not
result in the Corporation being "closely held" within the meaning of
Section 856(h) of the Code, or otherwise result in the Corporation's
failing to qualify as a REIT. In this regard, at no time may either (x) an
underwriter, or (y) any Person who would Constructively Own shares of
Capital Stock owned by an underwriter Constructively Own, concurrently, 10%
or more of the outstanding securities of any class or series of (i) the
Corporation and any tenant or lessee of the Corporation (which, as of the
Effective Date, includes Crestline Capital Corporation and its
subsidiaries), or (ii) the Corporation and any Person that would be
considered to Constructively Own or Beneficially Own 10% or more of any
tenant or lessee of the Corporation (which, as of the Effective Date,
includes Crestline Capital Corporation and its subsidiaries).
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(e) The Board of Directors may only reduce the Excepted Holder Limit for
an Excepted Holder: (1) with the written consent of such Excepted Holder at
any time or (2) pursuant to the terms and conditions of the agreements and
undertakings entered into with such Excepted Holder in connection with the
establishment of the Excepted Holder Limit for that Excepted Holder. No
Excepted Holder Limit shall be reduced to a percentage that is less than
the Ownership Limit.
Section 8.2.8 Increase or Decrease in Ownership Limit. The Board of
Directors may from time to time increase or decrease the Ownership Limit,
subject to the limitations provided in this Section 8.2.8.
(a) Any decrease may be made only prospectively as to subsequent holders
(other than a decrease as a result of a retroactive change in existing law,
in which case such change shall be effective immediately).
(b) The Ownership Limit may not be increased if, after giving effect to
such increase, five Persons who are considered individuals pursuant to
Section 542 of the Code, as modified by Section 856(h)(3) of the Code
(taking into account all of the Excepted Holders), could Beneficially Own,
in the aggregate, more than 49.5% of the value of the outstanding shares of
Capital Stock.
(c) Prior to the modification of the Ownership Limit pursuant to this
Section 8.2.8, the Board of Directors may require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or
advisable in order to determine or ensure the Corporation's status as a
REIT if the modification in the Ownership Limit were to be made.
Section 8.2.9 Legend. Each certificate for shares of Capital Stock (or
securities exercisable for or convertible into shares of Capital Stock) shall
bear substantially the following legend:
The shares of Capital Stock represented by this certificate are subject
to restrictions on Beneficial Ownership and Constructive Ownership and
Transfer primarily for the purpose of the Corporation's maintenance of its
status as a real estate investment trust (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"). Except as expressly provided
in the Corporation's charter, (i) no Person may Beneficially Own or
Constructively Own shares of Common Stock of the Corporation in excess of
9.8 percent (in value or number of shares, whichever is more restrictive)
of the outstanding Common Stock of the Corporation unless such Person is an
Excepted Holder (in which case the Excepted Holder Limit shall be
applicable) or an Excluded Holder (in which case the Excluded Holder Limit
shall be applicable); (ii) with respect to any class or series of shares of
Capital Stock other than Common Stock, no Person may Beneficially Own or
Constructively Own more than 9.8 percent (in value or number of shares,
whichever is more restrictive) of the outstanding shares of such class or
series of such stock of the Corporation (collectively, (i) and (ii) are
referred to herein as the "Ownership Limit"), unless such Person is an
Excepted Holder (in which case the Excepted Holder Limit shall be
applicable) or an Excluded Holder (in which case the Excluded Holder Limit
shall be applicable); (iii) no Person may Beneficially Own or
Constructively Own shares of Capital Stock that would result in the
Corporation being "closely held" under Section 856(h) of the Code, would
cause either the Corporation to be considered to Constructively Own an
interest in a tenant that is described in Section 856(d)(2)(B) of the Code
for purposes of applying Section 856(c) of the Code or Host Marriott, L.P.
(or any successor thereto) to be considered to Constructively Own an
interest in a tenant that is described in Section 856(d)(2)(B) of the Code
for purposes of applying Section 7704(d) of the Code, or otherwise would
cause the Corporation to fail to qualify as a REIT under the Code; and (iv)
no Person may Transfer shares of Capital Stock if such Transfer would
result in shares of Capital Stock of the Corporation being owned by fewer
than 100 Persons. Notwithstanding the foregoing, commencing at 12:01 a.m.
(Eastern Standard Time) on the day immediately following the effective date
of the merger (the "Merger") of Host Marriott Corporation, a Delaware
corporation, with and into the Corporation, no Excluded Holder shall
Beneficially Own or Constructively Own shares of Capital Stock in excess of
the Excluded Holder Limit for such Excluded Holder. An "Excepted Holder"
means a stockholder of the Corporation for whom an Excepted Holder Limit is
created by the Board of Directors. An "Excluded Holder" means any Person
who acquires Constructive Ownership or Beneficial Ownership of shares of
Common Stock solely be reason of the Transfer of Common Stock in the Merger
and who, immediately following the Merger, either Beneficially Owns or
Constructively Owns shares of Common
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Stock in excess of the Ownership Limit solely by reason of the Transfer of
Common Stock in the Merger. The "Excluded Holder Limit" means, with respect
to any Excluded Holder, the lesser of (i) shares of Capital Stock
representing 9.9% (in value) of the outstanding shares of Capital Stock of
the Corporation or (ii) the shares of Capital Stock that such Excluded
Holder was considered to Constructively Own immediately following the
Merger solely by reason of the Merger (taking into account only such shares
of Capital Stock and no other shares as to which such Person may thereafter
become, for any reason, the Constructive Owner or the Beneficial Owner),
provided, however, that if at any time the Excluded Holder Limit for any
Excluded Holder would be less than the Ownership Limit, such Excluded
Holder shall cease to be an Excluded Holder and the Ownership Limit shall
thereafter apply to such Person. Any Person who Beneficially Owns or
Constructively Owns or attempts to Beneficially Own or Constructively Own
shares of Capital Stock which cause or will cause a Person to Beneficially
Own or Constructively Own shares of Capital Stock in excess or in violation
of the above limitations must immediately notify the Corporation. If any of
the restrictions on Transfer are violated, the shares of Capital Stock
represented hereby will be automatically transferred to a Charitable
Trustee of a Charitable Trust for the benefit (except as otherwise provided
in the charter of the Corporation) of one or more Charitable Beneficiaries.
In addition, upon the occurrence of certain events, attempted Transfers in
violation of the restrictions described above may be void ab initio. A
Person who attempts to Beneficially Own or Constructively Own shares of
Capital Stock in violation of the Transfer restrictions described above
shall have no claim, cause of action or any recourse whatsoever against a
transferor of such shares of Capital Stock. All capitalized terms in this
legend have the meanings defined in the Corporation's charter, as the same
may be amended from time to time, a copy of which, including the
restrictions on Transfer, will be furnished to each holder of shares of
Capital Stock of the Corporation on request and without charge.
Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability to a stockholder on request and without charge.
Section 8.3 Transfer of Shares of Capital Stock in the Corporation.
Section 8.3.1 Ownership in Trust. Upon any purported Transfer or other
event described in Section 8.2.1(b) that would result in a transfer of
shares of Capital Stock to a Charitable Trust, such shares of Capital Stock
shall be deemed to have been transferred to the Charitable Trustee as
trustee of a Charitable Trust for the exclusive benefit of one or more
Charitable Beneficiaries (except to the extent otherwise provided in
Section 8.3.5). Such transfer to the Charitable Trustee shall be deemed to
be effective (i) as of 12:01 a.m. (Eastern Standard Time) on the
Restriction Date, as to any Person who Beneficially Owns or Constructively
Owns shares of Capital Stock in violation of Section 8.2.1(a)(i) or
8.2.1(a)(ii) or 8.2.1(a)(iii) as of such time and date as a result of the
Merger and the Transfer of shares of Capital Stock to holders of shares of
Host Marriott Corporation or (ii) as of the close of business on the
Business Day prior to any other purported Transfer or other event that
otherwise results in the transfer to the Charitable Trust pursuant to
Section 8.2.1(b) (or as of the close of business on the Effective Date if
such other purported Transfer or other event occurs on that date). The
Charitable Trustee shall be appointed by the Corporation and shall be a
Person unaffiliated with the Corporation and any Prohibited Owner. Each
Charitable Beneficiary shall be designated by the Corporation as provided
in Section 8.3.7.
Section 8.3.2 Status of Shares of Capital Stock Held by the Charitable
Trustee. Shares of Capital Stock held by the Charitable Trustee shall be
issued and outstanding shares of Capital Stock of the Corporation. The
Prohibited Owner shall have no rights in the shares of Capital Stock held
by the Charitable Trustee. The Prohibited Owner shall not benefit
economically from ownership of any shares of Capital Stock held in trust by
the Charitable Trustee (except to the extent otherwise provided in Section
8.3.5), shall have no rights to dividends or other distributions, and shall
not possess any rights to vote or other rights attributable to the shares
of Capital Stock held in the Charitable Trust. The Prohibited Owner shall
have no claim, cause of action or other recourse whatsoever against the
purported transferor of such shares of Capital Stock.
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Section 8.3.3 Dividend and Voting Rights. The Charitable Trustee shall
have all voting rights and rights to dividends or other distributions with
respect to shares of Capital Stock held in the Charitable Trust,
which rights shall be exercised for the exclusive benefit of the Charitable
Beneficiary (except to the extent otherwise provided in Section 8.3.5). Any
dividend or other distribution paid prior to the discovery by the
Corporation that shares of Capital Stock have been transferred to the
Charitable Trustee shall be paid with respect to such shares of Capital
Stock to the Charitable Trustee upon demand and any dividend or other
distribution authorized but unpaid shall be paid when due to the Charitable
Trustee. Any dividends or distributions so paid over to the Charitable
Trustee shall be held in trust for the Charitable Beneficiary. The
Prohibited Owner shall have no voting rights with respect to shares of
Capital Stock held in the Charitable Trust and, subject to Maryland law,
effective as of the date that shares of Capital Stock have been transferred
to the Charitable Trustee, the Charitable Trustee shall have the authority
(at the Charitable Trustee's sole discretion) (i) to rescind as void any
vote cast by a Prohibited Owner prior to the discovery by the Corporation
that shares of Capital Stock have been transferred to the Charitable
Trustee and (ii) to recast such vote in accordance with the desires of the
Charitable Trustee acting for the benefit of the Charitable Beneficiary;
provided, however, that if the Corporation has already taken irreversible
action, then the Charitable Trustee shall not have the power to rescind and
recast such vote. Notwithstanding the provisions of this Article VIII,
until the Corporation has received notification that shares of Capital
Stock have been transferred into a Charitable Trust, the Corporation shall
be entitled to rely on its share transfer and other shareholder records for
purposes of preparing lists of stockholders entitled to vote at meetings,
determining the validity and authority of proxies, and otherwise conducting
votes of stockholders.
Section 8.3.4 Rights Upon Liquidation. Upon any voluntary or involuntary
liquidation, dissolution or winding up of or any distribution of the assets
of the Corporation, the Charitable Trustee shall be entitled to receive,
ratably with each other holder of shares of Capital Stock of the class or
series of shares of Capital Stock that is held in the Charitable Trust,
that portion of the assets of the Corporation available for distribution to
the holders of such class or series (determined based upon the ratio that
the number of shares of such class or series of shares of Capital Stock
held by the Charitable Trustee bears to the total number of shares of
Capital Stock of such class or series of shares of Capital Stock then
outstanding). The Charitable Trustee shall distribute any such assets
received in respect of the shares of Capital Stock held in the Charitable
Trust in any liquidation, dissolution or winding up or distribution of the
assets of the Corporation, in accordance with Section 8.3.5.
Section 8.3.5 Sale of Shares by Charitable Trustee.
(a) Within 20 days of receiving notice from the Corporation that
shares of Capital Stock have been transferred to the Charitable Trust,
the Charitable Trustee of the Charitable Trust shall sell the shares of
Capital Stock held in the Charitable Trust (together with the right to
receive dividends or other distributions with respect to such shares of
Capital Stock as to any shares of Capital Stock transferred to the
Charitable Trustee as a result of the operation of Section 8.2.1(b)) to
a person, designated by the Charitable Trustee, whose ownership of the
shares of Capital Stock will not violate the ownership limitations set
forth in Section 8.2.1(a). Upon such sale, the interest of the
Charitable Beneficiary in the shares of Capital Stock sold shall
terminate and the Charitable Trustee shall distribute the net proceeds
of the sale to the Prohibited Owner and to the Charitable Beneficiary
as provided in this Section 8.3.5.
(b) A person who becomes a Prohibited Owner by virtue of the first
sentence of Section 8.2.1(b) shall receive the lesser of (i) all of the
net sales proceeds per share received by the Charitable Trustee from
the sale or other disposition of such excess shares of Capital Stock
held in the Charitable Trust, or (ii) an amount equal to the Closing
Price of such excess shares of Capital Stock on the Effective Date,
with the balance, if any, to be paid to the Charitable Beneficiary.
(c) Any other Prohibited Owner shall receive the lesser of (1) the
net price paid by the Prohibited Owner for the shares of Capital Stock
or, if the Prohibited Owner did not give value for the shares of
Capital Stock in connection with the event causing the shares of
Capital Stock to be held in the
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Charitable Trust (e.g., in the case of a gift, devise or other such
transaction), the Market Price of the shares of Capital Stock on the
day of the event causing the shares of Capital Stock to be held in the
Charitable Trust, and (2) the net sales proceeds per share received by
the Charitable Trustee from the sale or other disposition of the shares
of Capital Stock held in the Charitable Trust. Any net sales proceeds
in excess of the amount payable to the Prohibited Owner shall be
immediately paid to the Charitable Beneficiary. If, prior to the
discovery by the Corporation that shares of Capital Stock have been
transferred to the Charitable Trustee, such shares of Capital Stock are
sold by a Prohibited Owner, then (i) such shares of Capital Stock shall
be deemed to have been sold on behalf of the Charitable Trust and (ii)
to the extent that the Prohibited Owner received an amount for such
shares of Capital Stock that exceeds the amount that such Prohibited
Owner was entitled to receive pursuant to this Section 8.3.5, such
excess shall be paid to the Charitable Trustee upon demand.
Section 8.3.6 Purchase Right in Shares of Capital Stock Transferred to
the Charitable Trustee. Shares of Capital Stock transferred to the
Charitable Trustee shall be deemed to have been offered for sale to the
Corporation, or its designee, at a price per share equal to the lesser of
(i) the price per share in the transaction that resulted in such transfer
to the Charitable Trust (or, in the case of a devise, gift or other such
transaction, the Market Price of the shares of Capital Stock on the day of
the event causing the shares of Capital Stock to be held in the Charitable
Trust) and (ii) the Market Price on the date the Corporation, or its
designee, accepts such offer. The Corporation shall have the right to
accept such offer until the Charitable Trustee has sold the shares of
Capital Stock held in the Charitable Trust pursuant to Section 8.3.5. Upon
such a sale to the Corporation, the interest of the Charitable Beneficiary
in the shares of Capital Stock sold shall terminate and the Charitable
Trustee shall distribute the net proceeds of the sale to the Prohibited
Owner.
Section 8.3.7 Designation of Charitable Beneficiaries. By written notice
to the Charitable Trustee, the Corporation shall designate from time to
time one or more nonprofit organizations to be the Charitable Beneficiary
of the interest in the Charitable Trust such that (i) shares of Capital
Stock held in the Charitable Trust would not violate the restrictions set
forth in Section 8.2.1(a) in the hands of such Charitable Beneficiary and
(ii) each such organization must be described in Sections 501(c)(3),
170(b)(1)(A) or 170(c)(2) of the Code and contributions to each such
organization must be eligible for deduction under each of Sections
170(b)(1)(A), 2055 and 2522 of the Code. In the absence of any such
determination by the Corporation, the Charitable Beneficiary shall be .
Section 8.4. Restrictions on Ownership and Transfer of Shares of Capital
Stock by Benefit Plans.
Section 8.4.1 Ownership Limitations. Notwithstanding any other provisions
herein, if and to the extent that any class or series of shares of Capital
Stock do not constitute Publicly Offered Securities, then Benefit Plan
Investors may not, on any date, hold, individually or in the aggregate, 25
percent or more of the value of such class or series of shares of Capital
Stock. For purposes of determining whether Benefit Plan Investors hold,
individually or in the aggregate, 25 percent or more of the value of such
class or series of shares of Capital Stock, the value of shares of Capital
Stock of such class held by any director or officer of the Corporation, or
any other Person who has discretionary authority or control with respect to
the assets of the Corporation, or any Person who provides investment advice
for a fee to the Corporation in connection with its assets, or an
"affiliate" of such person, as defined in 29 C.F.R. Section 2510.3-
101(f)(3), or any successor regulation thereto, shall be disregarded.
Section 8.4.2 Remedies for Violations by Benefit Plan Investors. If the
Board of Directors or any duly authorized committee thereof shall at any
time determine in good faith that (i) a Transfer or other event has taken
place that results in a violation of Section 8.4.1 or will otherwise result
in the underlying assets and property of the Corporation becoming assets of
any ERISA Investor or (ii) that a Person intends to acquire or has
attempted to acquire or hold shares of Capital Stock in a manner that will
result in a violation of Section 8.4.1 or will otherwise result in the
underlying assets and property of the Corporation becoming assets of any
ERISA Investor, the Board of Directors or a committee thereof shall take
such action as it
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deems advisable to mitigate, prevent or cure the consequences that might
result to the Corporation from such Transfer or other event, including
without limitation, refusing to give effect to or preventing such Transfer
or event through redemption of such shares of Capital Stock or refusal to
give effect to the Transfer or event on the books of the Corporation or
instituting proceedings to enjoin such Transfer or other event.
Section 8.4.3 Information on Benefit Plan Status. Any Person who acquires
or attempts or intends to acquire or hold shares of Capital Stock shall
provide to the Corporation such information as the Corporation may request
in order to determine whether such acquisition or holding has resulted or
will result in a violation of Section 8.4.1 or otherwise has resulted or
will result in the underlying assets and property of the Corporation
becoming assets of any ERISA Investor, including the name and address of
any Person for whom a nominee holds shares of Capital Stock and whether the
underlying assets of such Person include assets of any Benefit Plan
Investor.
Section 8.5 NYSE Transactions. Nothing in this Article VIII shall preclude
the settlement of any transaction entered into through the facilities of the
NYSE or any other national securities exchange or automated inter-dealer
quotation system. The fact that the settlement of any transaction takes place
shall not negate the effect of any other provision of this Article VIII and
any transferee in such a transaction shall be subject to all of the provisions
and limitations set forth in this Article VIII.
Section 8.6 Enforcement. The Corporation is authorized specifically to seek
equitable relief, including injunctive relief, to enforce the provisions of
this Article VIII.
Section 8.7 Non-Waiver. No delay or failure on the part of the Corporation
or the Board of Directors in exercising any right hereunder shall operate as a
waiver of any right of the Corporation or the Board of Directors, as the case
may be, except to the extent specifically waived in writing.
Section 8.8 Enforceability. If any of the restrictions on transfer of shares
of Capital Stock contained in this Article VIII are determined to be void,
invalid or unenforceable by any court of competent jurisdiction, then the
Prohibited Owner may be deemed, at the option of the Corporation, to have
acted as an agent of the Corporation in acquiring such shares and to hold such
shares on behalf of the Corporation.
Section 8.9 Amendments. Notwithstanding any other provisions of the charter
or Bylaws of the Corporation, the affirmative vote of stockholders holding at
least two-thirds of all of the votes entitled to be cast thereon shall be
required to amend, alter, change, repeal, or adopt any provisions inconsistent
with, the provisions of this ARTICLE VIII.
ARTICLE IX
MERGER, CONSOLIDATION, SHARE EXCHANGE OR TRANSFER OF ASSETS
Subject to the terms of any class or series of Capital Stock at the time
outstanding, the Corporation may merge with or into another entity, may
consolidate with one or more other entities, may participate in a share
exchange or may transfer its assets within the meaning of the MGCL, but any
such merger, consolidation, share exchange or transfer of its assets must be
approved (i) by the Board of Directors in the manner provided in the MGCL and
(ii) by the stockholders by the affirmative vote of two-thirds of all votes
entitled to be cast thereon to the extent a stockholder vote is required under
the MGCL to effect any such transaction. Notwithstanding the foregoing, any
merger of the Corporation with or into a trust organized for the purpose of
changing the Corporation's form of organization from a corporation to a trust
shall require the approval of stockholders of the Corporation by the
affirmative vote only of a majority of all the votes entitled to be cast on
the matter, provided that (i) the shareholders of the trust immediately
following the merger are the same as the stockholders of the Corporation
immediately prior to the merger and (ii) the trust's declaration of trust
contains amendment provisions substantially equivalent to those contained in
Section 7(d), Section 8.9, the last sentence of this Article IX and Section
10(a)(7) hereof. Notwithstanding any other provisions of the charter or Bylaws
of the Corporation, the affirmative vote of stockholders holding at least two-
thirds of all of the votes entitled to be cast thereon shall be required to
amend, alter, change, repeal, or adopt any provisions inconsistent with, the
provisions of this ARTICLE IX.
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ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10(a) Additional Provisions. The following provisions are hereby
adopted for the purpose of defining, limiting, and regulating the powers of
the Corporation and of the directors and stockholders of the Corporation:
(1) Authority to Issue Stock. The Board of Directors is hereby empowered
to authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities convertible into shares of its stock of any class or classes,
whether now or hereafter authorized, for such consideration as may be
deemed advisable by the Board of Directors and without any action by the
stockholders.
(2) No Preemptive Rights. No stockholder of the Corporation shall have
preemptive rights to purchase, subscribe for, or otherwise acquire any
stock or other securities of the Corporation, and any and all preemptive
rights are hereby denied; other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which the Board of
Directors may determine to offer for subscription may, as the Board of
Directors in its sole discretion shall determine, be offered to the holders
of any class, series or type of stock or other securities at the time
outstanding to the exclusion of the holders of any or all other classes,
series or types of stock or other securities at the time outstanding.
(3) Indemnification. The Corporation shall indemnify (A) its directors
and officers, whether serving the Corporation or at its request any other
entity, to the full extent required or permitted by the general laws of the
State of Maryland now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by law and
(B) other employees and agents to such extent as shall be authorized by the
Board of Directors or the Bylaws and be permitted by law. The foregoing
rights of indemnification shall not be exclusive of any other rights to
which those seeking indemnification may be entitled. The Board of Directors
may take such action as is necessary to carry out these indemnification
provisions and is expressly empowered to adopt, approve and amend from time
to time such by-laws, resolutions or contracts implementing such provisions
or such further indemnification arrangements as may be permitted by law. No
amendment of the charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to any act or omission occurring prior to such
amendment or repeal.
(4) Liability of Directors and Officers. To the fullest extent permitted
by Maryland statutory or decisional law, as amended or interpreted, no
director or officer of this Corporation shall be personally liable to the
Corporation or its stockholders for money damages. No amendment of the
charter of the Corporation or repeal of any of its provisions shall limit
or eliminate the benefits provided to directors and officers under this
provision with respect to any act or omission which occurred prior to such
amendment or repeal.
(5) Call of Special Meetings of Stockholders. A special meeting of the
stockholders of the Corporation may be called by the President, the Board
of Directors or any other person specified in the Bylaws. The Secretary of
the Corporation shall also call a special meeting of the stockholders on
the written request of stockholders entitled to cast a majority of all the
votes entitled to be cast at the meeting.
(6) Bylaws. The power to adopt, alter and repeal the Bylaws of the
Corporation is vested exclusively in the Board of Directors.
(7) Amendments. The Corporation reserves the right from time to time to
make any amendments of its charter which may now or hereafter be authorized
by law, including without limitation any amendments changing the terms or
contract rights, as expressly set forth in the charter, of any of its
outstanding stock by classification, reclassification or otherwise. Except
as otherwise provided in the charter of the Corporation, any amendment to
the charter shall be valid only if approved by the affirmative vote of
stockholders of the Corporation holding not less than a majority of all the
votes entitled to be cast on the matter. Notwithstanding any other
provisions of the charter or Bylaws of the Corporation, the affirmative
vote of
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stockholders holding at least two-thirds of all of the votes entitled to be
cast thereon shall be required to amend, alter, change, repeal, or adopt
any provisions inconsistent with, the provisions of Section 10(a) of this
ARTICLE X.
Section 10(b) No Limitation of Powers. The enumeration and definition of
particular powers of the Board of Directors included herein shall in no way be
limited or restricted by reference to or inference from the terms of any other
clause of this or any other Article or the charter of the Corporation, or
construed as or deemed by inference or otherwise in any manner to exclude or
limit any powers conferred upon the Board of Directors under the general laws
of the State of Maryland now or hereinafter in force.
SECOND: Immediately before this amendment and restatement, the total number
of shares of stock of all classes which the Corporation had authority to issue
was 1,000 shares, all of which were classified as shares of Common Stock, par
value $.01 per share, amounting to an aggregate par value of $10. The
foregoing amendment and restatement increases the authorized capital stock of
the Corporation to 800,000,000 shares, of which 750,000,000 shares initially
are classified as Common Stock, par value $.01 per share, amounting to an
aggregate par value of $7,500,000, and 50,000,000 shares initially are
classified as Preferred Stock, par value $.01 per share, amounting to an
aggregate par value of $500,000. A description of each class of stock,
including preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends and qualifications is set forth in
Article VI hereof.
THIRD: The board of directors of the Corporation, by a unanimous consent in
writing in lieu of a meeting under Section 2-408 of the MGCL, dated ,
1998, adopted a resolution which sets forth the foregoing amendment and
restatement of the Articles of Incorporation, declaring that the said
amendment and restatement of the Articles of Incorporation was advisable and
directing that it be submitted for action thereon by the stockholders by a
unanimous consent in writing in lieu of a meeting under Section 2-505 of the
MGCL.
FOURTH: Notice of a meeting of stockholders to take action on the amendment
and restatement of the Articles of Incorporation was waived by all of the
stockholders of the Corporation.
FIFTH: The amendment and restatement of the Articles of Incorporation of the
Corporation as hereinabove set forth was approved by the unanimous consent in
writing of the stockholders on , 1998.
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IN WITNESS WHEREOF, HMC Merger Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President and attested by its Secretary on , 1998.
HMC MERGER CORPORATION
By:
----------------------------------
----------------------------------
President
Attest:
--------------------------------
--------------------------------
Secretary
I, , President of HMC Merger Corporation hereby acknowledge the
foregoing Articles of Amendment and Restatement of Articles of Incorporation
of HMC Merger Corporation to be the corporate act of HMC Merger Corporation,
and to the best of my knowledge, information and belief, these matters and
facts are true in all material respects, and my statement is made under
penalties of perjury.
-------------------------------------
-------------------------------------
President of HMC Merger Corporation
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EXHIBIT C TO APPENDIX A
HMC MERGER CORPORATION
BYLAWS
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office of HMC Merger Corporation
(the "Corporation") shall be located at such place or places as the directors
may designate.
Section 2. Additional Offices. The Corporation may have additional offices
at such places as the directors may from time to time determine or the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place. All meetings of stockholders shall be held at the
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. Annual Meeting. An annual meeting of the stockholders for the
election of directors and the transaction of any business within the powers of
the Corporation shall be held during the month of May of each year, after the
delivery of the annual report referred to in Section 12 of this Article II, at
a convenient location and on proper notice, on a date and at the time set by
the directors, beginning with the year 1999. Failure to hold an annual meeting
does not invalidate the Corporation's existence or affect any otherwise valid
acts of the Corporation.
Section 3. Special Meetings. A special meeting of the stockholders of the
Corporation may be called by the President or the Board of Directors or by
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation in the manner specified in articles
supplementary filed as part of the charter of the Corporation (the "Charter").
The Secretary of the Corporation shall also call a special meeting of the
stockholders on the written request of stockholders entitled to cast a
majority of all the votes entitled to be cast at the meeting. A special
meeting need not be called to consider any matter which is substantially the
same as a matter voted on at any meeting of the stockholders held during the
preceding twelve months.
Section 4. Notice. Not less than ten nor more than 90 days before each
meeting of stockholders, the Secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time
and place of the meeting and, in the case of a special meeting or as otherwise
may be required by any statute, the purpose for which the meeting is called,
either by mail or by presenting it to such stockholder personally or by
leaving it at his residence or usual place of business. If mailed, such notice
shall be deemed to be given when deposited in the United States mail addressed
to the stockholder at his post office address as it appears on the records of
the Corporation, with postage thereon prepaid.
Section 5. Scope of Notice. Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute
to be stated in such notice. No business shall be transacted at a special
meeting of stockholders except as specifically designated in the notice.
Section 6. Organization. At every meeting of the stockholders, the Chairman
of the Board, if there is one, shall conduct the meeting or, in the case of
vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated: the
Vice Chairman of the Board, if there is one, the Chief Executive Officer, if
there is one, the President, the Vice Presidents in their order of rank and
seniority, or a Chairman chosen by the stockholders entitled to cast a
majority of the votes which all
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stockholders present in person or by proxy are entitled to cast, shall act as
Chairman, and the Secretary, or, in his absence, an Assistant Secretary, or in
the absence of both the Secretary and Assistant Secretaries, a person
appointed by the Chairman shall act as Secretary.
Section 7. Quorum. At any meeting of stockholders, the presence in person or
by proxy of stockholders entitled to cast a majority of all the votes entitled
to be cast at such meeting shall constitute a quorum; but this section shall
not affect any requirement under any statute or the Charter for the vote
necessary for the adoption of any measure. If, however, such quorum shall not
be present at any meeting of the stockholders, the stockholders entitled to
vote at such meeting, present in person or by proxy, shall have the power to
adjourn the meeting from time to time to a date not more than 120 days after
the original record date without notice other than announcement at the
meeting. At such adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting as
originally notified.
Section 8. Voting. Subject to the rights of the holders of any class or
series of stock (other than Common Stock) to elect additional directors under
specified circumstances, a plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient
to elect a director. Each share may be voted for as many individuals as there
are directors to be elected and for whose election the share is entitled to be
voted. Unless otherwise provided in the Charter, a majority of the votes cast
at a meeting of stockholders duly called and at which a quorum is present
shall be sufficient to approve any other matter which may properly come before
the meeting, unless more than a majority of the votes cast is required herein
or by statute or by the Charter. Unless otherwise provided in the Charter,
each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote at a meeting of stockholders.
Section 9. Proxies. A stockholder may cast the votes entitled to be cast by
the shares owned of record by him either in person or by proxy executed in
writing by the stockholder or by his duly authorized attorney in fact. Such
proxy shall be filed with the Secretary of the Corporation before or at the
time of the meeting. No proxy shall be valid after 11 months from the date of
its execution, unless otherwise provided in the proxy.
Section 10. Voting of Shares by Certain Holders. Shares of the Corporation
registered in the name of a corporation, partnership, trust or other entity,
if entitled to be voted, may be voted by the president or a vice president, a
general partner, limited liability company, trustee or member manager thereof,
as the case may be, or a proxy appointed by any of the foregoing individuals,
unless some other person who has been appointed to vote such shares pursuant
to a bylaw or a resolution of the governing board of such corporation or other
entity or agreement of the partners of the partnership presents a certified
copy of such bylaw, resolution or agreement, in which case such person may
vote such shares. Any trustee or other fiduciary may vote shares registered in
his name as such fiduciary, either in person or by proxy.
Shares of the Corporation directly or indirectly owned by it shall not be
voted at any meeting and shall not be counted in determining the total number
of outstanding shares entitled to be voted at any given time, unless they are
held by it in a fiduciary capacity, in which case they may be voted and shall
be counted in determining the total number of outstanding shares at any given
time.
The directors may adopt by resolution a procedure by which a stockholder may
certify in writing to the Corporation that any shares registered in the name
of the stockholder are held for the account of a specified person other than
the stockholder. The resolution shall set forth the class of stockholders who
may make the certification, the purpose for which the certification may be
made, the form of certification and the information to be contained in it; if
the certification is with respect to a record date or closing of the share
transfer books, the time after the record date or closing of the share
transfer books within which the certification must be received by the
Corporation; and any other provisions with respect to the procedure which the
directors consider necessary or desirable. On receipt of such certification,
the person specified in the certification shall be regarded as, for the
purposes set forth in the certification, the stockholder of record of the
specified shares in place of the stockholder who makes the certification.
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Section 11. Inspectors. At any meeting of stockholders, the chairman of the
meeting may appoint one or more persons as inspectors for such meeting. Such
inspectors shall ascertain and report the number of shares represented at the
meeting based upon their determination of the validity and effect of proxies,
count all votes, report the results and perform such other acts as are proper
to conduct the election and voting with impartiality and fairness to all the
stockholders.
Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting
shall be prima facie evidence thereof.
Section 12. Reports to Stockholders. The directors shall submit to the
stockholders at or before the annual meeting of stockholders a report of the
business and operations of the Corporation during the prior fiscal year,
containing a balance sheet and a statement of income and surplus of the
Corporation, accompanied by the certification of an independent certified
public accountant, and such further information as the directors may determine
is required pursuant to any law or regulation to which the Corporation is
subject. Within the earlier of 20 days after the annual meeting of
stockholders or 120 days after the end of the fiscal year of the Corporation,
the directors shall place the annual report on file at the principal office of
the Corporation and with any governmental agencies as may be required by law
and as the directors may deem appropriate.
Section 13. Nominations and Proposals by Stockholders.
(a) Annual Meetings of Stockholders. (1) Subject to the rights of holders
of any class or series of stock having a preference over the Common Stock
as to dividends or upon liquidation to elect directors under specified
circumstances, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the
directors or (iii) by any stockholder of the Corporation who was a
stockholder of record both at the time of giving of notice provided for in
this Section 13(a) and at the time of the annual meeting, who is entitled
to vote at the meeting and who complied with the notice procedures set
forth in this Section 13(a).
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)
(1) of this Section 13, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation and such other
business must otherwise be a proper matter for action by stockholders. To
be timely, a stockholder's notice shall be delivered to the Secretary at
the principal executive offices of the Corporation not later than the close
of business on the 60th day nor earlier than the close of business on the
90th day before the date on which the Corporation first mailed its proxy
materials for the prior year's annual meeting of stockholders. In no event
shall the public announcement of a postponement or adjournment of an annual
meeting to a later date or time commence a new time period for the giving
of a stockholder's notice as described above. Such stockholder's notice
shall set forth as to each person whom the stockholder proposes to nominate
for election or reelection as a director all information relating to such
person that is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving
as a director if elected); (ii) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of
the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in such
business of such stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the stockholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made, (x) the name and address of such stockholder, as they
appear on the Corporation's books, and of such beneficial owner and (y) the
number of each class of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
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(b) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting. Except
as otherwise provided for or fixed by or pursuant to the provisions of the
Charter of the Corporation relating to the rights of the holders of any
class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation to elect directors under specified
circumstances, nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which
directors are to be elected (i) pursuant to the Corporation's notice of
meeting, (ii) by or at the direction of the Board of Directors or (iii)
provided that the Board of Directors has determined that directors shall be
elected at such special meeting, by any stockholder of the Corporation who
was a stockholder of record both at the time of giving of notice provided
for in this Section 13(b) and at the time of the special meeting, who is
entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 13(b). Except as otherwise provided for or fixed
by or pursuant to the provisions of the Charter of the Corporation relating
to the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation to
elect directors under specified circumstances, in addition to the foregoing
requirements, for nominations or other business to be properly brought
before a special meeting by a stockholder, such stockholder's notice
containing the information required by paragraph (a)(2) of this Section 13
must be delivered to the Secretary at the principal executive offices of
the Corporation not earlier than the close of business on the 90th day
prior to such special meeting and not later than the close of business on
the later of the 60th day prior to such special meeting or the tenth day
following the day on which public announcement is first made of the date of
the special meeting. In no event shall the public announcement of a
postponement or adjournment of a special meeting to a later date or time
commence a new time period for the giving of a stockholder's notice as
described above.
(c) General. (1) Except as otherwise provided for or fixed by or pursuant
to the provisions of the Charter of the Corporation relating to the rights
of the holders of any class or series of stock having a preference over the
Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, only such persons who are nominated in accordance
with the procedures set forth in this Section 13 shall be eligible to serve
as directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance
with the procedures set forth in this Section 13. The chairman of the
meeting shall have the power and duty to determine whether a nomination or
any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth
in this Section 13 and, if any proposed nomination or business is not in
compliance with this Section 13, to declare that such nomination or
proposal shall be disregarded.
(2) For purposes of this Section 13, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed
by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 13, a
stockholder shall also comply with all applicable requirements of state law
and of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this Section 13.
Section 14. Informal Action by Stockholders. Subject to the rights of the
holders of any class or series of stock (other than Common Stock) to elect
additional directors under specified circumstances and notwithstanding the
provisions of Section 13 of this Article II, any action required or permitted
to be taken at a meeting of stockholders may be taken without a meeting if a
consent in writing, setting forth such action, is signed by all stockholders
entitled to vote on such matter.
Section 15. Voting by Ballot. Voting on any question or in any election at a
meeting of stockholders may be viva voce unless the presiding officer shall
order or any stockholder present at such meeting in person or by proxy shall
demand that voting be by ballot.
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ARTICLE III
DIRECTORS
Section 1. General Powers; Qualifications; Trustees Holding Over. The
business and affairs of the Corporation shall be managed under the direction
of its Board of Directors. A director shall be an individual at least 21 years
of age who is not under legal disability. In case of failure to elect
directors at an annual meeting of the stockholders, the directors holding over
shall continue to direct the management of the business and affairs of the
Corporation until their successors are elected and qualify.
Section 2. Number. At any regular meeting or at any special meeting called
for that purpose, a majority of the entire Board of Directors may establish,
increase or decrease the number of directors, subject to any limitations on
the number of directors set forth in the Charter.
Section 3. Annual and Regular Meetings. An annual meeting of the directors
shall be held immediately after and at the same place as the annual meeting of
stockholders, no notice other than this Bylaw being necessary. The directors
may provide, by resolution, the time and place, either within or without the
State of Maryland, for the holding of regular meetings of the directors
without other notice than such resolution.
Section 4. Special Meetings. Special meetings of the directors may be called
by or at the request of the Chairman of the Board or the President or by a
majority of the directors then in office. The person or persons authorized to
call special meetings of the directors may fix any place, either within or
without the State of Maryland, as the place for holding any special meeting of
the directors called by them.
Section 5. Notice. Notice of any special meeting shall be given by written
notice delivered personally, telegraphed, facsimile-transmitted or mailed to
each director at his business or residence address. Personally delivered or
telegraphed notices shall be given at least two days prior to the meeting.
Notice by mail shall be given at least five days prior to the meeting.
Telephone or facsimile-transmission notice shall be given at least 24 hours
prior to the meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail properly addressed, with postage thereon
prepaid. If given by telegram, such notice shall be deemed to be given when
the telegram is delivered to the telegraph company. Telephone notice shall be
deemed given when the director is personally given such notice in a telephone
call to which he is a party. Facsimile-transmission notice shall be deemed
given upon completion of the transmission of the message to the number given
to the Corporation by the director and receipt of a completed answer-back
indicating receipt. Neither the business to be transacted at, nor the purpose
of, any annual, regular or special meeting of the directors need be stated in
the notice, unless specifically required by statute or these Bylaws.
Section 6. Quorum. A majority of the directors shall constitute a quorum for
convening any meeting of the directors, provided that, if less than a majority
of such directors are present at said meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice, and
provided further that if, pursuant to the Charter or these Bylaws, the vote of
a majority of a particular group of directors is required for action, a quorum
must also include a majority of such group.
The directors present at a meeting which has been duly called and convened
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough directors to leave less than a quorum.
Section 7. Voting. The action of the majority of the directors present at a
meeting at which a quorum is present when such meeting is convened shall be
the action of the directors, unless the concurrence of a greater proportion is
required for such action by applicable statute, the Charter or these Bylaws.
Section 8. Telephone Meetings. The directors may participate in a meeting by
means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person
at the meeting.
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Section 9. Informal Action by Directors. Any action required or permitted to
be taken at any meeting of the directors may be taken without a meeting, if a
consent in writing to such action is signed by each director and such written
consent is filed with the minutes of proceedings of the directors.
Section 10. Vacancies. If for any reason any or all of the directors cease
to be directors, such event shall not terminate the Corporation or affect
these Bylaws or the powers of the remaining directors hereunder. Subject to
the rights of holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, any vacancy (including a vacancy created by an
increase in the number of directors) shall be filled, at any regular meeting
or at any special meeting called for that purpose, by a majority of the
directors. Any individual so elected as director shall hold office until the
next annual meeting of stockholders and until his successor is elected and
qualified.
Section 11. Compensation. (a) The directors shall not receive any stated
salary for their services as directors but, by resolution of the directors,
may receive fixed sums per year and/or per meeting and/or per visit to real
property owned or to be acquired by the Corporation and for any service or
activity they perform or engage in as directors. Such fixed sums may be paid
either in cash or in shares of the Corporation. Directors may be reimbursed
for expenses of attendance, if any, at each annual, regular or special meeting
of the directors or of any committee thereof; and for their expenses, if any,
in connection with each property visit and any other service or activity
performed or engaged in as directors; but nothing herein contained shall be
construed to preclude any directors from serving the Corporation in any other
capacity and receiving compensation therefor.
(b) The Corporation may lend money to, guarantee an obligation of or
otherwise assist a director or a trustee or director of a direct or indirect
subsidiary of the Corporation; provided, however, that such director or other
person is also an executive officer of the Corporation or of such subsidiary,
or the loan, guarantee or other assistance is in connection with the purchase
of Shares. The loan, guarantee or other assistance may be with or without
interest, unsecured, or secured in any manner that the Board of Directors
approves, including a pledge of shares.
Section 12. Removal of Directors. Subject to the rights of holders of one or
more classes or series of stock other than Common Stock to elect one or more
directors, any director may be removed only for cause and only by the
affirmative vote of stockholders holding at least two thirds of all the votes
entitled to be cast for the election of directors generally.
Section 13. Loss of Deposits. No director shall be liable for any loss which
may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or shares have been
deposited.
Section 14. Surety Bonds. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 15. Reliance. Each director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or
failure to act in reliance in good faith upon the books of account or other
records of the Corporation, upon an opinion of counsel or upon reports made to
the Corporation by any of its officers or employees or by the advisers,
accountants, appraisers or other experts or consultants selected by the
directors or officers of the Corporation, regardless of whether such counsel
or expert may also be a director.
Section 16. Certain Rights of Directors, Officers, Employees and Agents. The
directors shall have no responsibility to devote their full time to the
affairs of the Corporation. Any director or officer, employee or agent of the
Corporation (other than a full-time officer, employee or agent of the
Corporation), in his personal capacity or in a capacity as an affiliate,
employee or agent of any other person, or otherwise, may have business
interests and engage in business activities similar or in addition to those of
or relating to the Corporation.
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ARTICLE IV
COMMITTEES
Section 1. Number, Tenure and Qualification. The directors may appoint from
among its members an Executive Committee, an Audit Committee and a
Compensation Committee, each composed of at least three directors, and other
committees, each composed of one or more directors, to serve at the pleasure
of the directors; provided, that the membership of the Compensation Committee
shall consist of a majority of Independent Directors and the membership of the
Audit Committee shall consist only of Independent Directors. An individual
shall be deemed to be an "Independent Director" hereunder if such individual
is not an affiliate of the Corporation and is not an employee of the
Corporation.
Section 2. Powers. The directors may delegate to committees appointed under
Section 1 of this Article IV any of the powers of the directors, except as
prohibited by law.
Section 3. Meetings. Notice of committee meetings shall be given in the same
manner as notice for special meetings of the Board of Directors. One-third,
but not less than two (except for one-member committees), of the members of
any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The
Board of Directors may designate a chairman of any committee, and such
chairman or any two members of any committee (except for one-member
committees) may fix the time and place of its meetings unless the Board shall
otherwise provide. In the absence or disqualification of any member of any
such committee, the members thereof present at any meeting and not
disqualified from voting, whether or not they constitute a quorum, may
unanimously appoint another director to act at the meeting in the place of
such absent or disqualified members.
Each committee shall keep minutes of its proceedings and shall report the
same to the Board of Directors at the next succeeding meeting, and any action
by the committee shall be subject to revision and alteration by the Board of
Directors, provided that no rights of third persons shall be affected by any
such revision or alteration.
Section 4. Telephone Meetings. Members of a committee of the directors may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
Section 5. Informal Action by Committees. Any action required or permitted
to be taken at any meeting of a committee of the directors may be taken
without a meeting, if a consent in writing to such action is signed by each
member of the committee and such written consent is filed with the minutes of
proceedings of such committee.
Section 6. Vacancies. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace
any absent or disqualified member or to dissolve any such committee.
Section 7. Emergency. In the event of a state of disaster of sufficient
severity to prevent the conduct and management of the affairs and business of
the Corporation by its directors and officers as contemplated by the Charter
and these Bylaws, any two or more available members of the then incumbent
Executive Committee shall constitute a quorum of that Committee for the full
conduct and management of the affairs and business of the Corporation in
accordance with the provisions of this Article IV. In the event of the
unavailability, at such time, of a minimum of two members of the then
incumbent Executive Committee, the available directors shall elect an
Executive Committee composed of any two members of the Board of Directors,
whether or not they be officers of the Corporation, which two members shall
constitute the Executive Committee for the full conduct and management of the
affairs of the Corporation in accordance with the foregoing provisions of this
Section 7. This Section 7 shall be subject to implementation by resolution of
the Board of Directors passed from time to time for that purpose, and any
provisions of the Bylaws (other than this Section 7) and any resolutions which
are contrary to the provisions of this Section 7 or to the provisions of any
such implementing resolutions shall be
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suspended until it shall be determined by any interim Executive Committee
acting under this Section 7 that it shall be to the advantage of the
Corporation to resume the conduct and management of its affairs and business
under all the other provisions of these Bylaws.
ARTICLE V
OFFICERS
Section 1. General Provisions. The officers of the Corporation shall include
a President, a Secretary and a Treasurer and may include a Chairman of the
Board, a Vice Chairman of the Board, a Chief Executive Officer, a Chief
Operating Officer, a Chief Financial Officer, a Corporate Counsel, one or more
Vice Presidents, one or more Assistant Secretaries and one or more Assistant
Treasurers. In addition, the directors may from time to time appoint such
other officers with such powers and duties as they shall deem necessary or
desirable. The officers of the Corporation shall be elected annually by the
directors at the first meeting of the directors held after each annual meeting
of stockholders. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as may be convenient.
Each officer shall hold office until his successor is elected and qualifies or
until his death, resignation or removal in the manner hereinafter provided.
Any two or more offices except President and Vice President may be held by the
same person. In their discretion, the directors may leave unfilled any office
except that of President and Secretary. Election of an officer or agent shall
not of itself create contract rights between the Corporation and such officer
or agent.
Section 2. Removal and Resignation. Any officer or agent of the Corporation
may be removed at any time by the directors if in their judgment the best
interests of the Corporation would be served thereby, but such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Any officer of the Corporation may resign at any time by giving written notice
of his resignation to the directors, the Chairman of the Board, the President
or the Secretary. Any resignation shall take effect at any time subsequent to
the time specified therein or, if the time when it shall become effective is
not specified therein, immediately upon its receipt. The acceptance of a
resignation shall not be necessary to make it effective unless otherwise
stated in the resignation. Such resignation shall be without prejudice to the
contract rights, if any, of the Corporation.
Section 3. Vacancies. A vacancy in any office may be filled by the directors
for the balance of the term.
Section 4. Chairman and Vice Chairman of the Board. The directors may from
time to time appoint a Chairman of the Board and a Vice Chairman of the Board.
The Chairman of the Board shall preside over the meetings of the directors and
of the stockholders at which he shall be present and shall in general oversee
all of the business and affairs of the Corporation. In the absence of the
Chairman of the Board, the Vice Chairman of the Board shall preside at such
meetings at which he shall be present. The Chairman and the Vice Chairman of
the Board may execute any deed, mortgage, bond, contract or other instrument,
except in cases where the execution thereof shall be expressly delegated by
the directors or by these Bylaws to an officer or some other agent of the
Corporation or shall be required by law to be otherwise executed. The Chairman
of the Board and the Vice Chairman of the Board shall perform such other
duties as may be assigned to him or them by the directors.
Section 5. Chief Executive Officer. The directors may designate a Chief
Executive Officer from among the elected officers. The Chief Executive Officer
shall have responsibility for implementation of the policies of the
Corporation, as determined by the directors, and for the administration of the
business affairs of the Corporation. In the absence of both the Chairman and
Vice Chairman of the board, the Chief Executive Officer shall preside over the
meetings of the directors and of the stockholders at which he shall be
present.
Section 6. Chief Operating Officer. The directors may designate a Chief
Operating Officer from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President or the directors.
Section 7. Chief Financial Officer. The directors may designate a Chief
Financial Officer from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President or the directors.
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Section 8. Corporate Counsel. The directors may designate a Corporate
Counsel from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President or the directors.
Section 9. President. In the absence of the Chairman, the Vice Chairman of
the Board and the Chief Executive Officer, the President shall preside over
the meetings of the directors and of the stockholders at which he shall be
present. In the absence of a designation of a Chief Executive Officer by the
directors, the President shall be the Chief Executive Officer and shall be ex
officio a member of all committees that may, from time to time, be constituted
by the directors. The President may execute any deed, mortgage, bond, contract
or other instrument, except in cases where the execution thereof shall be
expressly delegated by the directors or by these Bylaws to some other officer
or agent of the Corporation or shall be required by law to be otherwise
executed; and in general shall perform all duties incident to the office of
president and such other duties as may be prescribed by the Chief Executive
Officer or the directors from time to time.
Section 10. Vice Presidents. In the absence of the President or in the event
of a vacancy in such office, the Vice President (or in the event there be more
than one Vice President, the Vice Presidents in the order designated at the
time of their election or, in the absence of any designation, then in the
order of their election) shall perform the duties of the President and when so
acting shall have all the powers of and be subject to all the restrictions
upon the President; and shall perform such other duties as from time to time
may be assigned to him by the Chief Executive Officer, the President or the
directors. The directors may designate one or more Vice Presidents as
Executive Vice President, Senior Vice President or as Vice President for
particular areas of responsibility.
Section 11. Treasurer. The Treasurer shall have the custody of the funds and
securities of the Corporation and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the directors.
The Treasurer shall disburse the funds of the Corporation as may be ordered
by the directors, taking proper vouchers for such disbursements, and shall
render to the Chief Executive Officer, the President and the directors, at the
regular meetings of the directors or whenever they may require it, an account
of all his transactions as Treasurer and of the financial condition of the
Corporation.
If required by the directors, the Treasurer shall give the Corporation a
bond in such sum and with such surety or sureties as shall be satisfactory to
the directors for the faithful performance of the duties of his office and for
the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, moneys and
other property of whatever kind in his possession or under his control
belonging to the Corporation.
Section 12. Secretary. The Secretary shall (a) keep the minutes of the
proceedings of the stockholders, the directors and committees of the directors
in one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provisions of these Bylaws or as required by
law; (c) be custodian of the trust records and of the seal of the Corporation;
(d) keep a register of the post office address of each stockholder which shall
be furnished to the Secretary by such stockholder; (e) have general charge of
the share transfer books of the Corporation; and (f) in general perform such
other duties as from time to time may be assigned to him by the Chief
Executive Officer, the President or the directors.
Section 13. Assistant Secretaries and Assistant Treasurers. The Assistant
Secretaries and Assistant Treasurers, in general, shall perform such duties as
shall be assigned to them by the Secretary or Treasurer, respectively, or by
the Chief Executive Officer, the President or the directors. The Assistant
Treasurers shall, if required by the directors, give bonds for the faithful
performance of their duties in such sums and with such surety or sureties as
shall be satisfactory to the directors.
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Section 14. Salaries. The salaries and other compensation of the officers
shall be fixed from time to time by the directors and no officer shall be
prevented from receiving such salary or other compensation by reason of the
fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The directors may authorize any officer or agent to
enter into any contract or to execute and deliver any instrument in the name
of and on behalf of the Corporation and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the directors or by an authorized person
shall be valid and binding upon the directors and upon the Corporation when
authorized or ratified by action of the directors.
Section 2. Checks and Drafts. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name
of the Corporation shall be signed by such officer or agent of the Corporation
in such manner as shall from time to time be determined by the directors.
Section 3. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the directors may designate.
ARTICLE VII
SHARES
Section 1. Certificates. Each stockholder shall be entitled to a certificate
or certificates which shall represent and certify the number of shares of each
class of stock held by him in the Corporation. Each certificate shall be
signed by the Chief Executive Officer, the President or a Vice President and
countersigned by the Secretary or an Assistant Secretary or the Treasurer or
an Assistant Treasurer and may be sealed with the seal, if any, of the
Corporation. The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the Corporation shall, from time to
time, issue several classes or series of shares, each class or series may have
its own number series. A certificate is valid and may be issued whether or not
an officer who signed it is still an officer when it is issued. Each
certificate representing shares which are restricted as to their
transferability or voting powers, which are preferred or limited as to their
dividends or as to their allocable portion of the assets of the Corporation
upon liquidation or which are redeemable at the option of the Corporation,
shall have a statement of such restriction, limitation, preference or
redemption provision, or a summary thereof, plainly stated on the certificate.
In lieu of such statement or summary, the Corporation may set forth upon the
face or back of the certificate a statement that the Corporation will furnish
to any stockholder, upon request and without charge, a full statement of such
information.
Section 2. Transfers. Certificates shall be treated as negotiable and title
thereto and to the shares they represent shall be transferred by delivery
thereof. Upon surrender to the Corporation or the transfer agent of the
Corporation of a share certificate duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, the Corporation
shall issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any share
or shares as the holder in fact thereof and, accordingly, shall not be bound
to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of the State
of Maryland.
Notwithstanding the foregoing, transfers of shares of stock of the
Corporation will be subject in all respects to the Charter and all of the
terms and conditions contained therein.
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Section 3. Replacement Certificate. Any officer designated by the directors
may direct a new certificate to be issued in place of any certificate
previously issued by the Corporation alleged to have been lost, stolen or
destroyed upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen or destroyed. When authorizing the issuance
of a new certificate, an officer designated by the directors may, in his
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or the owner's legal
representative to advertise the same in such manner as he shall require and/or
to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.
Section 4. Closing of Transfer Books or Fixing of Record Date. The directors
may set, in advance, a record date for the purpose of determining stockholders
entitled to notice of or to vote at any meeting of stockholders or determining
stockholders entitled to receive payment of any dividend or the allotment of
any other rights, or in order to make a determination of stockholders for any
other proper purpose. Such date, in any case, shall not be prior to the close
of business on the day the record date is fixed and shall be not more than 90
days and, in the case of a meeting of stockholders not less than ten days,
before the date on which the meeting or particular action requiring such
determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the directors may provide that the share
transfer books shall be closed for a stated period but not longer than 20
days. If the share transfer books are closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders,
such books shall be closed for at least ten days before the date of such
meeting.
If no record date is fixed and the share transfer books are not closed for
the determination of stockholders, (a) the record date for the determination
of stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of stockholders
entitled to receive payment of a dividend or an allotment of any other rights
shall be the close of business on the day on which the resolution of the
directors, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, except when (i) the determination has
been made through the closing of the transfer books and the stated period of
closing has expired or (ii) the meeting is adjourned to a date more than 120
days after the record date fixed for the original meeting, in either of which
case a new record date shall be determined as set forth herein.
Section 5. Share Ledger. The Corporation shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 6. Fractional Shares; Issuance of Notes. The directors may issue
fractional shares or provide for the issuance of scrip, all on such terms and
under such conditions as they may determine. Notwithstanding any other
provision of the Charter or these Bylaws, the directors may issue units
consisting of different securities of the Corporation. Any security issued in
a unit shall have the same characteristics as any identical securities issued
by the Corporation, except that the directors may provide that for a specified
period securities of the Corporation issued in such unit may be transferred on
the books of the Corporation only in such unit.
Section 7. Exemption from Title 3, Subtitle 7 of the Maryland General
Corporation Law. The Corporation hereby exempts from the provisions of Title
3, Subtitle 7 of the Maryland General Corporation Law the acquisition of
voting shares by Marriott International, Inc., pursuant to the exercise of its
right to acquire up to 20% of the outstanding Common Stock of the Corporation
following the merger of Host Marriott Corporation, a
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Delaware corporation, with and into the Corporation, pursuant to that certain
Distribution Agreement dated October 8, 1993, as amended.
ARTICLE VIII
FISCAL YEAR
The directors shall have the power, from time to time, to fix the fiscal
year of the Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. Authorization. Dividends and other distributions upon the shares
of stock of the Corporation may be authorized and declared by the directors,
subject to the provisions of law and the Charter. Dividends and other
distributions may be paid in cash, property or shares of the Corporation,
subject to the provisions of law and the Charter.
Section 2. Contingencies. Before payment of any dividends or other
distributions, there may be set aside out of any funds of the Corporation
available for dividends or other distributions such sum or sums as the
directors may from time to time, in their absolute discretion, think proper as
a reserve fund for contingencies, for equalizing dividends or other
distributions, for repairing or maintaining any property of the Corporation or
for such other purpose as the directors shall determine to be in the best
interest of the Corporation, and the directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICIES
Subject to the provisions of the Charter, the Board of Directors may from
time to time adopt, amend, revise or terminate any policy or policies with
respect to investments by the Corporation as it shall deem appropriate in its
sole discretion.
ARTICLE XI
SEAL
Section 1. Seal. The directors may authorize the adoption of a seal by the
Corporation. The seal shall have inscribed thereon the name of the Corporation
and the year of its formation. The directors may authorize one or more
duplicate seals and provide for the custody thereof.
Section 2. Affixing Seal. Whenever the Corporation is permitted or required
to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the
word "(SEAL)" adjacent to the signature of the person authorized to execute
the document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland law in effect from time to time,
the Corporation shall indemnify (a) any director or officer or any former
director or officer (including among the foregoing, for all purposes of this
Article XII and without limitation, any individual who, while a director or
officer and at the express request of the Corporation, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan
or any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) who has been successful, on the merits or otherwise, in the
defense of a proceeding to which he was made a party by reason of service in
such capacity, against reasonable expenses incurred by him in connection with
the proceeding, and (b) any director or officer or any former director or
officer against any claim or liability to which he may become subject by
reason of such
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status unless it is established that (i) his act or omission was material to
the matter giving rise to the proceeding and was committed in bad faith or was
the result of active and deliberate dishonesty, (ii) he actually received an
improper personal benefit in money, property or services or (iii) in the case
of a criminal proceeding, he had reasonable cause to believe that his act or
omission was unlawful. In addition, the Corporation shall, without requiring a
preliminary determination of the ultimate entitlement to indemnification, pay
or reimburse, in advance of final disposition of a proceeding, reasonable
expenses incurred by a director or officer or former director or officer made
a party to a proceeding by reason of such status, provided that, in the case
of a director or officer, the Corporation shall have received (i) a written
affirmation by the director or officer of his good faith belief that he has
met the applicable standard of conduct necessary for indemnification by the
Corporation as authorized by these Bylaws and (ii) a written undertaking by or
on his behalf to repay the amount paid or reimbursed by the Corporation if it
shall ultimately be determined that the applicable standard of conduct was not
met. The Corporation may, with the approval of its directors, provide such
indemnification or payment or reimbursement of expenses to any director or
officer or any former director or officer who served a predecessor of the
Corporation and to any employee or agent of the Corporation or a predecessor
of the Corporation. Neither the amendment nor repeal of this Article, nor the
adoption or amendment of any other provision of the Charter or these Bylaws
inconsistent with this Article, shall apply to or affect in any respect the
applicability of this Article with respect to any act or failure to act which
occurred prior to such amendment, repeal or adoption.
Any indemnification or payment or reimbursement of the expenses permitted by
these Bylaws shall be furnished in accordance with the procedures provided for
indemnification or payment or reimbursement of expenses, as the case may be,
under Section 2-418 of the MGCL for directors of Maryland corporations. The
Corporation may provide to directors and officers such other and further
indemnification or payment or reimbursement of expenses, as the case may be,
to the fullest extent permitted by the MGCL, as in effect from time to time,
for directors of Maryland corporations.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Charter or
Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by
the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of such notice.
Neither the business to be transacted at nor the purpose of any meeting need
be set forth in the waiver of notice, unless specifically required by statute.
The attendance of any person at any meeting shall constitute a waiver of
notice of such meeting, except where such person attends a meeting for the
express purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
The directors shall have the exclusive power to adopt, alter or repeal any
provision of these Bylaws and to make new Bylaws.
ARTICLE XV
MISCELLANEOUS
All references to the Charter shall include any amendments thereto. In these
Bylaws, unless the context otherwise requires, words used in the singular or
in the plural include both the plural and singular and words denoting any
gender include all genders.
* * * *
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APPENDIX B
November [ ], 1998
The Board of Directors
Host Marriott Corporation
10400 Fernwood Road
Washington, DC 20058
Lady and Gentlemen:
BT Wolfensohn has acted as financial advisor to Host Marriott Corporation, a
Delaware corporation ("Host"), in connection with its proposed conversion to a
real estate investment trust ("REIT").
You have requested BT Wolfensohn's opinion, as investment bankers, as to the
fairness, from a financial point of view, to the holders of Host common stock
of certain transactions, described in the appendix attached hereto (the "REIT
Transactions"), to be effected by Host in connection with the conversion to a
REIT.
In connection with BT Wolfensohn's role as financial advisor to Host, and in
arriving at its opinion, BT Wolfensohn has reviewed certain publicly available
financial and other information concerning Host and Crestline, as defined in
the appendix attached hereto, and certain internal analyses and other
information furnished to it by Host and Crestline. BT Wolfensohn has also held
discussions with members of the senior management of Host and Crestline
regarding the businesses and prospects of Host and of Crestline. In addition,
BT Wolfensohn has (i) reviewed the reported prices and trading activity for
Host common stock, (ii) compared certain financial and stock market
information for Host with similar information for certain companies whose
securities are publicly traded, (iii) reviewed certain public information of
certain companies it deemed appropriate in analyzing Host and Crestline, and
(iv) performed such other studies and analyses and considered such other
factors as it deemed appropriate.
BT Wolfensohn has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning Host and Crestline, including,
without limitation, any financial information, forecasts or projections
considered in connection with the rendering of its opinion. Accordingly, for
purposes of its opinion, BT Wolfensohn has assumed and relied upon the
accuracy and completeness in all material respects of all such information and
BT Wolfensohn has not conducted a physical inspection of any of the properties
or assets, and has not prepared or obtained any independent evaluation or
appraisal of any of the assets or liabilities, of Host and Crestline. With
respect to the financial forecasts and projections made available to BT
Wolfensohn and used in its analyses, BT Wolfensohn has assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the management of Host and Crestline, as the case
may be, as to the matters covered thereby. In rendering its opinion, BT
Wolfensohn expresses no view as to the reasonableness of such forecasts and
projections or the assumptions on which they are based. BT Wolfensohn's
opinion is necessarily based upon economic, market and other conditions as in
effect on, and the information made available to it as of, the date hereof.
BT Wolfensohn has assumed that the REIT Transactions will take place prior
to or in connection with Host's election of REIT status in accordance with
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"REIT Rules"). For purposes of rendering its opinion, BT Wolfensohn has
analyzed the REIT Transactions assuming alternatively that the Blackstone
Acquisition (as defined in the appendix attached hereto) is not consummated or
is consummated in accordance with the terms of such transaction. BT Wolfensohn
has also assumed that all material federal, state, local and other approvals
and consents required in connection with the REIT Transactions will be
obtained and that in connection with obtaining any necessary federal, state,
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local and other approvals and consents, or any amendments, modifications or
waivers to any agreements, instruments or orders to which Host is a party or
is subject or by which it is bound, no limitations, restrictions or conditions
will be imposed or amendments, modifications or waivers made that would have a
material adverse effect on Host or Crestline. In addition, BT Wolfensohn has
been advised by Host, and accordingly has assumed for purposes of its opinion,
that the E&P Distribution (as defined in the appendix attached hereto) will be
taxable to the Host stockholders.
BT Wolfensohn has also assumed that upon consummation of the REIT
Transactions, Host will qualify for treatment as a REIT under the REIT Rules
(and BT Wolfensohn understands that Host will obtain an opinion, which will be
based on certain assumptions and representations of Host and subject to
certain qualifications, to that effect from its outside counsel prior to
consummation of the REIT Transactions). At your request, we have not solicited
any proposals from any third parties for the acquisition of any of the assets
of Host or Crestline nor made any determination as to whether any such
proposal could be obtained if solicited.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of Host and is not a recommendation to holders of Host common stock
to approve the merger of Host into HMC Merger Corporation in order to give
effect to the REIT Transactions. This opinion is limited to the fairness, from
a financial point of view, to the holders of Host common stock of the REIT
Transactions, and BT Wolfensohn expresses no opinion as to the merits of the
underlying decision by Host to engage in the REIT Transactions.
BT Wolfensohn is engaged in the merger and acquisition and client advisory
business of Bankers Trust (together with its affiliates, the "BT Group") and,
for legal and regulatory purposes, is a division of BT Alex. Brown
Incorporated, a registered broker-dealer and member of the New York Stock
Exchange. BT Wolfensohn will be paid a fee for its services as financial
advisor to Host in connection with the REIT Transactions, a substantial
portion of which is contingent upon consummation of the REIT Transactions. BT
Wolfensohn regularly performs advisory services for Host, which pays an annual
retainer fee for such services. One or more members of the BT Group have, from
time to time, provided investment banking, commercial banking (including
extension of credit) and other financial services to Host or its affiliates
for which it has received compensation. A member of the BT Group is the lead
administrative agent for Host's $1.25 billion bank facility and was the co-
administrator agent for Host's recent bond tender and subsequent $1.7 billion
re-offering. In the ordinary course of business, members of the BT Group may
actively trade in the securities and other instruments and obligations of Host
for their own accounts and for the accounts of their customers. Accordingly,
the BT Group may at any time hold a long or short position in such securities,
instruments and obligations.
Based upon and subject to the foregoing, it is BT Wolfensohn's opinion as
investment bankers that the REIT Transactions, taken together, are fair, from
a financial point of view, to the holders of Host common stock.
Very truly yours,
BT WOLFENSOHN
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APPENDIX
For the purposes of this opinion, the REIT Transactions mean (i) the
contribution by Host of its wholly-owned full-service hotels, certain
interests in hotel partnerships and certain other assets to Host Marriott L.P.
in exchange for units of limited and general partnership interest in Host
Marriott L.P. and the assumption of liabilities, (ii) the reincorporation of
Host from the State of Delaware to the State of Maryland by merging Host into
HMC Merger Corporation ("Host REIT"), a wholly-owned subsidiary of Host, (iii)
the taxable distribution by Host to its stockholders which Host has advised BT
Wolfensohn will consist of shares of common stock of Crestline (as defined
below) and approximately $250 million in cash or, at the election of Host
common stockholders, in Host REIT common stock (the "E&P Distribution"), (iv)
the assumption by Host Marriott L.P. of the debentures of Host underlying the
Convertible Quarterly Income Preferred Securities and other indebtedness of
Host and the related conversion price adjustment of the such debentures, (v)
the acquisition by merger of eight limited partnerships that own full service
hotels in which Host or its subsidiaries are general partners in exchange for
limited partnership interests in Host Marriott L.P., (vi) the acquisition of
partnership interests from unaffiliated partners of four partnerships that own
one or more full-service hotels and that are partially but not wholly-owned by
Host or one of its subsidiaries in exchange for limited partnership interests
in Host Marriott L.P., (vii) the acquisition from The Blackstone Group and a
series of funds controlled by Blackstone Real Estate Partners of ownership of,
or controlling interests in, twelve hotels and a mortgage loan secured by a
thirteenth hotel in exchange for limited partnership interests in Host
Marriott L.P., the assumption of certain liabilities and other consideration,
including up to 18% of the shares of Crestline (as defined below) common stock
(the "Blackstone Acquisition"), (viii) the creation and capitalization of the
taxable corporations in which Host Marriott L.P. will own 95% of the economic
interest but not voting stock and which will hold various assets contributed
by Host and its subsidiaries to Host Marriott L.P., which assets, if owned
directly by Host Marriott L.P., could jeopardize Host's status as a REIT, and
(ix) the leasing of all of virtually the full-service hotels owned or
controlled by Host Marriott L.P. for initial terms ranging generally from
seven to ten years to lessees, which will be indirect wholly-owned
subsidiaries of Crestline (the "Lessees"), whereby the Lessees will operate
the hotels under the existing brand names and pursuant to their existing
management agreements.
The terms and conditions of the transactions comprising the REIT
Transactions are more fully described in the Proxy Statement/Prospectus dated
November [ ], 1998.
Crestline means Crestline Capital Corporation (formerly HMC Senior
Communities, Inc.) a Delaware corporation, or, as the context may require,
such entity together with the Lessees and its other subsidiaries or any of
them, which currently is a wholly-owned subsidiary of Host but will become a
separate public company as part of the REIT Transactions when Host distributes
the common stock of Crestline to its existing stockholders, as part of the E&P
Distribution.
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APPENDIX C
TAX OPINION OF
HOGAN & HARTSON L.L.P.
WITH RESPECT TO THE MERGER
NOVEMBER , 1998
HMC Merger Corporation
Host Marriott, L.P.
10400 Fernwood Road
Bethesda, MD 20817
Ladies and Gentlemen:
We have acted as tax counsel to HMC Merger Corporation, a Maryland
corporation ("Host REIT"), Host Marriott Corporation, a Delaware corporation
("Host"), and Host Marriott, L.P., a Delaware limited partnership (the
"Operating Partnership"), in connection with the following series of related
transactions (which collectively are referred to as the "REIT Conversion"),
each of which is described more fully in the Proxy Statement/Prospectus which
is part of the Registration Statement filed with the Securities and Exchange
Commission by Host REIT on Form S-4 (File No. 333-64793):
(1) the contribution by Host of its wholly-owned full-service hotel
assets, interests in certain hotel partnerships, and certain other assets
to the Operating Partnership in exchange for OP Units (and possibly
preferred partnership interests) and the assumption of all of Host's
liabilities other than the liabilities of Crestline Capital Corporation, a
Maryland corporation ("Crestline"), (the "OP Contribution");
(2) the distribution by Host of Crestline common stock to Host's
shareholders and the one or more distributions of cash or other
consideration made in connection with the REIT Conversion by Host or Host
REIT to their respective shareholders (collectively, the "Initial E&P
Distribution");
(3) the reincorporation of Host from the State of Delaware to the State
of Maryland by means of the merger of Host with and into Host REIT (the
"Merger");
(4) the recently completed refinancing and amendment of the debt
securities and certain credit facilities of Host;
(5) the acquisition by merger of up to eight limited partnerships that
own full-service hotels in which Host or its subsidiaries are general
partners (the "Partnerships") in exchange for OP Units (which may be
exchanged for Host REIT Common Stock or unsecured notes of the Operating
Partnership), if and to the extent consummated (the "Partnership Mergers");
(6) the acquisition of the partnership or membership interests from
unaffiliated partners or members of four partnerships or limited liability
companies that own one or more full-service hotels and that are partially
but not wholly-owned by Host or one of its subsidiaries (the "Private
Partnerships") in exchange for OP Units, if and to the extent consummated;
(7) the expected acquisition by the Operating Partnership from The
Blackstone Group and a series of funds controlled by Blackstone Real Estate
Partners of ownership of, or controlling interests in, twelve hotels and a
mortgage loan secured by a thirteenth hotel in exchange for OP Units, the
assumption of certain liabilities and other consideration, including up to
approximately 18% of the shares of Crestline common stock (the "Blackstone
Acquisition"), to the extent such acquisition is consummated;
(8) the creation and capitalization of the taxable corporations (the
"Non-Controlled Subsidiaries") in which the Operating Partnership will own
95% of the economic interest but no voting stock and which will hold
various assets contributed by Host and its subsidiaries to the Operating
Partnership, with all of the voting stock, representing 5% of the economic
interest, to be owned by the Host Marriott Statutory
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Employee/Charitable Trust, the beneficiaries of which will be a separate
trust benefiting certain employees of Host REIT, a designated public
charity, and possibly other outside investors (the "Host
Employee/Charitable Trust");
(9) the leasing of virtually all of the full-service Hotels owned or
controlled by the Operating Partnership for initial terms ranging generally
from seven to ten years (the "Leases") to lessees, which will be indirect
wholly-owned subsidiaries of Crestline (the "Lessees"); and
(10) the related transactions described in the Proxy Statement/Prospectus
and the other steps occurring prior to, substantially concurrent with or
within a reasonable time after the effective date of the Merger (the
"Effective Date"), as Host may determine to be necessary or desirable to
complete or facilitate the transactions contemplated in the Proxy
Statement/Prospectus or otherwise to permit Host REIT to elect to be
treated as a REIT for federal income tax purposes for its first taxable
year commencing after the completion of the REIT Conversion.
In connection with the REIT Conversion, we have been asked to provide you
with the opinions on certain federal income tax matters set forth in this
letter. Capitalized terms used in this letter and not otherwise defined herein
have the meaning set forth in the Proxy Statement/Prospectus.
BASES FOR OPINIONS
The opinions set forth in this letter are based on our best judgment
regarding the application of relevant current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations thereunder
(including proposed and temporary Treasury Regulations), and interpretations
of the foregoing as expressed in court decisions, applicable legislative
history, and the administrative rulings and practices of the IRS, including
its practices and policies in issuing private letter rulings, which are not
binding on the IRS except with respect to a taxpayer that receives such a
ruling, all as of the date hereof. These provisions and interpretations are
subject to change, which may or may not be retroactive in effect, that might
result in material modifications of our opinions. Nevertheless, we undertake
no responsibility to advise you of any new developments in the law or in the
application or interpretation of the federal income tax laws.
Our opinion does not foreclose the possibility of a contrary determination
by the IRS or a court of competent jurisdiction, or of a contrary position
taken by the IRS or the Treasury Department in regulations or rulings issued
in the future. In this regard, an opinion of counsel with respect to an issue
merely represents counsel's best judgment with respect to the probable outcome
on the merits with respect to such issue, is not binding on the IRS or the
courts, and is not a guarantee that the IRS will not assert a contrary
position with respect to such issue or that a court will not sustain such a
position asserted by the IRS.
In rendering the following opinions, we have examined such statutes,
regulations, records, agreements, certificates and other documents as we have
considered necessary or appropriate as a basis for such opinions, including
the following:
(1) the form of Agreement and Plan of Merger attached to the Proxy
Statement/Prospectus at Appendix A and to be executed by and among Host,
Host REIT and the Operating Partnership (the "Merger Agreement");
(2) the Proxy Statement/Prospectus;
(3) the Prospectus/Consent Solicitation Statement which is part of the
Registration Statement filed with the SEC by the Operating Partnership on
Form S-4 (File No. 333-55807) and which relates to the Partnership Mergers;
(4) the Prospectus which is part of the Registration Statement filed with
the SEC by Crestline on Form S-1 (File No. 333-64657);
(5) the Restated Certificate of Incorporation of Host, dated November 11,
1997 and the Bylaws of Host, as certified by the Secretary of Host as being
true, complete, correct and in effect as of the date hereof;
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(6) the Articles of Incorporation of Host REIT dated September 28, 1998
and the Bylaws of Host REIT dated September 28, 1998;
(7) the form of Articles of Amendment and Restatement of Articles of
Incorporation of Host REIT;
(8) the form of Amended Articles of Incorporation of Crestline and the
form of Bylaws of Crestline;
(9) the form of the contribution agreement relating to the OP
Contribution;
(10) the form of Second Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, proposed to be entered into at or
about the time of the Partnership Mergers;
(11) the form of agreement of merger relating to the Partnership Mergers
(including various exhibits thereto) by and among Host REIT, the Operating
Partnership, a Partnership, and its corresponding Merger Partnership, as
amended to the date hereof;
(12) the partnership agreements (or form thereof), each as amended to the
date hereof and as proposed to be amended in connection with the REIT
Conversion, of each Partnership, each Merger Partnership and each Private
Partnership that will remain in existence after the REIT Conversion;
(13) the form of lease relating to the Leases and the executed term
sheets regarding each Lease;
(14) the form of organizational documents relating to the formation and
capitalization of the Host Employee/Charitable Trust;
(15) the contribution agreement relating to the Blackstone Acquisition,
dated as of April 16, 1998, as amended; and
(16) any other documents as we deem necessary or appropriate.
The opinions set forth in this letter also are premised on certain written
factual representations of Host and Host REIT contained in a letter to us
dated as of this date, regarding the Merger, the OP Contribution and the
Initial E&P Distribution (the "Representation Letter").
For purposes of rendering our opinions, we have not made an independent
investigation or audit of the facts set forth in any of the above-referenced
documents, including the Proxy Statement/Prospectus and the Representation
Letter. We consequently have relied upon representations in the Representation
Letter that the information presented in such documents or otherwise furnished
to us is accurate and complete in all material respects. We are not aware,
however, of any material facts or circumstances inconsistent with such
representations or the assumptions set forth herein. In this regard, we have
assumed with your consent the following:
(1) All of the representations and statements set forth in the documents
that we reviewed in connection with the preparation of this opinion letter,
including the Representation Letter (the "Reviewed Documents") are true and
correct and will be true and correct at the time of the Merger, the OP
Contribution, and/or the Initial E&P Distribution (as appropriate), and
that any such representation or
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statement made as a belief or made "to the knowledge of" or similarly
qualified is correct and accurate without such qualification.
(2) All of the information set forth in the Reviewed Documents is
accurate and completely describes all material facts relevant to our
opinion.
(3) All of the obligations imposed by the Reviewed Documents on the
parties thereto have been and will continue to be performed or satisfied in
accordance with their terms.
(4) All signatures to the Reviewed Documents are genuine, all documents
submitted to us as originals are authentic, all documents submitted to us
as copies conform to the originals, and all original documents from which
any copies were made are authentic.
(5) All of the Reviewed Documents have been (or will be by the Effective
Date or by the time described in the Proxy Statement/Prospectus) duly
executed and delivered, where due execution and delivery are prerequisites
to the effectiveness thereof. As to Reviewed Documents which we have
reviewed only a form, all such documents will be duly executed and
delivered without material changes from the form reviewed by us.
(6) The Merger will be consummated in accordance with the laws of the
States of Maryland and Delaware and will qualify as a statutory merger
under the laws of the States of Maryland and Delaware.
(7) The Merger will be consummated in accordance with the Merger
Agreement and as described in the Proxy Statement/Prospectus (including
satisfaction of all covenants and conditions to the obligations of the
parties without amendment or waiver thereof).
(8) Host and Host REIT will comply with all reporting obligations with
respect to the Merger required under the Code and the Treasury Regulations
thereunder.
(9) The Merger Agreement and all other documents and instruments referred
to therein or in the Proxy Statement/Prospectus are valid and binding in
accordance with their terms.
(10) Host and Host REIT have been and will continue to be operated in the
manner described in their organizational documents and in the Proxy
Statement/Prospectus.
Any variation or difference in the facts from those set forth in the
Reviewed Documents (including, in particular but without limitation of the
foregoing, the Proxy Statement/Prospectus and the Representation Letter) may
affect the conclusions stated herein. In addition, if any one of the
statements, representations, warranties or assumptions upon which we have
relied to issue this opinion letter is incorrect, our opinions might be
adversely affected and may not be relied upon.
OPINIONS
Based upon, subject to, and limited by the assumptions and qualifications
set forth in this letter, and subject to the condition that the REIT
Conversion be completed in the manner set forth in the Proxy
Statement/Prospectus, we are of the opinion that for federal income tax
purposes:
1. The Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code.
2. No gain or loss will be recognized by Host or Host REIT solely by
reason of the Merger.
3. Except with respect to holders of Host Common Stock who are
nonresident alien individuals, foreign corporations, foreign partnerships
or foreign estates or trusts and who at any time during the five-year
period ending on the Effective Date owned more than 5% of the Host Common
Stock ("Excluded Stockholders"), no gain or loss will be recognized by
holders of Host Common Stock upon the conversion of such stock into Host
REIT Common Stock.
4. Except with respect to Excluded Stockholders, the tax basis of shares
of Host REIT Common Stock received by a holder of Host Common Stock
pursuant to the Merger in the aggregate will be the same as the holder's
adjusted tax basis in the shares of Host Common Stock being converted in
the Merger.
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5. Except with respect to Excluded Stockholders, the holding period of
shares of Host REIT Common Stock received by a holder of Host Common Stock
pursuant to the Merger will include the holder's holding period with
respect to the shares of Host Common Stock being converted in the Merger,
assuming that the Host Common Stock was held as a capital asset at the time
of the Merger.
6. The discussion in the Proxy Statement/Prospectus under the heading
"Federal Income Tax Consequences," to the extent it contains descriptions
of applicable federal income tax law, is correct in all material respects.
* * * * *
This opinion letter addresses only the specific federal income tax matters
set forth above and does not address any other federal, state, local or
foreign tax consequences that may result from the Merger or any other
transaction undertaken in connection with the Merger or that may result from
the REIT Conversion. In particular, but not in limitation of the foregoing,
this opinion letter does not address (i) the tax consequences of the Merger as
applied to any particular holder of Host Common Stock in light of his
particular circumstances, such as dealers in securities, corporate
shareholders subject to the alternative minimum tax, foreign persons, and
holders of shares of Host Common Stock who acquired such shares upon exercise
of stock options or in other compensatory transactions; (ii) the tax
consequences to Host and its subsidiaries of the OP Contribution and the
contributions by such subsidiaries to the Operating Partnership; or (iii) the
tax consequences to Host of the distribution of Crestline common stock
pursuant to the Initial E&P Distribution. With respect to the qualification of
Host REIT as a REIT, we refer you to our opinion letter addressing this issue,
which we have delivered to you and which can be found at Appendix D to the
Proxy Statement/Prospectus and to the discussion in the Proxy
Statement/Prospectus under the heading "Federal Income Tax Consequences--
Federal Income Taxation of Host REIT Following the Merger."
We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery of this opinion letter.
This opinion letter has been prepared for your use in connection with the
Proxy Statement/Prospectus and the REIT Conversion and should not be quoted in
whole or in part or otherwise be referred to, or filed with or furnished to
any governmental agency or other person or entity, without the prior written
consent of this firm. We do, however, consent to the references to this
opinion letter and to Hogan & Hartson L.L.P. under the captions, "Legal
Matters" and "Federal Income Tax Consequences," in the Proxy
Statement/Prospectus and to the inclusion of this opinion letter as an
appendix to the Proxy Statement/Prospectus. In giving this consent, we do not
thereby admit that we are an "expert" within the meaning of the Securities Act
of 1933.
Very truly yours,
Hogan & Hartson L.L.P.
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APPENDIX D
TAX OPINION OF
HOGAN & HARTSON L.L.P.
WITH RESPECT TO QUALIFICATION
OF HOST REIT AS A REIT
, 1998
HMC Merger Corporation
Host Marriott, L.P.
10400 Fernwood Road
Bethesda, MD 20817
Ladies and Gentlemen:
We have acted as tax counsel to HMC Merger Corporation, a Maryland
corporation ("Host REIT"), Host Marriott Corporation, a Delaware corporation
("Host"), and Host Marriott, L.P., a Delaware limited partnership (the
"Operating Partnership"), in connection with the following series of related
transactions (which collectively are referred to as the "REIT Conversion"),
each of which is described more fully in the Prospectus/Consent Solicitation
Statement which is part of the Registration Statement filed with the
Securities and Exchange Commission by the Operating Partnership on Form S-4
(File No. 333-55807) and which includes the Supplement for each Partnership
(as defined in (i) below) attached thereto (the "Consent Solicitation") and in
the Proxy Statement and Prospectus which is part of the Registration Statement
filed with the Securities and Exchange Commission by Host REIT on Form S-4
(File NO. 333-64793) (the "Prospectus"):
(i) the contribution of the following assets by Host and its subsidiaries
to the Operating Partnership, in exchange for a number of units of limited
partnership interest ("OP Units") and units of general partnership interest
of the Operating Partnership equal to the number of shares of Host common
stock outstanding at the time of the REIT Conversion, preferred partnership
interests in the Operating Partnership corresponding to any shares of Host
preferred stock outstanding at the time of the REIT Conversion, and the
assumption of certain liabilities of Host and its subsidiaries: (a) its
wholly owned full-service hotel assets; (b) its interests in Atlanta
Marriott Marquis II Limited Partnership, a Delaware limited partnership
("Atlanta Marquis"); Desert Springs Marriott Limited Partnership, a
Delaware limited partnership ("Desert Springs"); Hanover Marriott Limited
Partnership, a Delaware limited partnership ("Hanover"); Marriott
Diversified American Hotels, L.P., a Delaware limited partnership ("MDAH");
Marriott Hotel Properties Limited Partnership, a Delaware limited
partnership ("MHP"); Marriott Hotel Properties II Limited Partnership, a
Delaware limited partnership ("MHP2"); Mutual Benefit Chicago Marriott
Suite Hotel Partners, L.P., a Rhode Island limited partnership ("Chicago
Suites"); and Potomac Hotel Limited Partnership, a Delaware limited
partnership ("PHLP") (collectively, the "Partnerships"); (c) its interests
in partnerships (other than the Partnerships) or limited liability
companies that own one or more full-service hotels and are not wholly owned
by Host or one of its subsidiaries (the "Private Partnerships" and together
with the Partnerships, the "Hotel Partnerships"); and (d) certain other
businesses and assets (excluding that portion of its shares of common stock
of Crestline Capital Corporation, a Delaware corporation ("Crestline"),
that Host will distribute to its existing shareholders, the common stock of
Crestline that Host or Host REIT will distribute to the Blackstone Entities
(as defined in (v) below) and the cash or other consideration that Host or
Host REIT will distribute to Host's or Host REIT's shareholders, and
certain other de minimis assets);
(ii) the recently completed refinancing and amendment of the debt
securities and certain credit facilities of Host;
(iii) the proposed mergers of subsidiaries of the Operating Partnership
(the "Merger Partnerships") into the Partnerships, in which mergers the
Partnerships will be the surviving entities (the "Mergers");
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(iv) the acquisition (whether by merger or otherwise) by the Operating
Partnership of certain Private Partnerships or interests therein;
(v) the acquisition by the Operating Partnership of ownership of, or
controlling interests in, twelve upscale and luxury full-service hotel
properties (the "Blackstone Hotels") and certain other related assets
(including a mortgage loan secured by an additional hotel) from The
Blackstone Group and a series of funds controlled by Blackstone Real Estate
Partners (collectively, the "Blackstone Entities") in exchange for the
assumption or repayment of debt, OP Units and shares of capital stock of
Crestline, and cash (the "Blackstone Acquisition");
(vi) the creation and capitalization of the one or more taxable
corporations in which the Operating Partnership will own 95% of the
economic interest but no voting stock and which will hold various assets
contributed by Host and its subsidiaries to the Operating Partnership (the
"Non-Controlled Subsidiaries"), with all of the voting stock, representing
5% of the economic interest, to be owned by the Host Marriott Statutory
Employee/Charitable Trust, the beneficiaries of which will be certain
employees of Host REIT, and a designated public charity (the "Host
Employee/Charitable Trust"), and possibly other outside investors;
(vii) the distribution by Host of Crestline common stock to Host's
shareholders and by Host or Host REIT of cash or other consideration to
Host's or Host REIT's shareholders;
(viii) the merger of Host into Host REIT;
(ix) the leasing of the hotels in which the Operating Partnership has a
direct or indirect interest (the "Hotels") to subsidiaries of Crestline;
and
(x) the related transactions described in the Consent Solicitation and
the Prospectus and the other steps necessary or desirable to complete the
REIT Conversion.
In connection with the REIT Conversion, we have been asked to provide you
with the opinions on certain federal income tax matters set forth in this
letter. Capitalized terms used in this letter and not otherwise defined herein
have the meaning set forth in the Consent Solicitation.
BASES FOR OPINIONS
The opinions set forth in this letter are based on relevant current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including proposed and temporary Treasury
Regulations), and interpretations of the foregoing as expressed in court
decisions, applicable legislative history, and the administrative rulings and
practices of the Internal Revenue Service (the "IRS"), including its practices
and policies in issuing private letter rulings, which are not binding on the
IRS except with respect to a taxpayer that receives such a ruling, all as of
the date hereof. These provisions and interpretations are subject to change,
which may or may not be retroactive in effect, that might result in material
modifications of our opinions. Our opinion does not foreclose the possibility
of a contrary determination by the IRS or a court of competent jurisdiction,
or of a contrary position taken by the IRS or the Treasury Department in
regulations or rulings issued in the future. In this regard, an opinion of
counsel with respect to an issue merely represents counsel's best judgment
with respect to the probable outcome on the merits with respect to such issue,
is not binding on the IRS or the courts, and is not a guarantee that the IRS
will not assert a contrary position with respect to such issue or that a court
will not sustain such a position asserted by the IRS.
In rendering the following opinions, we have examined such statutes,
regulations, records, agreements, certificates and other documents as we have
considered necessary or appropriate as a basis for such opinions, including
the following: (1) Consent Solicitation and the Prospectus; (2) the form of
Second Amended and Restated Agreement of Limited Partnership of the Operating
Partnership, proposed to be entered into at or about the time of the Mergers;
(3) the form of the Articles of Amendment and Restatement of Articles of
Incorporation of Host REIT and the Bylaws of Host REIT dated September 28,
1998; (4) the form of Articles of Incorporation of Crestline and the form of
Bylaws of Crestline; (5) the partnership agreements (or form thereof), each as
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amended to the date hereof and as proposed to be amended in connection with
the REIT Conversion, of each Partnership, each Merger Partnership and each
Private Partnership that will remain in existence after the REIT Conversion;
(6) the form of agreement of merger relating to the Mergers (including various
exhibits thereto) by and among Host REIT, the Operating Partnership, a
Partnership, and its corresponding Merger Partnership, as amended to the date
hereof; (7) each contribution agreement (or form thereof) relating to the
acquisition by the Operating Partnership of the non-Host interests in the
Private Partnerships; (8) the contribution agreement relating to the
Blackstone Acquisition, dated as of April 16, 1998, as amended, and the form
of the contribution agreement relating to the acquisition by the Operating
Partnership of Host's assets; (9) the form of lease pursuant to which the
Operating Partnership, its subsidiaries and its controlled partnerships will
lease virtually all of the Hotels to the Lessees and the executed term sheets
regarding each such lease (the "Leases"); (10) the form of organizational
documents relating to the formation and capitalization of the Host
Employee/Charitable Trust; and (11) any other documents as we deem necessary
or appropriate. The opinions set forth in this letter also are premised on
certain written factual representations of Host REIT, Host and the Operating
Partnership contained in a letter to us dated as of this date, regarding the
organization, ownership and operations (including the income, assets,
businesses, liabilities, properties and accumulated undistributed earnings and
profits) of Host REIT, the Operating Partnership, the Hotel Partnerships, the
Subsidiary Partnerships, the Non-Controlled Subsidiaries, the Host
Employee/Charitable Trust, and Crestline and the Lessees following the REIT
Conversion (the "Representation Letter").
For purposes of rendering our opinions, we have not made an independent
investigation or audit of the facts set forth in any of the above-referenced
documents, including the Consent Solicitation, the Prospectus and the
Representation Letter. We consequently have relied upon representations in the
Representation Letter that the information presented in such documents or
otherwise furnished to us is accurate and complete in all material respects.
We are not aware, however, of any material facts or circumstances contrary to,
or inconsistent with, the representations we have relied upon as described
herein, or other assumptions set forth herein.
In this regard, we have assumed the following: (i) that all of the
representations and statements set forth in the documents that we reviewed
(including the Representation Letter) are true and correct and will be true
and correct at the time of the Mergers, that any representation or statement
made as a belief or made "to the knowledge of" or similarly qualified is
correct and accurate without such qualification, and that all of the
obligations imposed by any such documents on the parties thereto have been and
will continue to be performed or satisfied in accordance with their terms;
(ii) the genuineness of all signatures, the proper execution of all documents,
the authenticity of all documents submitted to us as originals, the conformity
to originals of documents submitted to us as copies, the authenticity of the
originals from which any copies were made and that any documents as to which
we have reviewed only a form will be duly executed at the time of the Mergers
without changes from the form reviewed by us; (iii) that each of Host REIT,
the Operating Partnership, the Hotel Partnerships, Crestline, the Non-
Controlled Subsidiaries, the Host Employee/Charitable Trust, the Lessees, and
the Subsidiary Partnerships have been (where applicable) and will continue to
be operated in the manner described in the relevant partnership agreement,
limited liability company operating agreement, articles of incorporation, or
other organizational documents and in the Consent Solicitation and the
Prospectus; (iv) that each of Host REIT, the Operating Partnership, the Hotel
Partnerships, Crestline, the Non-Controlled Subsidiaries, the Host
Employee/Charitable Trust, the Lessees, and the Subsidiary Partnerships will
be duly incorporated or organized and validly existing under the laws of the
state in which it was created at the time of the REIT Conversion; (v) as
represented by Host REIT and the Operating Partnership, that each of the
Leases will be enforced in accordance with its terms, and that each of the
lessors and the Lessees will act at all times in accordance with the terms
thereof; (vi) as represented by Host REIT and the Operating Partnership, that
there will be no agreements or understandings between Host REIT or the
Operating Partnership, on the one hand, and the Host Employee/Charitable
Trust, which owns 100% of the voting stock of each Non-Controlled Subsidiary,
or any of the Non-Controlled Subsidiaries themselves, on the other hand, that
are inconsistent with the Host Employee/Charitable Trust being considered to
be both the record and beneficial owner of more than 90% of the outstanding
voting stock of each of the Non-Controlled Subsidiaries; and (vii) as
represented by Host REIT and the Operating Partnership, no member of the
Marriott family, or any entity in which any member of the Marriott family owns
an interest, nor any other shareholder of Host REIT will own (determined by
taking into account
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the attribution rules under Section 318(a) of the Code, as modified by Section
856(d)(5) of the Code) at the time of the REIT Conversion more than 9.8% by
value of Host REIT, and Host REIT will take all available measures (including,
without limitation, enforcing the provisions of the Articles of Incorporation
of Host REIT) to ensure that there is not ownership in excess of such limit in
the future. Any variation or difference in the facts from those set forth in
the documents that we have reviewed and upon which we have relied (including,
in particular, the Consent Solicitation, the Prospectus and the Representation
Letter) may affect the conclusions stated herein.
OPINIONS
Based upon, subject to, and limited by the assumptions and qualifications
set forth herein (including those set forth below), and subject to the
condition that the REIT Conversion be completed in the manner set forth in the
Consent Solicitation and the Prospectus, we are of the opinion that:
1. Host REIT, beginning with its first taxable year commencing after
consummation of the REIT Conversion, will be organized in conformity with
the requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Code.
2. The Leases will be respected as leases for federal income tax
purposes.
3. If the Operating Partnership were a "publicly traded partnership"
within the meaning of Section 7704 of the Code because OP Units were
readily tradable on the substantial equivalent of a secondary market after
the Mergers and the REIT Conversion, it would qualify as a partnership for
federal income tax purposes because, based upon factual representations
made by Host, Host REIT and the Operating Partnership as to the proposed
method of operation of the Operating Partnership after the Mergers and the
REIT Conversion, at least ninety percent (90%) of its income will consist
of "qualifying income," as defined in Section 7704(d) of the Code.
* * * * *
Host REIT's ability to qualify as a REIT will depend in particular upon
whether each of the Leases is respected as a lease for federal income tax
purposes. If any one of such Leases is not respected as a lease for federal
income tax purposes, the Company likely will fail to qualify as a REIT. The
determination of whether a lease is a lease for federal income tax purposes is
highly dependent on specific facts and circumstances. In delivering the
opinion set forth above that each of the Leases will be respected as a lease
for federal income tax purposes, and the opinion set forth above that Host
REIT's proposed method of operation (as described in the Representation
Letter) should enable Host REIT to meet the requirements for qualification and
taxation as a REIT for its first taxable year commencing following
consummation of the REIT Conversion and subsequent taxable years, we expressly
rely upon, among other things, Host REIT's representations as to various
factual matters with respect to the Leases, including representations as to
the commercial reasonableness of the economic and other terms of the Leases,
the intent and economic expectations of the parties to the Leases, and the
allocation of various economic risks between the parties to the Leases, taking
into account all surrounding facts and circumstances. We express no opinion as
to any of the economic terms of the Leases, the commercial reasonableness
thereof, or whether the actual economic relationships created thereby are such
that the Leases will be respected for federal income tax purposes.
Host REIT's ability to qualify as a REIT also will depend upon Host REIT not
having at the close of its first taxable year for which its REIT election is
effective any "earnings and profits" accumulated in any prior taxable year of
Host REIT, Host, or any of its predecessors or subsidiaries (which would be
based on the
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consolidated earnings and profits of Host (including each of its predecessors)
accumulated from 1929, the first year that the predecessor of Host was a "C"
corporation, through and including Host's 1998 taxable year). The calculation
of "earnings and profits" depends upon a number of factual and legal
interpretations related to the activities and operations of Host and its
corporate affiliates during its entire corporate existence and is subject to
review and challenge by the IRS. Host and Host REIT have represented to us for
purposes of our opinion that Host REIT will have distributed by the close of
its first taxable year for which its REIT election is effective any "earnings
and profits" accumulated in any prior taxable year of Host REIT, Host, or any
of its predecessors or subsidiaries. There can be no assurance, however, that
the IRS will not examine the tax returns of Host and its affiliates for all
years prior to and including the REIT Conversion and propose adjustments to
increase their taxable income, which could result in Host REIT being
considered to have undistributed "earnings and profits" at the close of its
first taxable year for which its REIT election is effective, in which event
Host REIT would not qualify as a REIT for such year. We express no opinion as
to Host's current and accumulated "earnings and profits" or whether Host REIT
will be considered to have undistributed "earnings and profits" at the close
of its first taxable year for which its REIT election is effective.
Host REIT's qualification and taxation as a REIT depend upon Host REIT's
ability to meet on an ongoing basis (through actual annual operating results,
distribution levels, diversity of share ownership and otherwise) the various
qualification tests imposed under the Code and described in the Consent
Solicitation and the Prospectus. We have relied upon representations of Host
REIT and the Operating Partnership with respect to these matters (including
those set forth in the Representation Letter and in the Consent Solicitation
and the Prospectus) and will not review Host REIT's compliance with these
requirements on a continuing basis. Accordingly, no assurance can be given
that the actual results of Host REIT's operations, the sources of its income,
the nature of its assets, the level of its distributions to shareholders and
the diversity of its share ownership for any given taxable year will satisfy
the requirements under the Code for qualification and taxation as a REIT.
For a discussion relating the law to the facts, and the legal analysis
underlying the opinions set forth in this letter, we incorporate by reference
the discussions of federal income tax issues in the Section of the Consent
Solicitation under the heading "Federal Income Tax Consequences--Federal
Income Taxation of Host REIT Following the Mergers" and in the Section of the
Prospectus under the heading "Federal Income Tax Consequences--Federal Income
Taxation of Host REIT Following the Merger."
We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery of this opinion letter.
This opinion letter addresses only the specific federal income tax matters
set forth above and does not address any other federal, state, local or
foreign tax consequences that may result from the REIT Conversion or any other
transaction undertaken in connection therewith. This opinion letter has been
prepared for your use in connection with the Consent Solicitation, the
Prospectus and the REIT Conversion and should not be quoted in whole or in
part or otherwise be referred to, or filed with or furnished to any
governmental agency or other person or entity, without the prior written
consent of this firm. We do, however, consent to the references to this
opinion letter and to Hogan & Hartson L.L.P. under the captions, "Legal
Matters" and "Federal Income Tax Consequences," in the Consent Solicitation
and the Prospectus (and under the caption, "Federal Income Tax Consequences,"
in the Supplements) and to the inclusion of (i) this opinion letter as an
exhibit to the Prospectus and (ii) the form of this opinion letter as an
exhibit to the Consent Solicitation. In giving this consent, we do not thereby
admit that we are an "expert" within the meaning of the Securities Act of
1933.
Very truly yours,
Hogan & Hartson L.L.P.
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Host REIT Charter authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (i) any
present or former director or officer or (ii) any individual who, while a
director of Host REIT and at the request of Host REIT, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise from and against any
claim or liability to which such person may become subject or which such
person may incur by reason of his or her status as a present or former
Director or officer of Host REIT. The Host REIT Bylaws obligate it, to the
maximum extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer who is made party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director or officer of Host REIT and at the request of Host REIT, serves or
has served another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, trustee, officer or partner of such corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise and who is made a party to the proceeding by reason of his
service in that capacity, against any claim or liability to which he may
become subject by reason of such status. The Host REIT Charter and Host REIT
Bylaws also permit Host REIT to indemnify and advance expenses to any person
who served a predecessor of Host REIT in any of the capacities described above
and to any employee or agent of Host REIT or a predecessor of Host REIT. The
Host REIT Bylaws require Host REIT to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding
to which he is made a party by reason of his service in that capacity.
The MGCL permits a Maryland corporation to indemnify and advance expenses to
its directors, officers, employees and agents, and permits a corporation to
indemnify its present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission
was unlawful. However, under the MGCL, a Maryland corporation may not
indemnify a director or officer in a suit by or in the right of the
corporation if such director or officer has been adjudged to be liable to the
corporation. In accordance with the MGCL, the Host REIT Bylaws require it, as
a condition to advancing expenses, to obtain (1) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by Host REIT as authorized by the Host
REIT Bylaws and (2) a written statement by or on his behalf to repay the
amount paid or reimbursed by Host REIT if it shall ultimately be determined
that the standard of conduct was not met.
Host REIT intends to enter into indemnification agreements with each of its
directors and officers. The indemnification agreements will require, among
other things, that Host REIT indemnify its directors and officers to the
fullest extent permitted by law and advance to its directors or officers all
related expenses, subject to reimbursement if it is subsequently determined
that indemnification is not permitted.
The Partnership Agreement also provides for indemnification of Host REIT and
its officers and directors to the same extent that indemnification is provided
to officers and directors of Host REIT in the Host REIT Charter, and limits
the liability of Host REIT and its officers and directors to the Operating
Partnership and its respective partners to the same extent that the liability
of the officers and directors of Host REIT to Host REIT and its stockholders
is limited under the Host REIT Charter.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, Host REIT has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
FINANCIAL STATEMENT SCHEDULES
<TABLE>
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<S> <C>
Report of Independent Public Accountants on Financial Statement
Schedules............................................................... S-1
Schedule III--Real Estate and Accumulated Depreciation................... S-2
</TABLE>
<TABLE>
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EXHIBITS
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2.1 Form of Agreement and Plan of Merger dated November , 1998 (the
"Merger Agreement") by and among Host Marriott Corporation, HMC
Merger Corporation and Host Marriott L.P. (included as Appendix A to
the Proxy Statement/Prospectus that is part of this Registration
Statement).
3.1 Articles of Incorporation of HMC Merger Corporation (to be renamed
Host Marriott Corporation in connection with the REIT Conversion)
dated September 28, 1998 (incorporated by reference to Exhibit 3.12
of HMC Merger Corporation Registration Statement No. 333-55807).
3.2 Bylaws of HMC Merger Corporation (to be renamed Host Marriott
Corporation in connection with the REIT Conversion) dated September
28, 1998 (included as Exhibit C to the Merger Agreement which is
attached as Appendix A to the Proxy Statement/Prospectus that is part
of this Registration Statement).
3.3 Form of Articles of Amendment and Restatement of Articles of
Incorporation of HMC Merger Corporation (to be renamed Host Marriott
Corporation in connection with the REIT Conversion) (included as
Exhibit B to the Merger Agreement which is attached as Appendix A to
the Proxy Statement/Prospectus that is part of this Registration
Statement).
4.1 Form of Common Stock Certificate of HMC Merger Corporation (to be
renamed Host Marriott Corporation in connection with the REIT
Conversion) (incorporated by reference to Exhibit 4.7 of HMC Merger
Corporation Registration Statement No. 333-55807).
4.2 Guarantee Agreement, dated December 2, 1996, between Host Marriott
Corporation and IBJ Schroeder Bank & Trust Company, as Guarantee
Trustee (incorporated by reference to Exhibit 4.6 of Host Marriott
Corporation Registration Statement No. 333-19923).
4.3(i) Rights Agreement between Marriott Corporation and The Bank of New
York as Rights Agent dated February 3, 1989 (incorporated by
reference to Host Marriott Corporation Registration Statement No. 33-
62444).
4.3(ii) First Amendment to Rights Agreement between Marriott Corporation and
Bank of New York as Rights Agent dated as of October 8, 1993
(incorporated by reference to Host Marriott Corporation Registration
Statement No. 33-51707).
4.4 Indenture by and among HMC Acquisition Properties, Inc., as Issuer,
HMC SFO, Inc., as Subsidiary Guarantors, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Registration Statement No. 333-00768).
4.5 Indenture by and among HMH Properties, Inc., as Issuer, HMH Courtyard
Properties, Inc., HMC Retirement Properties, Inc., Marriott Financial
Services, Inc., Marriott SBM Two Corporation, HMH Pentagon
Corporation and Host Airport Hotels, Inc., as Subsidiary Guarantors,
and Marine Midland Bank, as Trustee (incorporated by reference to
Host Marriott Corporation Registration Statement 33-95058).
4.6 Indenture by and among HMH Properties, Inc., as Issuer, and the
Subsidiary Guarantors named therein, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Current Report on Form 8-K dated August 6, 1998).
4.7 Indenture for the 6 3/4% Convertible Debentures, dated December 2,
1996, between Host Marriott Corporation and IBJ Schroeder Bank &
Trust Company, as Indenture Trustee (incorporated by reference to
Exhibit 4.3 of Host Marriott Corporation Registration Statement No.
333-19923).
4.8 Amended and Restated Trust Agreement, dated December 2, 1996, among
Host Marriott Corporation, IBJ Schroeder Bank & Trust Company, as
Property Trustee, Delaware Trust Capital Management, Inc., as
Delaware Trustee, and Robert E. Parsons, Jr., Bruce D. Wardinski and
Christopher G. Townsend, as Administrative Trustees (incorporated by
reference to Exhibit 4.2 of Host Marriott Corporation Registration
Statement No. 333-19923).
</TABLE>
II-2
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<TABLE>
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EXHIBITS
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<C> <S>
5.1* Opinion of Hogan & Hartson L.L.P. regarding legality of the securities being
registered.
8.1 Opinion of Hogan & Hartson L.L.P. regarding certain tax matters (included as
Appendix C to the Proxy Statement/Prospectus that is part of the Registration
Statement).
8.2 Opinion of Hogan & Hartson L.L.P. regarding the qualification of Host REIT as a
REIT (included as Appendix D to the Proxy Statement/Prospectus that is part of the
Registration Statement).
10.1 Form of Second Amended and Restated Agreement of Limited Partnership of Host
Marriott, L.P. (incorporated by reference to Exhibit 3.1 of HMC Merger Corporation
Registration Statement No. 333-55807).
10.2 Form of Indenture between Host Marriott L.P., as Issuer, and Marine Midland Bank,
as Indenture Trustee, and Form of 6.56% Callable Note due December 15, 2005
(incorporated by reference to Exhibit 4.1 of HMC Merger Corporation Registration
Statement No. 333-55807).
10.3 Amended and Restated Credit Agreement dated as of June 19, 1997 and Amended and
Restated as of August 5, 1998 among Host Marriott Corporation, Host Marriott
Hospitality, Inc., HMH Properties, Inc., Host Marriott, L.P., HMC Capital Resources
Corp., Various Banks, Wells Fargo Bank, National Association, The Bank of Nova
Scotia and Credit Lyonnais New York Branch, as Co-Arrangers, and Bankers Trust
Company as Arranger and Administrative Agent (incorporated by reference to Host
Marriott Corporation Current Report on Form 8-K dated September 11, 1998).
10.4 Marriott Corporation Executive Deferred Compensation Plan dated as of December 6,
1990 (incorporated by reference to Exhibit 19(i) of the Host Marriott Corporation
Annual Report on Form 10-K for the fiscal year ended December 28, 1991).
10.5 Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan effective as of
October 8, 1993 (incorporated by reference to Host Marriott Corporation Current
Report on Form 8-K dated October 23, 1993).
10.6 Distribution Agreement dated as of September 15, 1993 between Marriott Corporation
and Marriott International, Inc. (incorporated by reference to Host Marriott
Corporation Current Report on Form 8-K dated October 23, 1993).
10.7 Amendment No. 1 to the Distribution Agreement dated September 15, 1993 by and among
Host Marriott Corporation, Host Marriott Services Corporation and Marriott
International (incorporated by reference to Host Marriott Corporation Current
Report on Form 8-K dated January 16, 1996).
10.8 Distribution Agreement dated December 22, 1995 by and between Host Marriott
Corporation and Host Marriott Services Corporation (incorporated by reference to
Host Marriott Corporation Current Report on Form 8-K dated January 16, 1996).
10.9 Tax Sharing Agreement dated as of October 5, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by reference to Host
Marriott Corporation Current Report on Form 8-K dated October 23, 1993).
10.10 Assignment and License Agreement dated as of October 8, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated by reference to
Host Marriott Corporation Current Report on Form 8-K dated October 23, 1993).
10.11 Amendment No. 1 to the Assignment and License Agreement dated as of October 8, 1993
by and between Marriott International, Inc. and Host Marriott Corporation
(incorporated by reference to Host Marriott Corporation Current Report on Form 8-K
dated January 16, 1996).
10.12 Form of Noncompetition Agreement between Host Marriott Corporation, Host Marriott,
L.P. and Crestline Capital Corporation and other parties named therein
(incorporated by reference to Exhibit 10.13 of HMC Merger Corporation Registration
Statement No. 333-55807).
10.13 Tax Administration Agreement dated as of October 8, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by reference to Host
Marriott Corporation Current Report on Form 8-K dated October 23, 1993).
10.14 Noncompetition Agreement dated as of October 8, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by reference to Host
Marriott Corporation Current Report on Form 8-K dated October 23, 1993).
</TABLE>
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<TABLE>
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EXHIBITS
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<S> <C>
10.15 Amendment No. 1 to the Noncompetition Agreement dated October 8, 1993 by and
between Host Marriott Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K dated January 16,
1996).
10.16 Host Marriott Lodging Management Agreement--Marriott Hotels, Resorts and Hotels
dated September 25, 1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference to Host Marriott Corporation
Registration Statement No. 33-51707).
10.17 Employee Benefits and Other Employment Matters Allocation Agreement dated as of
December 29, 1995 by and between Host Marriott Corporation and Host Marriott
Services Corporation (incorporated by reference to Host Marriott Corporation
Current Report on Form 8-K dated January 16, 1996).
10.18 Tax Sharing Agreement dated as of December 29, 1995 by and between Host Marriott
Corporation and Host Marriott Services Corporation (incorporated by reference to
Host Marriott Corporation Current Report on Form 8-K dated January 16, 1996).
10.19 Marriott/Host Marriott Employees' Profit Sharing Retirement and Savings Plan and
Trust (incorporated by reference to Host Marriott Corporation Registration
Statement No. 33-62444).
10.20 Contribution Agreement dated as of April 16, 1998 among Host Marriott Corporation,
Host Marriott, L.P. and the contributors named therein, together with Exhibit B
(incorporated by reference to Exhibit 10.18 of HMC Merger Corporation Registration
Statement No. 333-55807).
10.21 Amendment No. 1 to Contribution Agreement dated May 8, 1998 among Marriott
Corporation, Host Marriott, L.P. and the contributors named therein (incorporated
by reference to Exhibit 10.19 of HMC Merger Corporation Registration Statement No.
333-55807).
10.22 Amendment No. 2 to Contribution Agreement dated May 18, 1998 among Host Marriott
Corporation, Host Marriott, L.P. and the contributors named therein (incorporated
by reference to Exhibit 10.20 of HMC Merger Corporation Registration Statement No.
333-55807).
#10.23 Form of Lease (incorporated by reference to Exhibit 10.21 of HMC Merger Corporation
Registration Statement No. 333-55807)
#10.24 Form of Management Agreement for Full-Service Hotels (incorporated by reference to
Host Marriott Corporation Registration Statement No. 33-51707)
10.25 Form of Employee Benefits and Other Employment Matters Allocation Agreement between
Host Marriott Corporation, Host Marriott, L.P. and Crestline Capital Corporation.
10.26* Form of Distribution Agreement between HMC Merger Corporation and Crestline Capital
Corporation.
10.27* Form of Tax Sharing Agreement between HMC Merger Corporation and Crestline Capital
Corporation.
10.28* Form of Guaranty Agreement between HMC Merger Corporation, the lessees referred to
therein and Crestline Capital Corporation.
10.29* Form of Pooling Agreement between HMC Merger Corporation and Crestline Capital
Corporation.
10.30* Form of Asset Management Agreement between HMC Merger Corporation and Capital
Crestline Corporation.
10.31* Form of Non-competition Agreement between HMC Merger Corporation and Crestline
Capital Corporation.
21.1** List of Subsidiaries of HMC Merger Corporation.
23.1* Consent of Hogan & Hartson L.L.P. (included in Exhibits 5.1 and 8.1).
23.2 Consent of Arthur Andersen LLP.
23.3* Consents of Director nominees of HMC Merger Corporation (to be renamed Host
Marriott Corporation in connection with the REIT Conversion ).
27.1** Financial Data Schedule.
99.1 Form of Proxy Card.
99.2 Form of Opinion of BT Wolfensohn (included as Appendix B to the Proxy
Statement/Prospectus that is part of this Registration Statement).
</TABLE>
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* To be filed by amendment.
** Previously filed.
# Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
II-4
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ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of any
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus that is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such offering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The undersigned registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (c) immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statements through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
The undersigned hereby undertakes to file by means of a post-effective
amendment to Part II of the registration statement prior to consummation of
the REIT Conversion an updated tax opinion of Hogan & Hartson L.L.P. addressed
to the Board of Directors of Host with respect to the qualification of HMC
Merger Corporation as a REIT.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA,
STATE OF MARYLAND ON NOVEMBER 10, 1998.
HMC Merger Corporation
/s/ Robert E. Parsons, Jr.
By: _________________________________
NAME: ROBERT E. PARSONS, JR.
TITLE: PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert E. Parsons, Jr. President and Initial November 10, 1998
______________________________________ Director (Chief Executive
ROBERT E. PARSONS, JR. Officer and Chief
Financial Officer)
/s/ Donald D. Olinger Vice President (Chief November 10, 1998
______________________________________ Accounting Officer)
DONALD D. OLINGER
/s/ Christopher G. Townsend Vice President and Initial November 10, 1998
______________________________________ Director
CHRISTOPHER G. TOWNSEND
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
2.1 Form of Agreement and Plan of Merger dated November , 1998 (the
"Merger Agreement") by and among Host Marriott Corporation, HMC Merger
Corporation and Host Marriott L.P. (included as Appendix A to the
Proxy Statement/Prospectus that is part of this Registration
Statement).
3.1 Articles of Incorporation of HMC Merger Corporation (to be renamed
Host Marriott Corporation in connection with the REIT Conversion)
dated September 28, 1998 (incorporated by reference to Exhibit 3.12 of
HMC Merger Corporation Registration Statement No. 333-55807).
3.2 Bylaws of HMC Merger Corporation (to be renamed Host Marriott
Corporation in connection with the REIT Conversion) dated September
28, 1998 (included as Exhibit C to the Merger Agreement which is
attached as Appendix A to the Proxy Statement/Prospectus that is part
of this Registration Statement).
3.3 Form of Articles of Amendment and Restatement of Articles of
Incorporation of HMC Merger Corporation (to be renamed Host Marriott
Corporation in connection with the REIT Conversion) (included as
Exhibit B to the Merger Agreement which is attached as Appendix A to
the Proxy Statement/Prospectus that is part of this Registration
Statement).
4.1 Form of Common Stock Certificate of HMC Merger Corporation (to be
renamed Host Marriott Corporation in connection with the REIT
Conversion) (incorporated by reference to Exhibit 4.7 of HMC Merger
Corporation Registration Statement No. 333-55807).
4.2 Guarantee Agreement, dated December 2, 1996, between Host Marriott
Corporation and IBJ Schroeder Bank & Trust Company, as Guarantee
Trustee (incorporated by reference to Exhibit 4.6 of Host Marriott
Corporation Registration Statement No. 333-19923).
4.3(i) Rights Agreement between Marriott Corporation and The Bank of New York
as Rights Agent dated February 3, 1989 (incorporated by reference to
Host Marriott Corporation Registration Statement No. 33-62444).
4.3(ii) First Amendment to Rights Agreement between Marriott Corporation and
Bank of New York as Rights Agent dated as of October 8, 1993
(incorporated by reference to Host Marriott Corporation Registration
Statement No. 33-51707).
4.4 Indenture by and among HMC Acquisition Properties, Inc., as Issuer,
HMC SFO, Inc., as Subsidiary Guarantors, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Registration Statement No. 333-00768).
4.5 Indenture by and among HMH Properties, Inc., as Issuer, HMH Courtyard
Properties, Inc., HMC Retirement Properties, Inc., Marriott Financial
Services, Inc., Marriott SBM Two Corporation, HMH Pentagon Corporation
and Host Airport Hotels, Inc., as Subsidiary Guarantors, and Marine
Midland Bank, as Trustee (incorporated by reference to Host Marriott
Corporation Registration Statement 33-95058).
4.6 Indenture by and among HMH Properties, Inc., as Issuer, and the
Subsidiary Guarantors named therein, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Current Report on Form 8-K dated August 6, 1998).
4.7 Indenture for the 6 3/4% Convertible Debentures, dated December 2,
1996, between Host Marriott Corporation and IBJ Schroeder Bank & Trust
Company, as Indenture Trustee (incorporated by reference to Exhibit
4.3 of Host Marriott Corporation Registration Statement No. 333-
19923).
4.8 Amended and Restated Trust Agreement, dated December 2, 1996, among
Host Marriott Corporation, IBJ Schroeder Bank & Trust Company, as
Property Trustee, Delaware Trust Capital Management, Inc., as Delaware
Trustee, and Robert E. Parsons, Jr., Bruce D. Wardinski and
Christopher G. Townsend, as Administrative Trustees (incorporated by
reference to Exhibit 4.2 of Host Marriott Corporation Registration
Statement No. 333-19923).
<PAGE>
5.1* Opinion of Hogan & Hartson L.L.P. regarding legality of the securities
being registered.
8.1 Opinion of Hogan & Hartson L.L.P. regarding certain tax matters
(included as Appendix C to the Proxy Statement/Prospectus that is part
of the Registration Statement).
8.2 Opinion of Hogan & Hartson L.L.P. regarding the qualification of Host
REIT as a REIT (included as Appendix D to the Proxy
Statement/Prospectus that is part of the Registration Statement).
10.1 Form of Second Amended and Restated Agreement of Limited Partnership of
Host Marriott, L.P. (incorporated by reference to Exhibit 3.1 of HMC
Merger Corporation Registration Statement No. 333-55807).
10.2 Form of Indenture between Host Marriott L.P., as Issuer, and Marine
Midland Bank, as Indenture Trustee, and Form of 6.56% Callable Note due
December 15, 2005 (incorporated by reference to Exhibit 4.1 of HMC
Merger Corporation Registration Statement No. 333-55807).
10.3 Amended and Restated Credit Agreement dated as of June 19, 1997 and
Amended and Restated as of August 5, 1998 among Host Marriott
Corporation, Host Marriott Hospitality, Inc., HMH Properties, Inc.,
Host Marriott, L.P., HMC Capital Resources Corp., Various Banks, Wells
Fargo Bank, National Association, The Bank of Nova Scotia and Credit
Lyonnais New York Branch, as Co-Arrangers, and Bankers Trust Company as
Arranger and Administrative Agent (incorporated by reference to Host
Marriott Corporation Current Report on Form 8-K dated September 11,
1998).
10.4 Marriott Corporation Executive Deferred Compensation Plan dated as of
December 6, 1990 (incorporated by reference to Exhibit 19(i) of the
Host Marriott Corporation Annual Report on Form 10-K for the fiscal
year ended December 28, 1991).
10.5 Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan
effective as of October 8, 1993 (incorporated by reference to Host
Marriott Corporation Current Report on Form 8-K dated October 23,
1993).
10.6 Distribution Agreement dated as of September 15, 1993 between Marriott
Corporation and Marriott International, Inc. (incorporated by reference
to Host Marriott Corporation Current Report on Form 8-K dated October
23, 1993).
10.7 Amendment No. 1 to the Distribution Agreement dated September 15, 1993
by and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International (incorporated by reference to
Host Marriott Corporation Current Report on Form 8-K dated January 16,
1996).
10.8 Distribution Agreement dated December 22, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference to Host Marriott Corporation Current Report
on Form 8-K dated January 16, 1996).
10.9 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K dated
October 23, 1993).
10.10 Assignment and License Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Host Marriott Corporation Current Report
on Form 8-K dated October 23, 1993).
10.11 Amendment No. 1 to the Assignment and License Agreement dated as of
October 8, 1993 by and between Marriott International, Inc. and Host
Marriott Corporation (incorporated by reference to Host Marriott
Corporation Current Report on Form 8-K dated January 16, 1996).
10.12 Form of Noncompetition Agreement between Host Marriott Corporation,
Host Marriott, L.P. and Crestline Capital Corporation and other parties
named therein (incorporated by reference to Exhibit 10.13 of HMC Merger
Corporation Registration Statement No. 333-55807).
10.13 Tax Administration Agreement dated as of October 8, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K dated
October 23, 1993).
<PAGE>
10.14 Noncompetition Agreement dated as of October 8, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K dated
October 23, 1993).
10.15 Amendment No. 1 to the Noncompetition Agreement dated October 8, 1993
by and between Host Marriott Corporation and Marriott International,
Inc. (incorporated by reference to Host Marriott Corporation Current
Report on Form 8-K dated January 16, 1996).
10.16 Host Marriott Lodging Management Agreement--Marriott Hotels, Resorts
and Hotels dated September 25, 1993 by and between Marriott Corporation
and Marriott International, Inc. (incorporated by reference to Host
Marriott Corporation Registration Statement No. 33-51707).
10.17 Employee Benefits and Other Employment Matters Allocation Agreement
dated as of December 29, 1995 by and between Host Marriott Corporation
and Host Marriott Services Corporation (incorporated by reference to
Current Report on Host Marriott Corporation Form 8-K dated January 16,
1996).
10.18 Tax Sharing Agreement dated as of December 29, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference to Host Marriott Corporation Current Report
on Form 8-K dated January 16, 1996).
10.19 Marriott/Host Marriott Employees' Profit Sharing Retirement and Savings
Plan and Trust (incorporated by reference to Host Marriott Corporation
Registration Statement No. 33-62444).
10.20 Contribution Agreement dated as of April 16, 1998 among Host Marriott
Corporation, Host Marriott, L.P. and the contributors named therein,
together with Exhibit B (incorporated by reference to Exhibit 10.18 of
HMC Merger Corporation Registration Statement No. 333-55807).
10.21 Amendment No. 1 to Contribution Agreement dated May 8, 1998 among
Marriott Corporation, Host Marriott, L.P. and the contributors named
therein (incorporated by reference to Exhibit 10.19 of HMC Merger
Corporation Registration Statement No. 333-55807).
10.22 Amendment No. 2 to Contribution Agreement dated May 18, 1998 among Host
Marriott Corporation, Host Marriott, L.P. and the contributors named
therein (incorporated by reference to Exhibit 10.20 of HMC Merger
Corporation Registration Statement No. 333-55807).
#10.23 Form of Lease (incorporated by reference to Exhibit 10.21 of HMC Merger
Corporation Registration Statement No. 333-55807).
#10.24 Form of Management Agreement for Full-Service Hotels (incorporated by
reference to Host Marriott Corporation Registration Statement No. 33-
51707).
10.25 Form of Employee Benefits and Other Employment Matters Allocation
Agreement between Host Marriott Corporation, Host Marriott, L.P. and
Crestline Capital Corporation.
10.26* Form of Distribution Agreement between HMC Merger Corporation and
Crestline Capital Corporation.
10.27* Form of Tax Sharing Agreement between HMC Merger Corporation and
Crestline Capital Corporation.
10.28* Form of Guaranty Agreement between HMC Merger Corporation, the lessees
referred to therein and Crestline Capital Corporation.
10.29* Form of Pooling Agreement between HMC Merger Corporation and Crestline
Capital Corporation.
10.30* Form of Asset Management Agreement between HMC Merger Corporation and
Capital Crestline Corporation.
10.31* Form of Non-competition Agreement between HMC Merger Corporation and
Crestline Capital Corporation.
21.1** List of Subsidiaries of HMC Merger Corporation.
23.1* Consent of Hogan & Hartson L.L.P. (included in Exhibits 5.1 and 8.1).
23.2 Consent of Arthur Andersen LLP.
<PAGE>
23.3* Consents of Director nominees of HMC Merger Corporation (to be renamed
Host Marriott Corporation in connection with the REIT Conversion).
27.1** Financial Data Schedule.
99.1 Form of Proxy Card.
99.2 Form of Opinion of BT Wolfensohn (included as Appendix B to the Proxy
Statement/Prospectus that is part of this Registration Statement).
- --------
* To be filed by amendment.
** Previously filed.
# Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
<PAGE>
Exhibit 10.25
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT
MATTERS ALLOCATION AGREEMENT
BETWEEN HOST MARRIOTT CORPORATION,
HOST MARRIOTT, L.P. AND
CRESTLINE CAPITAL CORPORATION
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS.................................................................2
1.1. Definitions............................................................2
-----------
Aggregate Exercise Price....................................................2
------------------------
Aggregate Spread............................................................2
----------------
Aggregate Value.............................................................2
---------------
Agreement...................................................................2
---------
Code........................................................................2
----
Company Contribution........................................................2
--------------------
Commission..................................................................2
----------
Conversion Award............................................................2
----------------
Contribution Agreement......................................................3
----------------------
Contribution Date...........................................................3
-----------------
Crestline...................................................................3
---------
Crestline Common Stock......................................................3
----------------------
Crestline Stock Price.......................................................3
---------------------
Current Plan Year...........................................................3
-----------------
Deferred Compensation Plan..................................................3
--------------------------
(i) HMC Deferred Compensation Plan...................................3
------------------------------
(ii) Crestline Deferred Compensation Plan.............................3
------------------------------------
Distribution Agreement.....................................................3
----------------------
Distribution...............................................................4
------------
Distribution Date..........................................................4
-----------------
Employee...................................................................4
--------
(i) Crestline Employee...............................................4
------------------
(ii) Retained Employee................................................4
-----------------
(iii) Retained Individual..............................................4
-------------------
Employer Security..........................................................4
-----------------
ERISA......................................................................4
-----
Existing HMC Stock Award...................................................4
------------------------
Flexible Spending Plan.....................................................5
----------------------
HMC Comprehensive Stock Incentive Plan.....................................5
--------------------------------------
HMC........................................................................5
---
HMC Common Stock...........................................................5
----------------
HMC Stock Price............................................................5
---------------
HMLP.......................................................................5
----
HMO........................................................................5
---
Host Marriott Services Distribution:.......................................5
------------------------------------
Host REIT Stock............................................................5
---------------
Host REIT..................................................................5
---------
IRS........................................................................5
---
-i-
<PAGE>
Page
----
Marriott International Distribution:.......................................5
------------------------------------
Medical/Dental Plan........................................................6
-------------------
(i) Crestline Medical/Dental Plan...................................6
-----------------------------
(ii) Host Marriott Medical/Dental Plan...............................6
---------------------------------
Nonqualified Stock Option..................................................6
-------------------------
Plan.......................................................................6
----
Profit Sharing Plan........................................................6
-------------------
(i) Crestline Profit Sharing Plan...................................6
-----------------------------
(ii) Host Marriott Profit Sharing Plan...............................6
---------------------------------
Qualified Beneficiary......................................................6
---------------------
(i) HMC Qualified Beneficiary.......................................7
-------------------------
(ii) Crestline Qualified Beneficiary.................................7
-------------------------------
Service Credit.............................................................7
--------------
Stock Purchase Plan........................................................7
-------------------
Welfare Plan...............................................................7
------------
1.2. Certain Constructions.................................................7
---------------------
1.3. Schedules, Sections...................................................7
-------------------
1.4. Survival..............................................................7
--------
2. EMPLOYEE BENEFITS...........................................................8
-----------------
2.1. Employment............................................................8
----------
2.1.1. Allocation of Responsibilities................................8
------------------------------
2.1.2. Service Credits...............................................8
---------------
(i) Distribution Date Transfers.....................................8
---------------------------
(ii) Post-Distribution Date Transfers................................8
--------------------------------
2.2. Profit Sharing Plans..................................................8
--------------------
2.2.1. Sponsorship of Host Marriott Profit Sharing Plan..............8
------------------------------------------------
2.2.2. Establishment of the Crestline Profit Sharing Plan............9
--------------------------------------------------
2.2.3. Obligation to Make Company Contribution.......................9
---------------------------------------
2.2.4. Transfer and Acceptance of Account Balances...................9
-------------------------------------------
2.2.5. HMLP to Provide Information..................................10
---------------------------
2.2.6. Regulatory Filings...........................................11
------------------
2.3. Deferred Compensation Plans..........................................11
---------------------------
2.3.1. HMC Deferred Compensation Plan...............................11
------------------------------
2.3.2. Crestline Deferred Compensation Plan.........................11
------------------------------------
2.4. Other Plans..........................................................12
-----------
2.5. Stock Plans..........................................................12
-----------
2.5.1. Host Marriott Comprehensive Stock Incentive Plan.............12
------------------------------------------------
2.5.2. Crestline Comprehensive Stock Incentive Plan.................12
--------------------------------------------
2.5.3. Effect of the Distribution and Host REIT Conversion
---------------------------------------------------
on Awards Made Under the 1997 HMC
---------------------------------
Comprehensive Stock Incentive Plan Prior to the
-----------------------------------------------
Distribution Date............................................12
-----------------
2.5.4. Effect of the Host REIT Conversion on the Host
----------------------------------------------
Marriott Corporation Employee Stock Purchase Plan............14
-------------------------------------------------
2.6. Medical/Dental Plan Liability and Coverage...........................15
------------------------------------------
-ii-
<PAGE>
Page
----
2.6.1. Liability for Claims.........................................15
--------------------
2.6.2. Continuation Coverage Administration.........................16
------------------------------------
2.6.3. Flexible Benefits Plan.......................................16
----------------------
2.7. Paid Time Liabilities................................................17
---------------------
2.7.1. Division of Liabilities......................................17
-----------------------
2.8. Reservation of Right To Amend or Terminate Plans.....................17
------------------------------------------------
2.9. Notice...............................................................17
------
2.10. Payroll Reporting and Withholding...................................18
---------------------------------
2.10.1. Form W-2 Reporting..........................................18
------------------
2.10.2. Forms W-4 and W-5...........................................18
-----------------
2.10.3. Garnishments, Tax Levies, Child Support Orders,
-----------------------------------------------
Qualified Medical Child Support Orders and Wage
-----------------------------------------------
Assignments.................................................18
-----------
2.10.4. Authorizations for Payroll Deductions.......................18
-------------------------------------
3. LABOR AND EMPLOYMENT MATTERS...............................................20
----------------------------
3.1. Separate Employers...................................................20
------------------
3.2. Employment Policies and Practices....................................20
---------------------------------
3.3. Claims...............................................................20
------
3.3.1. Scope........................................................20
-----
3.3.2. Employment-Related Claims....................................20
-------------------------
3.3.3. Obligation to Indemnify......................................20
-----------------------
3.3.4. Pre-Host REIT Conversion.....................................21
------------------------
3.3.5. Distribution and Other Joint Liability Claims................21
---------------------------------------------
3.3.6. Host REIT Conversion Employment-Related Claims...............22
----------------------------------------------
3.4. Notice of Claims.....................................................22
----------------
3.5. Assumption of Unemployment Tax Rates.................................22
------------------------------------
3.6. Intercompany Service Charge..........................................22
---------------------------
3.7. WARN Claims..........................................................23
-----------
3.8. Employees on Leave of Absence........................................23
-----------------------------
3.9. No Third Party Beneficiary Rights....................................23
---------------------------------
3.10. Attorney-Client Privilege...........................................23
-------------------------
4. DEFAULT....................................................................24
-------
4.1. Default..............................................................24
-------
4.2. Force Majeure........................................................24
-------------
5. MISCELLANEOUS..............................................................25
-------------
5.1. Relationship of Parties..............................................25
-----------------------
5.2. Access to Information; Cooperation...................................25
----------------------------------
5.3. Assignment...........................................................25
----------
5.4. Headings.............................................................25
--------
5.5. Severability of Provisions...........................................25
--------------------------
5.6. Parties Bound........................................................26
-------------
5.7. Notices..............................................................26
-------
5.8. Further Action.......................................................27
--------------
5.9. Waiver...............................................................27
------
5.10. Governing Law.......................................................27
-------------
-iii-
<PAGE>
Page
----
5.11. Consent to Jurisdiction.............................................27
-----------------------
5.12. Entire Agreement....................................................27
----------------
-iv-
<PAGE>
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS
----------------------------------------------
ALLOCATION AGREEMENT
--------------------
THIS EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
("Agreement") is made and entered into as of _________________, by and between
HOST MARRIOTT CORPORATION, a Delaware corporation ("HMC"), HOST MARRIOTT, L.P.,
a Delaware limited partnership ("HMLP") and CRESTLINE CAPITAL CORPORATION, a
Maryland corporation ("Crestline").
R E C I T A L S
WHEREAS, subject to certain conditions, HMC intends to enter into
certain transactions pursuant to a plan to reorganize its business operations so
that it will qualify as a real estate investment trust as of January 1, 1999
("Host REIT Conversion"); and
WHEREAS, as part of the Host REIT Conversion (i) HMC will transfer all
its liabilities, including but not limited to liabilities relating to employee
benefits, to HMLP (ii) HMC will merge with and into HMC Merger Corporation (to
be renamed Host Marriott Corporation) and (iii) holders of HMC Common Stock will
receive a dividend of outstanding common shares of Crestline; and
WHEREAS, in connection with the Host REIT Conversion, HMC and
Crestline have entered into a Distribution Agreement (the "Distribution
Agreement") dated as of ____________, 1998, and HMC and HMLP have entered into a
Contribution Agreement ("Contribution Agreement") dated as of _____________,
1998; and
WHEREAS, pursuant to the Distribution Agreement, HMC and Crestline
have agreed to enter into an agreement allocating responsibilities with respect
to employee compensation, benefits, labor and certain other employment matters
pursuant to the terms and conditions set forth herein; and
WHEREAS, pursuant to the Contribution Agreement, HMC and HMLP have
agreed to enter into an agreement allocating responsibilities with respect to
employee compensation, benefits, labor and certain other employment matters
pursuant to the terms and conditions set forth herein; and
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, HMC, HMLP and Crestline agree as follows:
1. DEFINITIONS
1.1. Definitions
-----------
As used in this Agreement, the following terms shall have the meanings
indicated below:
Aggregate Exercise Price: the exercise price of shares of HMC Common
------------------------
Stock covered by an Existing HMC Stock Award multiplied by the number of shares
of HMC Common Stock covered by such award on the Distribution Date.
Aggregate Spread: the difference between the aggregate exercise price
----------------
of an Existing HMC Stock Award and sum of the HMC Stock Price and one-tenth
(1/10) of the Crestline Stock Price, multiplied by the number of shares
underlying such Existing HMC Stock Award remaining unexercised on the
Distribution Date.
Aggregate Value: the number of shares of HMC Common Stock covered
---------------
under an Existing HMC Stock Award under the 1997 HMC Comprehensive Stock
Incentive Plan as of the Distribution Date multiplied by the sum of the HMC
Stock Price and one-tenth (1/10) of the Crestline Stock Price.
Agreement: the Employee Benefits And Other Employment Matters
---------
Allocation Agreement Between Host Marriott Corporation, Host Marriott, L.P. and
Crestline Capital Corporation, as set forth herein.
Code: the Internal Revenue Code of 1986, as amended, or any successor
----
legislation.
Company Contribution: the contributions of HMC under the Host Marriott
--------------------
Corporation (HMC) Retirement and Savings Plan, as determined in the sole and
absolute discretion of HMC's Board of Directors.
Commission: the Securities and Exchange Commission.
----------
Conversion Award: an adjustment under the 1997 HMC Comprehensive Stock
----------------
Plan of an option to acquire Host REIT Stock or an adjustment of restricted
shares or deferred shares of Host REIT Stock with respect to a Retained
Individual or Retained Employee or a conversion under the Crestline
Comprehensive Stock Incentive Plan of Existing HMC Stock Awards to acquire
Crestline Common Stock or an award of restricted shares or deferred shares of
Crestline Common Stock with respect to a Crestline Employee to reflect the
2
<PAGE>
Distribution and Host REIT Conversion on Existing HMC Stock Awards held on
the Distribution Date, in accordance with Section 2.5.
Contribution Agreement: the agreement described in the third recital
----------------------
of this Agreement.
Contribution Date: the Closing Date, as defined in the Contribution
-----------------
Agreement.
Crestline: Crestline Capital Corporation, a Maryland corporation.
---------
Crestline Common Stock: the common stock, $.01 par value per share,
----------------------
of Crestline.
Crestline Comprehensive Stock Incentive Plan: the Crestline Capital
--------------------------------------------
Corporation 1998 Comprehensive Stock Incentive Plan, an equity-based incentive
compensation plan established by Crestline providing for awards of options,
restricted stock, deferred stock, stock appreciation rights, dividend equivalent
rights and other stock based awards for eligible employees of Crestline and
their beneficiaries.
Crestline Stock Price: the average of the average of the highest and
---------------------
lowest quoted per share trading prices on the New York Stock Exchange for a
share of Crestline Common Stock for each of the 10 consecutive trading days
beginning on the date the Crestline Common Stock begins trading on a when issued
basis.
Current Plan Year: the plan year or fiscal year, whichever is
-----------------
applicable with respect to any Plan, which includes the Distribution Date.
Deferred Compensation Plan: a plan of deferred compensation that is
--------------------------
not tax-qualified under Section 401(a) of the Code and that is maintained for
Employees of HMC, HMLP or Crestline and their beneficiaries, as described below:
(i) HMC Deferred Compensation Plan: the Host Marriott Corporation
------------------------------
Executive Deferred Compensation Plan maintained by HMC for the period before the
Contribution Date which will be assumed and maintained by HMLP effective as of
the Contribution Date and will be renamed the Host Marriott, L.P. Executive
Deferred Compensation Plan, effective as of the Contribution Date.
(ii) Crestline Deferred Compensation Plan: the Crestline Capital
------------------------------------
Corporation Executive Deferred Compensation Plan to be established by Crestline,
effective as of the Distribution Date to provide benefits to Crestline Employees
on or after the Distribution Date
Distribution Agreement: the agreement described in the third recital
----------------------
of this Agreement.
3
<PAGE>
Distribution: the distribution by HMC of outstanding common shares of
------------
Crestline to HMC's shareholders.
Distribution Date: the date as of which the stock records of Crestline
-----------------
reflect the Distribution.
Employee: an individual who on the Distribution Date, is identified
--------
as being in any of the following categories:
(i) Crestline Employee: any individual: (i) employed by HMC or
------------------
any subsidiary of HMC on or before the Distribution Date who will be employed by
Crestline or any subsidiary of Crestline as part of the Host REIT Conversion on
or after the Distribution Date, or (ii) who is a beneficiary of an individual
described in the immediately preceding clause;
(ii) Retained Employee: any individual: (i) employed by HMC or
-----------------
any subsidiary of HMC on or before the Contribution Date who will be employed by
HMLP or any subsidiary or affiliate of HMLP as part of the Host REIT Conversion
on or after the Contribution Date, or (ii) who is a beneficiary of an individual
described in the immediately preceding clause; or
(iii) Retained Individual: any individual, other than a Crestline
-------------------
Employee or a Retained Employee, who (x) on or before the Distribution Date was
employed by HMC or any subsidiary of HMC (y) was or is a Marriott International
Employee or Marriott Terminee, as defined in the Employee Benefits & Other
Employment Matters Allocation Agreement, entered into as of October 8, 1993,
between Marriott International, Inc. (renamed Sodexho Marriott Services, Inc.)
and HMC, (z) was or is a Host Marriott Services Individual, Host Marriott
Services Employee or Host Marriott Services Terminee, as defined in the Employee
Benefits & Other Employment Matters Allocation Agreement, entered into as of
December 29, 1995, between Host Marriott Services Corporation and HMC or (w) is
a beneficiary of an individual described in clauses (x), (y) or (z).
Employer Security: Host REIT Stock in the case of Retained Employees
-----------------
and Retained Individuals and Crestline Common Stock in the case of Crestline
Employees.
ERISA: the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor legislation.
Existing HMC Stock Award: an (i) unexercised option to purchase
------------------------
shares, (ii) award of restricted shares, (iii) award of deferred shares or (iv)
award of stock appreciation rights held by a grantee on the Distribution Date
pursuant to the 1997 HMC Comprehensive Stock Incentive Plan.
4
<PAGE>
Flexible Spending Plan: the Host Marriott Corporation Section 125 Plan
----------------------
maintained by HMC before the Distribution Date which will be assumed and
maintained by HMLP, in accordance with Section 2.6.3 of this Agreement.
1997 HMC Comprehensive Stock Incentive Plan: the Host Marriott
-------------------------------------------
Corporation 1997 Comprehensive Stock Incentive Plan (formerly called the Host
Marriott Corporation 1993 Comprehensive Stock Incentive Plan), as may be amended
from time to time, maintained by HMC before the Contribution Date and continued
by HMC, HMLP and their affiliates after the Contribution Date.
HMC: Host Marriott Corporation, a Delaware corporation for the period
---
before the Contribution Date and Host REIT for the period beginning on or after
the Contribution Date.
HMC Common Stock: the common stock, $1.00 par value per share, of HMC.
----------------
HMC Stock Price: the average of the average of the highest and lowest
---------------
quoted per share trading prices on the New York Stock Exchange for a share of
HMC Common Stock (trading on an ex-dividend basis for the period before the
Distribution Date) for each of the 10 consecutive trading days beginning on the
date the Crestline Common Stock begins trading on a when issued basis.
HMLP: Host Marriott, L.P., a Delaware limited partnership.
----
HMO: any health maintenance organization organized under 42 U.S.C. (S)
---
300e-9, or a state health maintenance organization statute that provides medical
services for Employees under any Plan.
Host Marriott Services Distribution: the 1995 Host Marriott Services
-----------------------------------
Corporation distribution by HMC to shareholders of the capital stock of its
wholly owned subsidiary Host Marriott Services Corporation.
Host REIT Stock: the common stock, $.01 par value per share, of Host
---------------
REIT.
Host REIT: Host Marriott Corporation, a Maryland corporation for the
---------
period beginning on the Contribution Date and HMC Merger Corporation for the
period before the Contribution Date.
IRS: the Internal Revenue Service.
---
Marriott International Distribution: the: (i) 1993 Marriott
-----------------------------------
Corporation distribution to its shareholders of the capital stock of its wholly
owned subsidiary Marriott International, Inc., and (ii) 1997 Marriott
International, Inc. (renamed Sodexho Marriott Services, Inc.) distribution to
its shareholders of the capital stock of its subsidiary New Marriott, Inc.
(renamed Marriott International, Inc.).
5
<PAGE>
Medical/Dental Plan: a Welfare Plan providing health benefits to
-------------------
Employees and their dependents, as described below:
(i) Crestline Medical/Dental Plan: the Plan to be established by
-----------------------------
HMC in accordance with Section 2.6 of this Agreement to provide welfare
benefits, including but not limited to health and dental benefits; or
(ii) Host Marriott Medical/Dental Plan : the existing Host
---------------------------------
Marriott Corporation Medical/Dental/Vision Care Plan maintained by HMC prior to
the Contribution Date primarily for the benefit of eligible employees and their
dependents and assumed and continued by HMLP, effective as of the Contribution
Date pursuant to Section 2.6 of this Agreement.
Nonqualified Stock Option: an award under the 1997 HMC Comprehensive
-------------------------
Stock Incentive Plan of a stock option which is not qualified as an incentive
stock option under Code Section 422.
Plan: any plan, policy, arrangement, contract or agreement providing
----
compensation or benefits for any group of Employees or former Employees or any
individual Employee or former Employee, or the dependents or beneficiaries of
any such Employee or former Employee, whether formal or informal or written or
unwritten, and including, without limitation, any means, whether or not legally
required, pursuant to which any benefit is provided by an employer to any
Employee or former employee or the beneficiaries of any such Employee or former
employee.
Profit Sharing Plan: a defined contribution plan maintained pursuant
-------------------
to Section 401(a) of the Code, as described below:
(i) Crestline Profit Sharing Plan: the Crestline Capital
-----------------------------
Corporation Retirement and Savings Plan to be adopted by Crestline; or
(ii) Host Marriott Profit Sharing Plan: the Host Marriott
---------------------------------
Corporation (HMC) Retirement and Savings Plan maintained by HMC prior to the
Contribution Date which will be assumed and maintained by HMLP, in accordance
with Section 2.2 of this Agreement.
Qualified Beneficiary: an individual (or dependent thereof) who
---------------------
either (1) experiences a "qualifying event" (as that term is defined in Code
Section 4980B(f)(3) and ERISA Section 603) while a participant in a
Medical/Dental Plan, or (2) becomes a "qualified beneficiary" (as that term is
defined in Code Section 4980B(g)(1) and ERISA 607(3)) under a Medical/Dental
Plan, and who is included in any one of the following categories:
6
<PAGE>
(i) HMC Qualified Beneficiary: any person, other than a Crestline
-------------------------
Qualified Beneficiary, who is a Qualified Beneficiary on or after the
Distribution Date under the Host Marriott Medical/Dental Plan; or
(ii) Crestline Qualified Beneficiary: any person who is a
-------------------------------
Qualified Beneficiary under the Crestline Medical/Dental Plan.
Service Credit: the period taken into account under any Plan for
--------------
purposes of determining length of service, eligibility, participation, vesting,
benefit accrual and similar requirements under such Plan.
Stock Purchase Plan: a stock-based Plan meeting the requirements of
-------------------
Section 423 of the Code.
Welfare Plan: any Plan which provides medical, health, disability,
------------
accident, life insurance, death, dental or other welfare benefit, including,
without limitation, any post-employment benefit.
1.2. Certain Constructions
---------------------
References to the singular in this Agreement shall refer to the plural and
vice-versa and references to the masculine shall refer to the feminine and vice-
versa.
1.3. Schedules, Sections
-------------------
References to a "Schedule" are, unless otherwise specified, to one of
the Schedules attached to this Agreement, and references to a "Section" are,
unless otherwise specified, to one of the Sections of this Agreement.
1.4. Survival
--------
Obligations described in this Agreement shall remain in full force and
effect and shall survive the Distribution Date and the Contribution Date.
7
<PAGE>
2. EMPLOYEE BENEFITS
2.1. Employment
----------
2.1.1. Allocation of Responsibilities
------------------------------
Effective as of the Distribution Date, except to the extent retained or
assumed by HMLP under this Agreement or any other agreement relating to the
Distribution or Host REIT Conversion, Crestline shall retain or assume, as the
case may be, responsibility as employer for the Crestline Employees. Effective
as of the Contribution Date, except to the extent retained or assumed by HMC
under this Agreement or any other agreement relating to the Host REIT
Conversion, HMLP or its affiliates shall retain or assume, as the case may be,
responsibility as employer for the Retained Employees. The assumption or
retention of responsibility as employer described in this Section 2.1.1 shall
not, of itself, constitute a severance or a termination of employment under any
Plan of severance or of income extension maintained by HMC, HMLP or Crestline,
and no such severance, separation or termination shall be deemed to occur.
2.1.2. Service Credits
---------------
(i) Distribution Date Transfers . HMLP shall credit each Retained
---------------------------
Individual and Retained Employee with such Employee's Service Credits and
original hire date as are reflected in HMC's records on the Contribution Date.
Crestline shall credit each Crestline Employee with such Employee's Service
Credits and original hire date as are reflected in HMC's records on the
Distribution Date. Such Service Credits and hire dates shall continue to be
maintained as described herein for as long as the Employee does not terminate
employment.
(ii) Post-Distribution Date Transfers. Subject to the provisions
--------------------------------
of ERISA and the Code, HMLP in the case of Retained Employees and Crestline in
the case of Crestline Employees may its sole discretion make such decisions as
it deems appropriate with respect to determining an Employee's Service Credits
for periods of service after the Distribution Date for Crestline Employees and
after the Contribution Date for Retained Employees.
2.2. Profit Sharing Plans
--------------------
2.2.1. Sponsorship of Host Marriott Profit Sharing Plan
------------------------------------------------
HMC shall transfer sponsorship of the Host Marriott Profit Sharing
Plan to HMLP, effective as of the Contribution Date. Further, on or around the
Contribution Date, HMC, as the General Partner for HMLP, shall in a timely
manner ratify: (1) the adoption of the Host Marriott Profit Sharing Plan by
HMLP, effective as of the Contribution Date, (2) changing the name of the Host
Marriott Profit Sharing Plan to the Host Marriott, L.P. Retirement and Savings
Plan,
8
<PAGE>
effective as of the Contribution Date, and (3) the adoption of any desired
amendments or amendments necessary for maintaining its tax-qualified status
under the Code or ERISA.
2.2.2. Establishment of the Crestline Profit Sharing Plan
--------------------------------------------------
Prior to the Distribution Date, Crestline shall take, or cause to be
taken, all action necessary and appropriate to establish and administer a new
Plan called the Crestline Capital Corporation Retirement and Savings Plan,
effective on or around the Distribution Date. The Crestline Capital Corporation
Retirement and Savings Plan shall be intended to qualify for tax-favored
treatment under Sections 401(a) and 401(k) of the Code and to be in compliance
with the requirements of ERISA and shall have terms substantially similar to the
terms of the Host Marriott Corporation (HMC) Retirement and Savings Plan (as in
effect on the Distribution Date). Crestline shall provide benefits under the
Crestline Capital Corporation Retirement and Savings Plan for all Crestline
Employees who were participants in or otherwise entitled to benefits under the
Host Marriott Profit Sharing Plan on the Distribution Date.
2.2.3. Obligation to Make Company Contribution
---------------------------------------
Effective as of the Contribution Date, HMLP shall be responsible for:
(1) HMC's obligations, if any, to make payment of Company Contributions (to the
extent allocable but not paid on the Contribution Date) under the Host Marriott
Profit Sharing Plan, in accordance with the terms and conditions of such Plan,
for the Plan Year beginning January 2, 1998, and (2) HMLP's obligations, if any,
to make payment of Company Contributions under the Host Marriott Profit Sharing
Plan in accordance with the terms and conditions of such Plan for the period
beginning on the Contribution Date. Notwithstanding any other provision of this
Agreement to the contrary, a Crestline Employee or Host Employee who ceases to
be an employee of HMC during the Plan Year beginning January 2, 1998 because of
a transaction relating to or arising from the Distribution or Host REIT
Conversion shall be eligible for an allocation of the discretionary
contributions, if any, made under the Host Profit Sharing Plan for such Plan
Year.
Effective as of the Distribution Date, Crestline shall be responsible
for the contributions, if any, required under the terms of the Crestline Profit
Sharing Plan in accordance with the terms and conditions of such Plan.
2.2.4. Transfer and Acceptance of Account Balances
-------------------------------------------
As soon as administratively practicable after the Contribution Date
and after the allocation of the contributions, if any, made for the Plan Year
beginning on January 2, 1998:
9
<PAGE>
(1) HMLP shall cause the trustee of the Host Marriott Profit Sharing
Plan to transfer to the trustee of the Crestline Profit Sharing Plan, in a
trustee-to-trustee transfer, cash, securities, other property or a combination
thereof equal to the account balances of all Crestline Employees. Prior to the
transfer described in the preceding sentence, HMLP shall cooperate with
Crestline and take such action as is appropriate to cause the trustee of the
Host Marriott Profit Sharing Plan to convert the account balances of Crestline
Employees to cash or other investments acceptable to the trustee of the
Crestline Profit Sharing Plan;
(2) Crestline shall cause the trustee of the Crestline Profit Sharing
Plan to accept the transfer from the trustee of the Host Marriott Profit Sharing
Plan; and
(3) Crestline shall credit the accounts under the Crestline Profit
Sharing Plan established for the benefit of Crestline Employees with the
amounts, if any, transferred on their behalf.
The transfers required by this Section 2.2.4 shall comply with Section
414(l) of the Code and the requirements of ERISA and the regulations promulgated
thereunder. Additionally, the transfers required by this Section 2.2.4 may take
place pending issuance of favorable determination letters (as described in
Section 2.2.6 below), or upon receipt of an opinion of counsel reasonably
satisfactory to both HMLP and Crestline that the Plans satisfy the requirements
for tax-qualification described in Sections 401(a) and 401(k) of the Code, or
can be made to so qualify by retroactive amendment, and that the transfers will
not adversely affect the tax-qualified status of either Plan or decrease the
accrued benefits of any participant.
2.2.5. HMLP to Provide Information
---------------------------
As soon as administratively practicable after the Distribution Date,
HMLP (with the cooperation of Crestline to the extent that relevant information
is in the possession of Crestline or any of its subsidiaries and in accordance
with Section 5.2), shall provide Crestline with a list of Crestline Employees
who, to the best knowledge of HMC or HMLP, were participants in or otherwise
entitled to benefits under the Host Marriott Profit Sharing Plan on the
Distribution Date, together with a listing of each participant's Service Credits
and account balance under such Plan. HMLP shall, as soon as administratively
practicable after the Distribution Date and in accordance with Section 5.2,
provide Crestline with such additional information in the possession of HMLP,
HMC or their subsidiaries or affiliates (and not already in the possession of
Crestline or any of its subsidiaries or affiliates) as may be reasonably
requested by Crestline and necessary for the administration of the Crestline
Profit Sharing Plan.
10
<PAGE>
2.2.6. Regulatory Filings
------------------
HMLP and Crestline shall, in connection with the plan-to-plan transfer
described in Section 2.2.4, cooperate in making any and all appropriate filings
required by the Commission or the IRS, or required under the Code, ERISA or any
applicable securities laws and the regulations thereunder, and take all such
action as may be necessary and appropriate to cause such transfer to take place
as soon as administratively convenient after the Distribution Date or otherwise
when required by law. Further, HMLP and Crestline shall each seek favorable IRS
determination letters to the effect that their respective Profit Sharing Plans
satisfy all tax-qualification requirements under Sections 401(a) and 401(k) of
the Code, and that the transfer described in Section 2.2.4 complied with the
applicable requirements of the Code and ERISA.
2.3. Deferred Compensation Plans
---------------------------
2.3.1. HMC Deferred Compensation Plan.
------------------------------
HMC shall transfer to HMLP sponsorship of the HMC Deferred
Compensation Plan and all liabilities and obligations for accrued benefits
(including any earnings attributable to such benefits) for Retained Individuals
and Retained Employees, effective as of the Contribution Date. Further, on or
around the Contribution Date, HMC, as General Partner for HMLP, shall in a
timely manner ratify the (1) assumption of the HMC Deferred Compensation Plan,
effective as of the Contribution Date, (2) assumption from HMC of all
liabilities for accrued benefits of Retained Individuals and Retained Employees
and earnings attributable to such benefits, effective as of the Contribution
Date (3) changing of the name of the Host Marriott Corporation Executive
Deferred Compensation Plan to Host Marriott, L.P. Executive Deferred
Compensation Plan, effective as of the Contribution Date, and (4) the adoption
of any amendments which are determined to be necessary or desirable for the
operation and administration of the HMC Deferred Compensation Plan.
2.3.2. Crestline Deferred Compensation Plan
------------------------------------
As soon as practicable before the Distribution Date, Crestline shall
adopt: (1) a new Deferred Compensation Plan with terms substantially similar to
the terms of the HMC Deferred Compensation Plan (as in effect on the
Distribution Date) and named the Crestline Capital Corporation Executive
Deferred Compensation Plan, and (2) assume from HMC all liabilities and
obligations of HMC relating to the accrued benefits and any earnings
attributable to such benefits for Crestline Employees. The foregoing shall be
subject to the requirements of ERISA and the Code.
11
<PAGE>
2.4. Other Plans
-----------
HMLP shall assume and continue the sponsorship, responsibility and the
associated liabilities of HMC for the Plans listed on Schedule A, effective as
of the Contribution Date. Nothing in this Section 2.4 is intended to require
HMLP to continue the Plans identified on Schedule A that have been terminated
prior to the Contribution Date or from terminating Plans identified on Schedule
A after the Contribution Date.
2.5. Stock Plans
-----------
2.5.1. Host Marriott Comprehensive Stock Incentive Plan
------------------------------------------------
Effective as of the Contribution Date, all future awards under the
1997 HMC Comprehensive Stock Incentive Plan will be denominated in Host REIT
Stock. Following the Contribution Date, HMC shall continue to reserve those
shares already reserved under the 1997 HMC Comprehensive Stock Plan. The shares
reserved pursuant to the preceding sentence shall be authorized by the
shareholders of HMC.
2.5.2. Crestline Comprehensive Stock Incentive Plan
--------------------------------------------
As soon as practicable before the Distribution Date: (i) Crestline
shall establish the Crestline Comprehensive Stock Incentive Plan, to cover the
Conversion Awards of Crestline Common Stock required by Section 2.5.3 of this
Agreement and for granting future awards of Crestline Common Stock to eligible
employees of Crestline and its affiliates, and (ii) HMC, acting as sole
shareholder of Crestline, shall approve the adoption of the Crestline
Comprehensive Stock Incentive Plan. All awards under the Crestline
Comprehensive Stock Incentive Plan will be denominated in Crestline Common
Stock. Crestline shall reserve 4,000,000 shares of Crestline Common Stock for
the awards, including the Conversion Awards, required by this Agreement. Shares
that are reserved pursuant to the preceding sentence but that are not used shall
be available for future awards under the Crestline Comprehensive Stock Incentive
Plan. Effective as of the Distribution Date, Crestline shall assume all
obligations with respect to, and shall administer Conversion Awards denominated
in Crestline Common Stock under the Crestline Comprehensive Stock Incentive
Plan.
2.5.3. Effect of the Distribution and Host REIT Conversion on Awards
-------------------------------------------------------------
Made Under the 1997 HMC Comprehensive Stock Incentive Plan Prior
----------------------------------------------------------------
to the Distribution Date
------------------------
(i) Restricted Stock: As soon as practicable after the Distribution
----------------
Date, each holder of an Existing HMC Stock Award of restricted shares who held
such award on the Distribution Date, shall receive, as part of the Distribution
and
12
<PAGE>
Host REIT Conversion, (1) one restricted share of Host REIT Stock, subject to
the terms of the 1997 HMC Comprehensive Stock Incentive Plan, for each
restricted share of HMC Common Stock held by such holder on the Distribution
Date, and (2) one restricted share of Crestline Common Stock, subject to the
terms of the Crestline Comprehensive Stock Incentive Plan, for each 10
restricted shares of HMC Common Stock held by such holder on the Distribution
Date.
The restrictions applicable to the shares awarded pursuant to this
Section 2.5.3(i) shall be replaced with restrictions in favor of HMLP, its
subsidiaries or affiliates with respect to Retained Individuals and Retained
Employees and Crestline, its subsidiaries or affiliates with respect to
Crestline Employees. The restrictions shall be released at the same time and on
the same schedule as the shares of HMC Common Stock were subject under the 1997
HMC Comprehensive Stock Incentive Plan on the Distribution Date, except that
release of such restrictions shall be contingent upon a finding by: (1) the
Compensation Policy Committee of the Board of Directors of HMC (or its designee)
that a grantee who is a Retained Employee or Retained Individual has satisfied
the conditions for such release; and (2) the Compensation Policy Committee of
the Board of Directors of Crestline (or its designee) that a grantee that is a
Crestline Employee has satisfied the conditions for such release.
(ii) Deferred Stock: As soon as administratively practicable after
--------------
the Distribution Date, holders of Existing HMC Stock Awards of deferred shares
shall have their accounts, determined as of the Distribution Date, treated as
follows: (1) the Existing HMC Stock Awards of each Retained Employee and
Retained Individual will be adjusted to the number of Host REIT Stock with a
total value based on the HMC Stock Price equal to the Aggregate Value of the
shares credited to their accounts, and (2) the Existing HMC Stock Awards of
each Crestline Employee will be assumed by the Crestline Comprehensive Stock
Incentive Plan and credited to accounts under such plan, as appropriate, and
will be adjusted to the number of shares of Crestline Common Stock with a total
value based on the Crestline Stock Price equal to the Aggregate Value of the
shares credited to their accounts.
(iii) Substitution of Stock Options: As soon as practicable after
-----------------------------
the Distribution Date, each Retained Employee, Retained Individual, Crestline
Employee who on the Distribution Date is a holder of an Existing HMC Stock Award
of stock options shall receive a Conversion Award of an option for Employer
Security in substitution of such Existing HMC Stock Award. The exercise price
and the number of shares underlying a Conversion Award that is granted pursuant
to this Section 2.5.3(iii) shall be determined in accordance with Sections 2.5.3
(iv) and 2.5.3 (v) of this Agreement.
Notwithstanding any other provision to the contrary, HMLP and
Crestline reserve the right prior to the issuance of any Conversion Award to
adopt
13
<PAGE>
resolutions modifying the terms and conditions, including but not limited
to the time within which options may be exercised, of Conversion Awards granted
pursuant to this Section 2.5.3(iii).
(iv) Adjustment of Option Price for Shares Covered by Options Granted
----------------------------------------------------------------
Pursuant to a Conversion Award: The provisions of this Section 2.5.3(iv) are
- ------------------------------
intended to ensure that the Aggregate Spread on each Existing HMC Stock Award is
maintained in the grants of Conversion Awards required by Section 2.5.3(iii) and
shall govern the determination of the option price of such Conversion Awards.
The option price for each share of Employer Security covered by a Conversion
Award shall be equal to the Aggregate Exercise Price divided by the number of
shares covered by such Conversion Award (determined in accordance with Section
2.5.3(v)).
(v) Number of Shares Covered by Options Granted Pursuant to a
---------------------------------------------------------
Conversion Award: A Conversion Award granted in substitution for an Existing
- ----------------
HMC Stock Award pursuant to Section 2.5.3(iii) shall be for the number of shares
of Employer Security with a total value based on the HMC Stock Price or the
Crestline Stock Price, as the case may be, equal to the Aggregate Value.
(vi) Limitation on 1997 HMC Comprehensive Stock Incentive Plan: To
---------------------------------------------------------
the extent that any adjustment or limitation of this Section 2.5.3 is
inconsistent with the terms of the 1997 HMC Comprehensive Stock Incentive Plan,
as in effect on the Distribution Date, or the terms of an Existing HMC Stock
Award, as in effect on the Distribution Date, the terms of the 1997 HMC
Comprehensive Incentive Plan or the terms of the Existing HMC Stock Award shall
not apply. Notwithstanding the preceding sentence, to the extent that the
requirements of this Section 2.5.3 are inconsistent with: (x) the intended tax
or accounting treatment of the Host REIT Conversion, or (y) any Existing HMC
Stock Award, HMLP and Crestline shall mutually agree on the alternative
adjustment.
2.5.4. Effect of the Host REIT Conversion on the Host Marriott
-------------------------------------------------------
Corporation Employee Stock Purchase Plan
----------------------------------------
The 1998 Plan Year for the Host Marriott Corporation Employee Stock
Purchase Plan shall end on December 18, 1998 or such other date as HMC shall
specify. HMC shall take all action necessary and appropriate for the eligible
participants of the Host Marriott Corporation Employee Stock Purchase Plan to
participate in the Distribution and Host REIT Conversion.
Prior to the Distribution Date Crestline shall take, or cause to be
taken all action necessary and appropriate to establish and administer a new
Plan called the Crestline Capital Corporation Employee Stock Purchase Plan,
effective as of the date approved by the Board of Directors of Crestline or such
other date as Crestline's Board of Directors shall specify. As soon as
administratively practicable before the Distribution Date, HMC, acting as sole
shareholder of Crestline, shall
14
<PAGE>
approve the adoption of Crestline Capital Corporation Employee Stock Purchase
Plan. The Crestline Capital Corporation Employee Stock Purchase Plan shall
constitute a Stock Purchase Plan and authorize eligible employees of Crestline,
its subsidiaries and affiliates to purchase Employer Security based on terms
similar to the Host Marriott Corporation Employee Stock Purchase Plan, as in
effect on January 2, 1998.
As soon as administratively practicable after the Distribution Date:
(1) HMLP shall take, or cause to be taken all action necessary and appropriate
to establish and administer a new Plan called the Host Marriott, L.P. Employee
Share Purchase Plan, effective as of January 1, 1999 or such other date as HMLP
shall specify; and (2) HMC, acting as General Partner for HMLP, shall ratify
the adoption of the Host Marriott, L.P. Employee Share Purchase Plan. The Host
Marriott, L.P. Employee Share Purchase Plan shall authorize eligible employees
of HMLP, its subsidiaries and affiliates to purchase Host REIT Stock based on
terms substantially similar to the Host Marriott Corporation Employee Stock
Purchase Plan, as in effect on January 2, 1998.
2.6. Medical/Dental Plan Liability and Coverage
------------------------------------------
2.6.1. Liability for Claims
--------------------
Effective as of the Contribution Date, HMC shall transfer sponsorship
of the Host Marriott Medical/Dental Plan to HMLP and HMLP shall be responsible
for providing medical/dental coverage, including stop-loss insurance, if any,
and assuming responsibility for the associated liabilities and accrued
obligations under such Plan for all Retained Employees and HMC Qualified
Beneficiaries. Retained Employees and HMC Qualified Beneficiaries shall have no
pre-existing condition limitation imposed other than that which is or was
imposed under the Host Marriott Medical/Dental Plan on the Contribution Date An
individual who is covered under the Host Marriott Medical/Dental Plan
immediately after the Contribution Date shall be credited with any expenses
incurred toward deductibles, out-of pocket expenses, maximum benefit payments,
and any benefit usage credited to such individual before the Contribution Date
for purposes of determining such individual's benefits under the Host Marriott
Medical/Dental Plan after the Contribution Date
Prior to the Distribution Date, Crestline shall take, or cause to be
taken, all action necessary and appropriate to: (1) establish a new
Medical/Dental Plan, on the terms deemed appropriate by Crestline (hereinafter
referred to as the Crestline Medical/Dental Plan) effective as of the
Distribution Date, and (2) assume from HMC all responsibility and liability for
the claims incurred on or after the Distribution Date for all Crestline
Employees and Crestline Qualified Beneficiaries. An individual who is covered
under the Crestline Medical/Dental Plan immediately after the Distribution Date
shall be credited with any expenses
15
<PAGE>
incurred toward deductibles, out-of pocket expenses, maximum benefit payments,
and any benefit usage credited to such individual on the Distribution Date for
purposes of determining such individual's benefits under the Crestline
Medical/Dental Plan after the Distribution Date.
The parties intend that an Employee who was covered under a Welfare
Plan maintained by HMC before the Contribution Date shall not have a gap in such
coverage because of a transaction relating to or arising from the Distribution
or Host REIT Conversion.
2.6.2. Continuation Coverage Administration
------------------------------------
Effective as of the Contribution Date, HMLP shall assume from HMC and
shall be solely responsible for, or cause its insurance carriers or HMOs to be
responsible for, the administration of the continuation coverage requirements
imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate
to any HMC Qualified Beneficiary. Effective as of the Distribution Date,
Crestline shall assume from HMC and shall be solely responsible for, or cause
its insurance carriers or HMOs to be responsible for, the administration of the
continuation coverage requirements imposed by Code Section 4980B and ERISA
Sections 601 through 608 as they relate to any Crestline Qualified Beneficiary.
2.6.3. Flexible Benefits Plan
----------------------
HMC shall transfer sponsorship of the Flexible Benefits Plan to HMLP,
effective as of the Contribution Date. Further, on or around the Contribution
Date, HMC, as the General Partner for HMLP, shall in a timely manner ratify: (1)
the adoption of the Flexible Benefits Plan, effective as of the Contribution
Date, (2) changing the name of the Flexible Benefits Plan to Host Marriott, L.P.
Flexible Benefits Plan, effective as of the Contribution Date, and (3) the
adoption of any desired amendments. Notwithstanding any other provision of this
Agreement or the Flexible Benefits Plan, claims incurred by a Crestline Employee
or Host Employee during the Current Plan Year shall be paid for under the
Flexible Benefits Plan, to the extent covered under the terms of such plan.
2.7. Paid Time Liabilities
---------------------
2.7.1. Division of Liabilities
-----------------------
Effective as of the Contribution Date, HMC shall transfer to HMLP all
accrued liabilities (whether vested or unvested and whether funded or unfunded)
for paid time leave, if any, for Retained Employees and Retained Individuals.
After the Contribution Date, HMLP shall be solely responsible for the payment of
such paid time leave to Retained Employees and Retained Individuals. Effective
as of the
16
<PAGE>
Distribution Date, HMC shall transfer to Crestline all accrued liabilities
(whether vested or unvested and whether funded or unfunded) for paid time leave,
if any, for Crestline Employees. After the Distribution Date, Crestline shall be
responsible for the payment of such paid time leave to Crestline Employees. HMLP
(in the case of Retained Employees) and Crestline (in the case of Crestline
Employees) shall provide the individuals covered by this Section 2.7.1 with the
same vested and unvested balances of paid time leave as was credited to such
individuals by HMC on the Contribution Date (in the case of Retained Employees)
and the Distribution Date (in the case of Crestline Employees). Nothing in this
Section 2.7.1 shall be construed in any way to limit the right of either HMLP or
Crestline to change its vacation or sick leave policies as it deems appropriate.
2.8. Reservation of Right To Amend or Terminate Plans
------------------------------------------------
Except as otherwise expressly provided, no provision of this
Agreement, shall be construed as a limitation on the right of HMC, HMLP or
Crestline to amend or terminate a Plan. In addition, notwithstanding any other
provision to the contrary, no provision of this Agreement shall be construed to
create a right in any individual (including an employee or former employee of
HMC, or dependent or beneficiary of such employee or former employee) under a
Plan which such individual would not otherwise have under the terms of the Plan.
2.9. Notice
------
HMC, HMLP and Crestline acknowledge that each may incur costs and
expenses, including, but not limited to, contributions to a Plan and the payment
of insurance premiums arising from or related to any Plan which are, as set
forth in this Agreement, the responsibility of the other party hereto.
Accordingly, HMC, HMLP and Crestline shall give notice to the other party of the
costs to be incurred prior to payment and demand that the other party which has
the obligation to pay shall pay the cost and expense and the other party shall
pay the cost and expenses no later than 30 days after receipt of such notice.
2.10. Payroll Reporting and Withholding
---------------------------------
2.10.1. Form W-2 Reporting
------------------
HMC, HMLP and Crestline shall prepare, file and distribute IRS Forms
W-2 in accordance with applicable laws and regulations.
2.10.2. Forms W-4 and W-5
-----------------
HMC, HMLP and Crestline shall cooperate as necessary with each other
to ensure that IRS Form W-4 (Employee's Withholding Allowance Certificate) and
W-5 (Earned Income Credit Advance Payment Certificate) are distributed,
completed and filed, in accordance with applicable laws and regulations.
17
<PAGE>
2.10.3. Garnishments, Tax Levies, Child Support Orders, Qualified
---------------------------------------------------------
Medical Child Support Orders and Wage Assignments
- -------------------------------------------------
With respect to Employees with garnishments, tax levies, child support
orders, qualified medical child support orders, and wage assignments in effect
with HMC on or before the: (i) Contribution Date, HMLP with respect to each
Retained Employee shall honor such payroll deduction authorizations or court or
governmental orders, and will continue to make payroll deductions and payments
to any authorized payee, as specified by the court or governmental order which
was filed with HMC on or before the Contribution Date, and (ii) Distribution
Date, Crestline with respect to each Crestline Employee shall honor such payroll
deduction authorization or court or governmental orders, and will continue to
make payroll deductions and payments to any authorized payee, as specified by
the court or governmental order which was filed with HMC on or before the
Distribution Date.
2.10.4. Authorizations for Payroll Deductions
-------------------------------------
Unless otherwise prohibited by this or another agreement entered into
in connection with the Host REIT Conversion, a governing Plan document, or
applicable law, with respect to Retained Employees with authorizations for
payroll deductions in effect with HMC: (i) HMLP or its affiliates as the
successor employer for each Retained Employee will honor the payroll deduction
authorizations for such Retained Employee and shall not require that such
Retained Employee submit a new authorization to the extent that the type of
deduction by HMLP does not differ from that made by HMC before the Contribution
Date, and (ii) Crestline as the successor employer for each Crestline Employee
will honor the payroll deduction authorizations for such Crestline Employee and
shall not require that such Crestline Employee submit a new authorization to the
extent that the type of deduction by Crestline does not differ from that made by
HMC before the Distribution Date. The deductions covered by this Section 2.10.4
include, but are not limited to, contributions to any Plan, U.S. Savings Bonds,
and United Giver's Fund; scheduled loan repayments to the Profit Sharing Plan or
to an employee credit union; and Direct Deposit of Payroll, bonus advances,
union dues, employee relocation loans, and other types of authorized company
receivables usually collectible through payroll deductions.
18
<PAGE>
3. LABOR AND EMPLOYMENT MATTERS
Notwithstanding any other provision of this Agreement or any other
Agreement between HMC, HMLP and Crestline to the contrary, HMC, HMLP and
Crestline understand and agree that:
3.1. Separate Employers
------------------
After the separation of Employees into their respective companies,
HMLP and Crestline will be separate and independent employers.
3.2. Employment Policies and Practices
---------------------------------
After the Distribution Date as to Crestline and the Contribution Date
as to HMLP, HMLP and Crestline may adopt, continue, modify or terminate such
employment policies, compensation practices, Plans, and other employee benefit
arrangements of any kind or description, as each may determine, in its sole
discretion, are necessary and appropriate.
3.3. Claims
------
3.3.1. Scope
-----
This section is intended to allocate all liabilities for employment-
related claims involving HMC, HMLP or Crestline including, but not limited to,
claims against either party or all the parties and their officers, directors,
agents and employees, or against or by their various Plans and plan
administrators and fiduciaries.
3.3.2. Employment-Related Claims
-------------------------
An employment-related claim shall include any actual or threatened
lawsuit, arbitration, ERISA claim, or federal, state, or local judicial or
administrative proceeding of whatever kind involving a demand by or on behalf of
or relating to Employees, or by or relating to any federal, state or local
government agency alleging liability against HMC, HMLP or Crestline, or against
any of their respective officers, directors, agents, employees, administrators,
trustees or fiduciaries.
3.3.3. Obligation to Indemnify
-----------------------
The duty of a party to indemnify, defend and hold harmless the other
party under this Section 3.3 shall include the following obligations of the
party having such duty: to provide a legal defense and incur all attorneys fees
and litigation costs which may be associated with such a defense; to pay all
costs of
19
<PAGE>
settlement or judgment where the indemnifying party has the full duty to do so
or to pay the full percentage of the party's share when the duty is only a
percentage of the full settlement or judgment; and to hold harmless from all
claims and costs which may be asserted with or arising from the duty of the
indemnifying party to defend and indemnify.
3.3.4. Pre-Host REIT Conversion
------------------------
(i) Crestline shall indemnify, defend and hold harmless HMC
and HMLP from any employment-related claim of a Crestline Employee; and
(ii) HMLP shall indemnify, defend and hold harmless HMC and
Crestline from any employment-related claims of a Retained Employee or Retained
Individual.
3.3.5. Distribution and Other Joint Liability Claims
---------------------------------------------
Where employment-related claims alleging or involving joint and
several liability asserted against Crestline and HMLP are not separately
traceable to liabilities relating to Crestline Employees, Retained Employees and
Retained Individuals any liability shall be apportioned between Crestline and
HMLP in accordance with the percentage that each party's Employees represents of
the combined total number of Employees of both parties. For purposes of the
preceding sentence, the percentage of liability assumed by Crestline shall equal
the ratio of (i) the total number of Crestline Employees on the Distribution
Date, to (ii) the combined total number of Crestline Employees, Retained
Employees and Retained Individuals (other than a Marriott International Employee
or Marriott Terminee, as defined in the Employee Benefits & Other Employment
Matters Allocation Agreement, entered into as of October 8, 1993 between
Marriott International, Inc. (renamed Sodexho Marriott Services, Inc.) and HMC
and a Host Marriott Services Individual, Host Marriott Services Employee or Host
Marriott Services Terminee, as defined in the Employee Benefits & Employee
Matters Allocation Agreement, entered into as of December 29, 1995, between Host
Marriott Services Corporation and HMC) on such date. Additionally, the
percentage of liability assumed by HMLP shall equal the ratio of (i) the total
number of Retained Employees and Retained Individuals on the Distribution Date
to (ii) the combined total number of Crestline Employees, Retained Employees and
Retained Individuals (other than a Marriott International Employee or Marriott
Terminee, as defined in the Employee Benefits & Other Employment Matters
Allocation Agreement, entered into as of October 8, 1993 between Marriott
International, Inc. (renamed Sodexho Marriott Services, Inc.) and HMC and a Host
Marriott Services Individual, Host Marriott Services Employee or Host Marriott
Services Terminee, as defined in the Employee Benefits & Employee Matters
Allocation Agreement, entered into as of December 29, 1995, between Host
Marriott Services Corporation and HMC) on such date.
20
<PAGE>
Each party will indemnify, defend, and hold harmless the other to the extent of
the indemnifying party's apportioned percentage determined in accordance
herewith.
3.3.6. Host REIT Conversion Employment-Related Claims
----------------------------------------------
Employment-related claims arising after the Distribution and division
of the Employees between the parties and not relating to, arising from, or in
connection with the Host REIT Conversion, will be the sole responsibility of
Crestline as to Crestline Employees and of HMLP as to Retained Employees and
Retained Individuals. Each party will indemnify, defend, and hold harmless the
other from employment-related claims of the other company.
3.4. Notice of Claims
----------------
Without limitation to the scope and application to each party in the
performance of its duties under Sections 3.4 and 3.5 of this Agreement, each
party will notify in writing and consult with the other party prior to making
any settlement to an employee claim, for the purpose of avoiding any prejudice
to such other party arising from the settlement.
3.5. Assumption of Unemployment Tax Rates
------------------------------------
Changes in state unemployment tax experience as of the Distribution
Date shall be handled in accordance with this Section 3.5. In the event
applicable state law permits the allocation of the unemployment tax experience
of HMC as of the Distribution Date, the HMC experience shall be transferred to
Crestline if this results in the lowest aggregate unemployment tax costs for
both Crestline and HMLP combined, and the HMC experience shall be retained by
HMLP if this results in the lowest aggregate unemployment tax costs for HMLP and
Crestline combined. In the event applicable state law does not permit the
allocation of the unemployment tax experience of HMC as of the Distribution
Date, the HMC experience shall be transferred to HMLP.
3.6. Intercompany Service Charge
---------------------------
Legal, professional, managerial, administrative, clerical, consulting,
and support or production services provided to one party by personnel of the
other party, upon the request of the first party or when such services are
otherwise required by this Agreement shall be charged to the party receiving
such services on commercially reasonable terms to be negotiated (or in
accordance with the provisions of any applicable agreement between the parties).
21
<PAGE>
3.7. WARN Claims
-----------
Before and after the Distribution Date, each party shall comply in all
material respects with the Worker Adjustment and Retraining Act ("WARN"). HMLP
shall be responsible for WARN claims relating to Retained Individuals and
Retained Employees. Crestline shall be responsible for WARN Claims relating to
Crestline Employees. Each party shall indemnify, defend and hold harmless the
other in connection with WARN Claims for which the indemnitor is responsible and
which are brought against the indemnitee.
3.8. Employees on Leave of Absence
-----------------------------
As of the Distribution Date, Crestline shall assume responsibility, if
any, as employer for any individual returning from an approved leave of absence
who prior to the Distribution Date was employed by HMC or any subsidiary of HMC
(other than Crestline) and who but for such approved leave of absence would be
an active employee of Crestline on or after the Distribution Date. As of the
Contribution Date, HMLP shall assume responsibility, if any, as employer for an
individual returning from an approved leave of absence who prior to the
Contribution Date was employed by HMC or any subsidiary of HMC (other than
Crestline) and who but for such approved leave of absence would be an active
employee of HMLP or its affiliates on or after the Contribution Date.
3.9. No Third Party Beneficiary Rights
---------------------------------
Neither this Agreement nor any other intercompany agreement between
HMC, HMLP and Crestline is intended to nor does it create any third party
contractual third-party beneficiary or other common law rights.
3.10. Attorney-Client Privilege
-------------------------
The provisions herein requiring either party to this Agreement to
cooperate shall not be deemed to be a waiver of the attorney/client privilege
for either party not shall it require either party to waive its attorney/client
privilege.
22
<PAGE>
4. DEFAULT
4.1. Default
-------
If a party materially defaults hereunder, each non-defaulting party
shall be entitled to all remedies provided by law or equity (including
reasonable attorneys' fees and costs of suit incurred).
4.2. Force Majeure
-------------
HMC, HMLP and Crestline shall incur no liability to each other due to
a default under the terms and conditions of this Agreement resulting from fire,
flood, war, strike, lock-out, work stoppage or slow-down, labor disturbances,
power failure, major equipment breakdowns, construction delays, accident, riots,
acts of God, acts of United States' enemies, laws, orders or at the insistence
or result of any governmental authority or any other delay beyond each other's
reasonable control.
23
<PAGE>
5. MISCELLANEOUS
5.1. Relationship of Parties
-----------------------
Nothing in this Agreement shall be deemed or construed by the parties
or any third party as creating the relationship of principal and agent,
partnership or joint venture between the parties, it being understood and agreed
that no provision contained herein, and no act of the parties, shall be deemed
to create any relationship between the parties other than the relationship set
forth herein.
5.2. Access to Information; Cooperation
----------------------------------
HMC, HMLP and Crestline and their authorized agents will be given
reasonable access to and may take copies of all information relating to the
subjects of this Agreement (to the extent permitted by federal and state
confidentiality laws) in the custody of the other party, including any agent,
contractor, subcontractor, agent or any other person or entity under the
contract of such party. The parties will provide one another with such
information within the scope of this Agreement as is reasonably necessary to
administer each party's Plans. The parties will cooperate with each other to
minimize the disruption caused by any such access and providing of information.
5.3. Assignment
----------
Neither party shall, without the prior written consent of the other,
have the right to assign any rights or delegate any obligations under this
Agreement.
5.4. Headings
--------
The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
5.5. Severability of Provisions
--------------------------
Neither HMC, HMLP nor Crestline intends to violate statutory or common
law by executing this Agreement or any contractual obligations of HMC. If any
provision in this Agreement is in violation of any law, such provision shall be
inoperative and the remainder of this Agreement shall remain in full force and
effect and shall be binding upon the parties.
24
<PAGE>
5.6. Parties Bound
-------------
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder.
5.7. Notices
-------
All notices, consents, approvals and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given when delivered personally or by overnight courier or three days after
being mailed by registered or certified mail (postage prepaid, return receipt
requested) to the named representatives of the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice, except that notices of changes of address shall be effective upon
receipt):
(a) if to HMC
HOST MARRIOTT CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher Townsend
(b) if to HMLP
HOST MARRIOTT, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher Townsend
(c) if to Crestline
CRESTLINE CAPITAL CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Tracy Colden
HMC shall, upon the request of Crestline or HMLP, provide copies of
all of its notices, consents, approvals and other communications relating to the
matters covered by this Agreement to any lender of Crestline or HMLP or other
person specified by Crestline or HMLP. HMLP shall upon the request of HMC or
Crestline provide copies of all of its actions, consents, approvals and other
communications given or made pursuant to its obligations under this Agreement to
any lender of HMC or Crestline or other person specified by HMC or Crestline.
Additionally, Crestline shall upon the request of HMC or HMLP provide copies of
25
<PAGE>
all of its actions, consents, approvals and other communications given or made
pursuant to its obligations under this Agreement to any lender of HMC or HMLP or
other person specified by HMC or HMLP.
5.8. Further Action
--------------
HMC, HMLP and Crestline each shall cooperate in good faith and take
such steps and execute such papers as may be reasonably requested by the other
party to implement the terms and provisions of this Agreement.
5.9. Waiver
------
HMC, HMLP and Crestline each agree that the waiver of any default
under any term or condition of this Agreement shall not constitute a waiver of
any subsequent default or nullify the effectiveness of that term or condition.
5.10. Governing Law
-------------
All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Maryland, regardless of
the laws that might be applied under applicable principles of choice of laws.
5.11. Consent to Jurisdiction
-----------------------
The parties irrevocably submit to the exclusive jurisdiction of (a)
the Courts of the State of Maryland, Montgomery County, or (b) any federal
district court where there is federal jurisdiction for the purpose of any suit,
action or other Court proceeding arising out of this Agreement. The parties
hereby irrevocably designate, appoint and empower [_____________________] in
each case as its true and lawful agent and attorney-in-fact in its name, place,
and stead to receive on its behalf service of process in any action, suit, or
proceeding with respect to any matters as to which it has submitted to
jurisdiction as set forth in the immediately preceding sentence.
5.12. Entire Agreement
----------------
This Agreement, the Distribution Agreement and Merger Agreement
constitute the entire understanding between the parties hereto, and supersede
all prior written or oral communications, relating to the subject matter covered
by said agreements. No amendment, modification, extension or failure to enforce
any condition of this Agreement by either party shall be deemed a waiver of any
of its rights herein. This Agreement shall not be amended except by a writing
executed by the parties.
26
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HOST MARRIOTT CORPORATION,
a Delaware corporation
By:
----------------------------
HOST MARRIOTT, L.P.,
a Delaware limited partnership
By:
----------------------------
CRESTLINE CAPITAL CORPORATION,
a Maryland corporation
By:
----------------------------
27
<PAGE>
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT
MATTERS ALLOCATION AGREEMENT
BETWEEN HOST MARRIOTT CORPORATION,
HOST MARRIOTT, L.P. AND
CRESTLINE CAPITAL CORPORATION
SCHEDULE A
Howard Johnson (Prime & Exeter) Retirement Award
Howard Johnson Company Executive Retirement Plan
Howard Johnson Retirement Plan (Long & Loyal)
Marriott Family Restaurants, Inc. Retirement Savings Plan
Big Boy Cleveland Disposition Deferred Stock Plan
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Washington, D.C.
November 6, 1998
<PAGE>
Exhibit 99.1
HOST MARRIOTT CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD TUESDAY, DECEMBER 15, 1998, 10:00 A.M.
The undersigned stockholder of Host Marriott Corporation, a Delaware
corporation ("Host"), hereby appoints ________ and ________ as proxies for the
undersigned, with the full power of substitution in each of them, to cast on
behalf of the undersigned all votes that the undersigned is entitled to cast at
Host's Special Meeting of Stockholders to be held on December 15, 1998, and
otherwise to represent the undersigned at the Special Meeting with all powers
possessed by the undersigned if personally present at the Special Meeting, and
at any and all adjournments or postponements thereof, upon the following matters
that are more fully described in the accompanying Proxy Statement/Prospectus.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and the accompanying Proxy Statement/Prospectus and revokes any
proxy heretofore given with respect to the Special Meeting. The Board of
Directors recommends votes FOR approval of the Agreement.
COMMENTS OR CHANGE OF ADDRESS
---------------------------------------------
---------------------------------------------
---------------------------------------------
(If you have written in the above space, please
mark the corresponding box on the reverse side of
this card)
CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE
See Reverse Side
Detach Proxy Card Here
[Host Marriott Corporation symbol]
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817-1109
The Special Meeting of Stockholders of Host Marriott Corporation will be held on
Tuesday, December 15, 1998, at 10:00 a.m. at the Ritz-Carlton Hotel, located at
1700 Tysons Boulevard in McLean, Virginia. Doors to the meeting will open at
____ a.m.
The Meeting will be conducted to consider and vote upon the proposal described
in the accompanying Proxy Statement/Prospectus, which provides for the approval
of the Agreement and Plan of Merger (the "Agreement") entered into by and among
Host Marriott Corporation, HMC Merger Corporation ("Host REIT") and Host
Marriott L.P. (the "Operating Partnership"), and to transact such other business
as may properly come before the meeting. The Agreement contemplates certain
restructuring transactions consisting of (A) the contribution by Host of its
wholly-owned, full-service hotels, its interests in certain hotel partnerships
and certain other assets to the Operating Partnership in exchange for units of
limited and general partnership interest in the Operating Partnership and
assumption of liabilities, and (B) the reincorporation of Host from the State of
Delaware to the State of Maryland by means of a merger of Host with and into
Host REIT, all as more fully described in the accompanying Proxy
Statement/Prospectus.
Stockholders of record at the close of business on November 13, 1998 will be
entitled to notice of and to vote at this meeting.
<PAGE>
This proxy when properly executed will be voted in the manner directed herein.
If this proxy is executed but no direction is made, the votes entitled to be
cast by the undersigned will be cast FOR approval of the Agreement and in the
discretion of the proxy holder on any other matter that may come before the
Special Meeting or any adjournment or postponement thereof.
The Board of Directors recommends a vote FOR approval of the Agreement.
FOR AGAINST ABSTAIN
/ / / / / /
I will attend the Special Meeting. / /
Signature __________________ Date __________ Change of Address/Comments
on Reverse Side / /
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please sign in full corporate
name by the President or other authorized officer. If a partnership, please
sign in partnership name by authorized person.
Please carefully detach here and return this proxy in the enclosed reply
envelope.
TELEPHONE AND INTERNET VOTING INSTRUCTIONS
You may use the telephone or internet to vote your shares electronically, 24
hours per day, 7 days a week. To access the telephone or internet voting
system, you must use the control number printed in the box above.
1. To vote over the telephone: Using a touch-tone telephone, call
1-800-_________.
2. To vote over the internet: Log on to the internet and go to the web site
http://www.____.
Your electronic vote authorizes the named proxies in the same manner as if you
marked, signed, dated and returned the proxy card. If you choose to vote your
shares electronically, there is no need for you to mail back your proxy card.
ADMISSION TICKET
HOST MARRIOTT CORPORATION
Special Meeting of Stockholders
Ritz-Carlton Hotel
1700 Tysons Boulevard
McLean, Virginia 22102
AGENDA
1. Proposal to approve the Agreement and Plan of Merger entered into by
and among Host Marriott Corporation, HMC Merger Corporation and Host
Marriott L.P.
2. Transaction of other business as may properly come before the Special
Meeting.
It is important that your shares be represented at this meeting, whether or not
you attend the meeting in person. To make sure your shares are represented, we
urge you to complete and mail the proxy card above, or vote by internet or
telephone.
If you and your guest plan on attending the Special Meeting, please mark the
appropriate box on the proxy card above. Present the Admission Ticket to the
Host Marriott Corporation representative at the entrance.
